On March 5, 2009, the California Air Resources Board (CARB) released its proposed regulation for reducing the carbon intensity of transportation fuels in California by an average of 10 percent by 2020.  The proposed “cradle to the grave” regulation takes into account, and seeks to reduce, greenhouse gas emissions associated with the full life-cycle of transportation fuels, including (1) direct emissions associated with producing, transporting and using the fuels, and (2) indirect emissions associated with other effects, such as those caused by land use changes.  Starting in 2011, regulated parties would be required to incrementally reduce the carbon intensity of the fuels they sell in California.

Regulated parties (generally producers and importers) will have substantial flexibility in how they meet the compliance schedule.  For example, fuel providers may supply a combination of fuels both above and below the standard so long as, on average, their fuels do not exceed the required carbon intensity.  If a party’s average fuel intensity exceeds the standard, it can offset the difference by purchasing credits from other fuel providers.

Several parties have voiced concern about the proposed regulation.  Earlier this week, a group of 111 scientists criticized CARB’s methodology for measuring indirect greenhouse gas emissions from biofuels (e.g., emissions from deforestation in other countries resulting from increased domestic use of food crops for biofuels), contending that the methodology is both unsound and unfairly singles out biofuels.  CARB contends that its model is “suitable” for measuring biofuel’s indirect impacts.  Others have voiced concern about the economic impact of the regulatory regime.  CARB estimates, however, that the displacement of petroleum-based fuels with lower-carbon intensity fuels will result in an overall savings in California, as much as $11 billion from 2010-2020.  These, and other issues, will be debated over the next 45 days.  CARB will formally decide whether to adopt the regulation at its April 23-24 hearing.

For further information about this topic, please contact Akin Gump.