LCFS Matures

FROM THE OCTOBER ISSUE: Amendments to California’s Low Carbon Fuel Standard could lead to favorable changes for the ethanol industry.
By Tim Albrecht | September 10, 2018

In 2016, California's greenhouse gas (GHG) levels were below 1990 levels for the first time since emissions peaked in 2004. That's equivalent to taking about 12 million cars off the road or saving 6 billion gallons of gasoline a year. The figures were released in July of this year and show promise for the state's maturing emissions goals. 

In the transportation sector, the main reason for that decline was California’s Low Carbon Fuel Standard. The LCFS is administered by the California Air Resources Board and uses a market-based cap-and-trade approach to ultimately lower GHG emissions, says Jessica Buckley, senior environmental scientist for RTP Environmental Associates Inc. “California essentially created this program to create a market for low-carbon fuels and hopefully stimulate further production. Sort of like what the Renewable Fuel Standard did federally.”

California is pushing its GHG reduction goals even further than the original 2020 goal. The original provision under Assembly Bill 32, the California Global Warming Solutions Act of 2006, required California to reduce its GHG emissions to 1990 levels by 2020. Senate Bill 32 increased that goal to 40 percent below 1990 levels by 2030, which is the most ambitious GHG reductions emissions goal in the U.S., says Graham Noyes, executive director of the Low Carbon Fuels Coalition and managing attorney of Noyes Law Corp. Within the statutory framework of AB 32 and SB 32, CARB has broad authority to design specific programs. The LCFS is a key additional program in the transportation sector, requiring a reduction of the carbon intensity of transportation fuels by 10 percent between 2011 and 2020. CARB is poised to extend the program to 2030, and require that a 20 percent reduction be achieved.

Spread of LCFS
The success of the LCFS has led to many states and even other countries looking to adopt similar programs, namely, the Pacific Coast Collaborative, an international government agency consisting of Oregon, Washington, California and British Columbia, Canada, Buckley says.
“Oregon has a program,” she says. “British Columbia has their own program that’s part of the Pacific Coast Collaborative; Alaska is observing right now, but I wouldn’t be surprised to see them try and join in the next five years or so; and Washington State is still working through their legislature. They’ve had some hiccups to the process, but my understanding is they’re still very interested in joining.”

Oregon’s Clean Fuels Program is most comparable to California’s LCFS. In some respects, it doesn’t have as many regulations as California’s program does, but it also has a 10 percent carbon intensity reduction, Noyes says. “The Oregon program started five years after California’s program so they’re a little behind in terms of carbon intensity reductions and market pricing.”

Other regions of the U.S. are considering legislation, too. Buckley says the Midwest has shown interest several times in creating its own LCFS program. “It’s mostly a grassroots type thing. Most of the biofuels in the U.S. are produced in the Midwest and, due to the shortfalls in transporting fuels to California, they’ve talked about creating their own standard and going to their legislatures to propose that. It would make it a lot easier to transport and sell their fuel within the Midwest.”

Some might worry that an increase in similar programs in other states could affect the import of fuels into the California market. But Noyes says that isn’t the case. Credits under the LCFS provide increased value for producers to continue selling into California, he says.

“We’re seeing a lot of product being sold into the California market because there’s a premium attached. You can get your RINs and get credit value on top of that. Some product is going into Oregon for the same reason. You don’t get quite as much premium there right now, but if we saw more similar programs in other states, hopefully it would be increasing demand for low-carbon fuels. That might compete with California’s market, but they’re very focused on spreading GHG reductions policies so they would welcome more policy structures like the LCFS.”

Buckley agrees that similar LCFS programs wouldn’t hurt California’s market. “There would still be a desire to sell fuels in California. It’s not just biofuels. There are a bunch of fuels in the California market, such as different biomethane and other low-carbon fuels. Anything that takes the majority of GHGs away from the petroleum fuels is the overall desire of the LCFS.”

A variety of fuels are being sold into California, but the main product is ethanol. “That ethanol is coming mostly from the Midwest, such as Minnesota, Iowa, Kansas, Nebraska, Illinois, Indiana,” Buckley says. “Ethanol is being sold into California from all over the U.S., but most of it is coming from where there is corn.”

The lowest carbon intensity ethanol is the most likely product to be sold into the California market, as it has more credit value for the producer, Noyes says. “The most efficient plants from a production standpoint, and ones using alternative feedstocks or who have very good energy profiles, are the producers servicing the California market. Geography matters, as well, so how far they have to travel to market dictates a lot.”

CARB Amendments
Even though the LCFS is seeing success in reaching California’s emissions goals, CARB isn’t slowing down. The organization is working on a handful of refinements and updates to the LCFS program. The main update was to the California Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model, specifically to ethanol, with some more favorable calculations. The amendments are intended to create more credit generation, Noyes says.

