Late last week, the California Air Resources Board (CARB) released its long-awaited Low Carbon Fuel Standard (LCFS). The standard-the first of its kind in the world-will require producers, importers and refiners of fuels to lower the carbon imprint of that fuel by 10% in the eight years from when the standard goes into effect in 2012.

The California standard provides an important template for further LCFS developing in other states and at the federal level. Gov. Schwarzenegger acknowledged this in his statement praising the standard, noting that 16 other states were looking to California for leadership on the issue, also, the report itself indicates that CARB is “working closely with the U.S. EPA to assure that the approaches [towards ILUC analysis] taken in the two analyses are as consistent and transparent as possible.”

The Energy Policy Act of 2005 amended the Clean Air Act, creating the Renewable Fuel Standard (RFS) program.  EPA promulgated regulations under this statute that became effective on September 1, 2007.  The Energy Independence and Security Act of 2007 (EISA), further amended the Clean Air Act provisions governing the RFS program.  Some of the major changes enacted in EISA include:

1. Expansion of the applicable volumes of renewable fuel.
2. Separation of the renewable fuel volume requirements into four categories: cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel.
3. Changes to the definition of renewable fuels and criteria (e.g. life cycle greenhouse gas (GHG) emission performance) for determining which if any of the four renewable fuel categories a given renewable fuel is eligible to meet.
4. Expansion of the fuel pool subject to the standards to include diesel and certain nonroad fuels and expansion of the obligated parties to include refiners, certain blenders, and importers of those fuels.
5. Inclusion of specific types of waivers and EPA-generated credits for cellulosic biofuel.

EPA is developing a Notice of Proposed Rulemaking to implement these changes to the RFS program, which generally are not effective until EPA issues final regulations. 

One of the most controversial provisions of the California standard is its inclusion of Indirect Land-Use Change (ILUC) analysis in its calculation of a fuel’s potential footprint. ClimateIntel has covered the issues of ILUC before, but essentially ILUC involves capturing the emissions that occur because of changing land use due to higher demand for certain crop-based biofuels, such as corn ethanol. In determining how to calculate ILUC, California looked at a series of different parameters, including crop yield elasticity, elasticity of land transformation and trade elasticity; using these parameters, the State developed ILUC calculations for a number of different ethanol fuel streams, including various corn-derived ethanol products and sugarcane ethanol.

The standard acknowledges a number of potential areas of uncertainty in its ILUC analysis—including questions about model inputs, the percentage of the carbon stored above and below ground (in biomass or soils) released into the atmosphere do to land conversion and others. In approving the standard, CARB asked its staff to continue to study these areas of uncertainty and report back by 2011.   

In the coming weeks, ClimateIntel will be looking further into the computer modeling relied upon by CARB and evaluating some of the major uncertainties associated with the modeling.  ClimateIntel will also review a recent study, discussed in the New York Times’ Green, Inc. blog questioning whether an LCFS even makes sense. 

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

As previously reported, the Environmental Protection Agency (EPA) is re-evaluating its March 6, 2008 denial of California’s waiver request to enforce greenhouse gas emission standards on automobile manufacturers.  The proposed emission standard is an important piece of California’s plan to reduce greenhouse gas emissions to 1990 levels by 2020 (accounting for almost 20 percent of the planned reductions).  To address California’s “compelling and extraordinary conditions,” as well as automaker’s concerns regarding a patchwork of federal and state emission standards, various commentators have predicted that the administration will soon announce a compromise deal whereby the federal government would enforce a new fortified fuel efficiency standard (i.e., CAFE standard).  In turn, California would agree to modify its regulation to create a pathway for automakers to meet its rules through compliance with the nationwide standard.

Several sticking points exist before a deal can be reached.  To be palatable to California, the federal CAFE standard would have to provide for at least the same level of emission reductions as California’s emission standard.  In addition, California would want to preserve its legal right under the Clean Air Act to go further in the future.  From automakers’ perspective, the deal would have to create a single nationwide standard.  The Detroit automakers would also want to utilize an attribute-based system for measuring fuel efficiency requirements.  Under an attribute-based system, target fuel economies are set based on a particular vehicle attribute (current CAFE standards use the vehicle’s footprint).  In contrast to California’s emission standard, which uses class-based emission targets, the attribute-based system would give each automaker a separately calculated target, based on its particular vehicle mix.  According to one study, this type of system could yield dramatically different impacts for the competitive position of individual automakers.  In particular, Detroit automakers would stand to receive most of the profit gains from higher attribute-based CAFE standards.

If a deal were to be reached, the Administration would need to act soon.  The National Highway Traffic Safety Administration is currently developing CAFE standards for model year 2012-2016.  This lengthy rulemaking process must be completed at least 18 months before the beginning of model year 2012, or by the end of March 2010.

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In yesterday’s installment, ClimateIntel discussed California’s draft Low Carbon Fuel Standard (LCFS), which is designed to reduce greenhouse gas emissions in the state by over 16 million metric tons by 2020-nearly 10% of the total reduction goals set by the state. In the draft proposal, California Air Resources Board (CARB) staff set forth an analytical means of calculating relative “carbon intensity” of the competing fuelstocks.  As part of that analysis, CARB staff included a factor for “indirect land use changes” (ILUC). The logic for considering ILUC is that if increased production of a specific type of biofuel in the United States causes a shift in land use, the immediate and future GHG emissions resulting from that land use change should be included in the life-cycle GHG emissions for that biofuel.  The theory for including indirect effects in measure of carbon intensity is generally not controversial.  Difficulties arise, however, when the theory is put into practice.

The debate with respect to the CARB draft proposal centers on the indirect effects of increased demand for certainly biologically-derived fuels and the resulting change in land-use patterns, both locally and globally.  As the report states, “A land use change effect is initially triggered by a significant increase in the demand for a cop-based biofuel.”  That increase demand changes the market dynamics for that particular crop, stimulating increased production, which, “if [it] takes place on land formerly in non-agricultural uses,” results in land use change impacts, such as “the carbon released to the atmosphere from the lost cover vegetation and disturbed soils in the periods following the land use conversion.”

When these land use changes are taken into account, as some studies show, total emissions from biofuels are significantly higher, calling in to question their effectiveness as a barrier to further climate change. This assertion, however, has been fiercely debated, as it requires a number of assumptions about how supply and demand dynamics affect land use, and what practices are used in the production of crops for fuel stocks.

The crux of the debate seems to derive from the notion that many factors drive land use changes.  Other factors that influence land use changes includes urbanization, economic growth that drives demand for land-based food, population growth, feed and fiber production, and extracting lumber or mineral resources.  Perhaps even more important, the modeling of indirect effects should consider the different and rapidly evolving land use policies of the United States and other nations.  The land use impacts of these factors are difficult to quantify and there is considerable uncertainty about predicting their future magnitude and effects.  

In California, the LCFS is determined by examining the carbon intensity of various fuels. When examining corn and sugarcane based biofuels, the analysis included emissions due to indirect effects-to the dismay of some researchers and biofuel executives, who argue in a letter to the California Air Resources Board that the land use analysis is over sensitive and weighted against crop-based fuelstocks.

With indirect land use change included in the analysis, three production methods for creating ethanol (called “pathways” in the report) had comparable or higher emissions than traditional fuels. All three were produced with Midwestern corn stock, though the bulk of their emissions came from direct effects, such as the transport of the products into California.

Actions in California may provide a template for national action: the U.S. Environmental Protection Agency (EPA) has also proposed to consider these indirect land use changes in its national Renewable Fuel Standard, though it has not yet decided how to make those calculations. As with the decision by the state of California, EPA’s decision has also engendered both criticism and praise.

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

So-called first and second generation biofuels share a common challenge—how to show that biofuels represent life-cycle greenhouse gas emissions savings as compared to traditional fossil fuels. The issue also causes breaches in the biofuels industry because the greenhouse gas emissions savings of different biofuels can vary substantially.  A universally accepted regulatory tool for answering the question is “life cycle analysis.” Life-cycle analyses for renewable fuels seek to quantify the greenhouse gas emissions created by the manufacture of the fuel, including its inputs, through transportation to the consumer, use and disposal.  Under the 2007 Energy Independence and Security Act, biofuels qualify for the new renewable fuels standard (RFS) only if all carbon emissions associated with their production and use result in emissions savings of at least 20 percent.  California Assembly Bill AB 32 and the Governor’s Executive Order S-01-07 call for a reduction of at least 10 percent in the carbon intensity of California’s transportation fuels by 2020.  These projected emissions savings thresholds face technical challenges in measuring life cycle emissions savings and political battles as the various stakeholders jockey for position.  The resulting uncertainty contributes to limitations on investment flows in biofuels.