“CARB added additional crediting mechanisms so there are some new ways to make credits, one of those is through the use of alternative jet fuel,” he says. “One additional new upgrade that could be very beneficial for the ethanol industry is carbon capture and sequestration (CCS). CARB is proposing a protocol that would enable CCS to be recognized and generate credits, which is something Archer Daniels Midland is already doing and other producers are looking at. CCS could provide a new source of revenue, a lot of GHG reduction and a whole new area of credit generation.”

A proposed simplified starch calculator for certain tier 1 fuels includes starch corn-based ethanol, as well as corn-fiber ethanol, Buckley says. “Some updates are going to be a little more paperwork, but will ultimately continue to move the market forward to create a very stable market for these fuels.

“One of the other changes is third-party verification,” she says. “This is a whole ball of wax, so to speak. They haven’t ironed out the final details with that, but they’re going to require facilities to contract a third party who is independent from creating the pathway, or from doing any kind of consulting work or compliance documents, to come in and verify the pathway is indeed valid.”

Kari Buttenhoff, compliance manager for Christianson PLLP, has been reviewing certain pieces of CARB’s amendments to the LCFS and discussing them with the organization. Christianson has been mainly focused on the verification piece of CARB’s proposal, she says. “We’ve been attending workshops and submitting public comments, as well as having private phone calls, to try and educate them more about renewable fuel and the transportation piece of the industry. So, we’re trying to help give them some education, while also explaining our concerns about the amendments to get them changed before they’re finalized.”

The goal is for most of the amendments to take effect January 1, 2019, but some will be phased in over time, particularly verification, Noyes says.

Verification Proposal
Verification is one of the most important amendments being proposed by CARB. It’s a way for CARB to have better visibility into how the plants are operating. Traditionally, custom pathways were outlined for plants based on the CI score of a facility. Many factors determine the CI of a plant, such as how much energy it’s using, what kind of energy it’s using, yield, coproducts and more. The challenge for CARB is keeping track of all the information, Noyes says.

Because of the amount of data that needs to be tracked, CARB is stretched a little thin, so it has requested third parties act as verifiers once they’ve gone through training programs and been certified by CARB, Buckley says. “My understanding is facilities will no longer be submitting their applications directly to CARB, but will submit those applications to their third-party verifier before sending to CARB. That’s in addition to the third-party verifier doing periodic validation and verification work on the pathways.”

Third-party verification will become mandatory for any LCFS participants in 2019. It’s currently voluntary, Buckley says.

Much of what will be involved with third-party verification is still being determined, so it’s unclear what the process could look like, Buttenhoff says. “What we’re seeing right now is there will be a simplified calculator that producers fill out to establish a pathway and get their CI. So they’ll have to report two months of data in that CI calculator each year and we’ll end up verifying that. The data is similar to the efficient producer pathways we’re reviewing, but it’s more detailed. The main engagement I would compare it to is a financial statement audit. So the verifications are going to require site visits, risk assessments, interviews of personnel and understanding of data management systems. It won’t go to the full extent of a financial audit, but the steps to get there will look very similar.”

Third-party verification isn’t a completely foreign concept for producers. RINs have third-party requirements, including engineering reports every three years, or when a new pathway is implemented. The LCFS third-party verification program is slightly different than RIN verification, though, Buckley says. “There is a little bit more involved in selecting a vendor for third-party verification in that there is a conflict of interest clause, so your vendor can’t be involved in any of the consulting or application preparation. There is also a five-year lookback on that, so if you’ve used that vendor for anything in the last five years, you won’t be able to use them for third-party verification.

“Right now, there is a rotation clause in the verification process where every six years a firm will need to be put on a three-year hiatus,” Buckley says. “So, every six years a facility needs to contract a new firm for a time period of three years.”

The conflict of interest rules and the firm rotation CARB is looking at putting in place are probably the biggest hurdles right now to finding a third party, Buttenhoff says. “Those are the main issues with the verification program at this time. With the scope of services that we provide for ethanol producers, the conflict of interest rules have been a real struggle.”

“I haven’t heard of anyone who is particularly happy about this system,” Buckley says. “From a compliance standpoint, to have someone who isn’t familiar with your facility come in may be a bit of a quagmire. I can see the rationale that CARB doesn’t want complacency in the system where things could be missed, though.”

As organizations like Christianson familiarize themselves with the potential changes to verification, California’s LCFS still serves as a model for other states and regions aiming for emissions reductions. At a displacement of 6 billion gallons of gasoline per year, and counting, experts seem to agree that it’s likely more states with progressive GHG goals will get onboard.

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Low Carbon Fuel Standard
The LCFS requires producers of petroleum-based fuels to reduce the carbon intensity of their products. The original plan under the program was a quarter of a percent carbon-intensity reduction in 2011 and would culminate in a 10 percent total reduction by 2020. The California Air Resources Board has proposed increasing the carbon intensity reduction goal to 20 percent below 2010 levels by 2030.

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Author: Tim Albrecht
Associate Editor, Ethanol Producer Magazine