Under the 2007 Energy Independence and Security Act, renewable fuels must meet life-cycle emissions reduction targets for renewable fuels to qualify for the Renewable Fuel Standard (RFS).  Any renewable fuel produced in a facility under construction as of December 2007 must meet a threshold 20 percent reduction from a 2005 baseline, which is generated by measuring the 2005 life-cycle greenhouse gas emissions of traditional fuels.  Beginning in 2009, the subcategories of renewable fuel created by the act (cellulosic biofuel, advanced biofuel and biodiesel) must meet life-cycle greenhouse gas emissions reductions of between 50 percent and 60 percent from the 2005 baseline before consideration for the RFS.

In California, the California Environmental Protection Agency is required to coordinate activities between the University of California, the California Energy Commission and other state agencies to develop and propose a draft compliance schedule to meet the 2020 target.  Furthermore, the California Air Resources Board (CARB) identified the establishment and implementation of the Low Carbon Fuel Standard (LCFS) as an early action item with a regulation to be adopted and implemented by 2010.

As we reported on ClimateIntel, on March 5, 2009, (CARB) released its proposed regulation for establishing an LCFS. The proposed “cradle to the grave” regulation takes into account 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.   The U.S. Environmental Protection Agency (EPA) is in the process of developing a similar rule as part of the development of a federal RFS

Compliance with these thresholds requires resolution of just how to measure life-cycle greenhouse gas emissions.  The sheer complexity of the analysis, including disagreements as to the appropriate methodology for measuring greenhouse gas emissions, has made LCFS rulemakings a difficult endeavor.  In 2007, as part of its rulemaking establishing the 2005 RFS, EPA determined that “the current state of scientific inquiry surrounding life-cycle analyses is not sufficiently robust to warrant its use.”  The science has not developed sufficiently since to allow for consensus on this issue, and rulemaking establishing a uniform methodology is likely to be controversial.

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As we reported on ClimateIntel earlier, one of President Obama’s first acts in office was to instruct the Environmental Protection Agency (EPA) to review its denial of California’s waiver request to federal regulations on automobile emissions. That waiver, which California had sought since 2005—and had been denied by the Bush administration EPA—would allow California to impose limits on the carbon dioxide emitted by new cars within the state.

That review will begin this Thursday, March 5th—almost a year to the day since the EPA rejected the original request—with a public hearing. Written comments regarding the waiver request will be accepted until April 6th. According to the EPA’s website on the waiver request, “EPA shall grant a waiver unless it finds that California:

• was arbitrary and capricious in its finding that its standards are in the aggregate at least as protective of public health and welfare as applicable federal standards;
• does not need such standards to meet compelling and extraordinary conditions; or
• has proposed standards not consistent with Section 202(a) of the Clean Air Act.”

Documents pertaining to the waiver request are available here.

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On February 11, 2009, in what is being termed the largest solar deal in the world, Southern California Edison and BrightSource Energy Inc. announced a deal that will bring 1,300 MW of solar-thermal power to California’s largest investor-owned utility.  The deal makes a bold statement against the current state of the credit markets and the panoply of considerations inherent in large-scale energy projects.  The optimism surrounding the ability to get the deal financed likely comes in significant part from the renewal of the federal investment tax credit for solar (ITC) in Q4 2008, as well as expectations over the new administration’s economic stimulus package.

The deal consists of a series of seven power purchase agreements (PPAs) broken into 100 or 200 MW chunks, which will first have to be approved by the California Public Utilities Commission (CPUC).  BrightSource, an Oakland, Calif. startup initially backed by investors like Google, Morgan Stanley, Chevron, BP, Statoil Hydro, VantagePoint Venture Partners and Black River, will own and operate the solar plants and, in turn, deliver power to SoCal Edison over the 20-year contract terms.

The first 100 MW is expected to be located in a solar-thermal complex already being developed by BrightSource on the California-Nevada border in the Mojave Desert, and may come online as early as 2013 depending on the regulatory approval process.  BrightSource is also looking to neighboring states for potential sites to power the deal, including the Devers-Palo Verde No.2 power corridor under review by the Arizona Corporation Commission, and the Mormon Mesa in Nevada.

These projects should benefit from the streamlined permitting process instituted by Executive Order S-14-08 (EO S-14-08), which was signed by Governor Schwarzenegger on November 17, 2008.  Among other things, EO S-14-08 propelled creation of the Renewable Energy Action Team (REAT) by the California Energy Commission (CEC) and Department of Fish & Game (DFG), and a Desert Renewable Energy Conservation Plan in the priority Mojave and Colorado deserts.  The projects should also experience the synergies resulting from an MOU entered into by and between the CEC, DFG, U.S. Fish and Wildlife Service and the U.S. Bureau of Land Management, which includes the federal partner agencies in the expedited permitting process for projects on federally-owned California land. As previously reported by ClimateIntel, California’s new streamlined process is expected to halve the application time for specific projects.

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Spurred by a variety of incentive programs, homeowners, businesses, and local governments installed 158 MW of grid-tied solar photovoltaic projects in the investor-owned utility (IOU) service areas of California in 2008, more than doubling the 78 MW installed in 2007.  Despite the economic downturn, the California Public Utilities Commission reported that the rate of installations is expected to remain strong in 2009.  According to the Commission, demand to participate in the largest incentive program, the California Solar Initiative (CSI), surged in the fourth quarter of 2008, breaking the previous records for most applications in a single quarter.

The CSI program, launched in 2007, provides upfront incentives for solar systems installed on existing residential homes, as well as existing and new commercial, industrial, government, non-profit and agricultural properties within the IOU service areas.  The program has a budget of $2.17 billion with the goal of reaching 1,940 MW of installed solar capacity by the end of 2016.  Combined with other statewide programs, $3.3 billion in incentives are available.

As a bright spot in the California economy, the CSI program has generated more than $5 billion worth of investment in solar projects in California.  According to the Commission, for every $1 in incentive committed by the CSI program, an additional $6 in private funds is invested in solar technology in California.  Considering the current demand to participate in the CSI program, and the availability of solar investment tax credits, this level of investment should continue in 2009.

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

Last week the California Air Resources Board (CARB) held a public workshop providing an implementation timeline and identifying rulemaking issues for the Assembly Bill 32 (AB 32) Scoping Plan, approved in December 2008.   AB 32, the California Global Warming Solutions Act, sets a target to reduce statewide emissions to 1990 levels by 2020.  The Scoping Plan recommended a mix of strategies to achieve emissions reductions, in particular a greenhouse gas cap-and-trade, as well as other market mechanisms, new energy regulations, voluntary measures, energy efficiency measures, and fees. CARB’s cap-and-trade rulemaking will determine all elements of the program design, including the scope and threshold of source eligibility, the level of emissions cap, the manner of allowance distribution, offsets, reporting requirements, and enforcement.  CARB will seek to establish transparent emissions trading rules, including possible restrictions on market participation.  Regulations for the cap-and-trade will be adopted by November 2010 and the cap-and-trade will begin on January 1, 2012 for the electricity generation sector and large industrial sources.  Additional sectors, such as commercial and residential natural gas use and transportation fuels, will be phased into the system in 2015.

CARB intends that its rulemaking harmonize as much as possible with that of Western Climate Initiative (WCI) member jurisdictions.   Under the Scoping Plan, CARB has committed to certain elements in the design of the cap-and-trade: the program will have a three-year compliance period, minimum 10 percent auction of emissions, and will limit offsets to no more than 49 percent.  However, CARB will participate with the WCI to ensure that critical elements of the rulemaking are harmonized between the partner jurisdictions. CARB anticipates that WCI members will share a standard auction design, coordinate auctions, and have consistent rulemaking provisions on offset and reporting protocols.  It is CARB’s position that participating in a regional program will reduce emissions leakage, support jobs retention, and give the WCI member states increased leverage on framing federal climate policy.  Adopting standard WCI elements will help ensure that emission allowances have comparable value across jurisdictions.

In crafting the California cap-and trade regulations, CARB will use a formal rulemaking process with extensive opportunity for public input in the regulatory process.  CARB will invite participation by US EPA and other federal lead agencies to participate in the rulemaking with the intention that CARB’s discussions of and recommendations on policy issues will influence national legislation and regulatory development.

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This past weekend, the White House announced that President Obama will instruct new EPA Administrator Jackson to vigorously review the request by the State of California to enforce more stringent greenhouse gas emissions standards on automobile manufacturers.  While much of the attention is focused on what impact this ruling may have on the struggling domestic automobile industry, the ruling could also lead to considerably more widespread  regulatory impact.  Indeed, one such impact could be to require EPA and their state counterparts to consider whether new and modified stationary sources must install Best Available Control Technology (”BACT”) for carbon dioxide.

Since December 2005, California has sought EPA’s permission to enforce a state law that would require automakers to reduce carbon dioxide emissions from new vehicles by 30 percent by 2016.  Under the Clean Air Act, EPA may not approve such a “waiver” request if it finds that the proposed state standards are not needed “to meet compelling and extraordinary conditions.” 42 U.S.C. § 7543(b)(1)(B).  Former EPA Administrator Johnson ruled last year that California did not make the required showing.  73 Fed. Reg. 12156 (March 6, 2008).  Last week, Mary Nichols, Chairman of the California Air Resource Board (”CARB”) petitioned EPA to reconsider that decision.

Then late last year, former Administrator Johnson issued another controversial decision—an interpretive rule—concluding that a “regulated NSR pollutant,” as used in 40 C.F.R.§ 52,21(b)(50), excluded pollutants for which EPA regulations required only monitoring or reporting, but not actual control of emissions.  As a result, according the Johnson memorandum, EPA Regions did not have to consider whether a new or modified stationary source had to install BACT for CO₂.

A ruling by EPA Administrator Jackson allowing California and other states to impose GHG emissions standards on automobiles could be considered “actual control of emissions” under the Clean Air Act.  If so, environmental groups and others seeking to require coal-fired power plants (and other stationary sources) to install BACT would have a new weapon in that effort.  Many questions remain unanswered and will likely continue to be unanswered until, at least, EPA rules on the CARB petition.  But, today’s memorandum from the President seems to represent an important step toward requiring BACT for CO₂.

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2008 was a landmark year for climate change initiatives in California.  Despite an economic downturn, the California Air Resources Board (CARB) approved an ambitious plan to slash greenhouse gas emissions to 1990 levels by 2020.  This plan, once implemented, will affect every sector in California.  The State Legislature also approved a pioneering bill to encourage “smart growth” regional land use planning.  In addition, Governor Schwarzenegger pushed for increased use of renewable energy and forged new relationships with leaders throughout the world to tackle climate change issues.  Not to be outdone, local agencies adopted measures to, among other things, incentivize the use of solar electricity and reduce emissions from California’s ports.

Looking forward to 2009, California regulators will be busy implementing many of the broad initiatives from 2008; within the next year, CARB must adopt enforceable regulations to implement its “discrete early action” measures to reduce greenhouse gas emissions.  CARB will also begin the rulemaking process to implement other measures set forth in its scoping plan.  Given the deepening economic crisis and criticisms surrounding its prior economic analysis, CARB will most certainly conduct further studies regarding the short and long term costs and benefits of its plan to reduce greenhouse gas emissions.  In addition, in collaboration with the Western Climate Initiative, CARB will fill in many of the gaps regarding how it plans to implement a cap-and-trade program covering 85 percent of the state’s emissions.

California planners can also look forward to receiving additional guidance in 2009 regarding the intersection between climate change and environmental review responsibilities.  By July 1, 2009, the Governor’s Office of Planning and Research must prepare guidelines for the evaluation of greenhouse gas emissions under the California Environmental Quality Act (CEQA).  Notably, as California’s economic woes increase, there will likely be increased pressure to exempt certain job-generating projects from CEQA review in order to speed their approval.  Notably, late last month, Governor Schwarzenegger vetoed a much needed tax package in part because he wanted to exempt additional “shovel-ready” projects from CEQA review.  With the economic downturn, the open question for 2009 appears to be whether policy makers and regulators will delay many of the impressive climate change initiatives of 2008.

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