California Air Resources Board Releases Draft Scoping Plan Update (Part 3)

Latham & Watkins LLP
Contact

Latham & Watkins LLPCARB doubles down on LCFS Program and liquid transportation fuels.

On May 10, 2022, the California Air Resources Board (CARB) released its Draft 2022 Scoping Plan Update (Draft Scoping Plan) for public review and comment. Assembly Bill (AB) 32, the California Global Warming Solutions Act of 2006 (AB 32), requires CARB to develop and update every five years a scoping plan that describes the approach California will take to reduce greenhouse gas (GHG) emissions to achieve the goal of reducing emissions to 1990 levels by 2020. Senate Bill (SB) 32 subsequently strengthened the state’s GHG emissions reductions target to at least 40% below 1990 levels by 2030. Our first post in this series discusses CARB’s Proposed Scenario to achieve the state’s GHG targets, which adopts a carbon neutrality target for 2045. Our second post explores how the Cap-and-Trade Program features in the Draft Scoping Plan. In this third post, we examine how California’s Low Carbon Fuel Standard (LCFS) Program factors into the state’s GHG reduction goals and how the LCFS Program may be amended in the near future. The Draft Scoping Plan states that CARB will initiate a rulemaking on the LCFS to ensure it continues to support low-carbon fuels that will displace petroleum fuels.[1]

The California LCFS Program was adopted in 2009 as one of the key measures to reduce GHG emissions in California under AB 32. The program’s original target was to reduce the carbon intensity (CI) of transportation fuel used in California by 2020 at least 10% from a 2010 baseline. CI is a measure of the amount of carbon dioxide equivalent (CO2e) emitted per unit of energy provided by that fuel, taking into account the GHG emissions over the lifecycle of the fuel — including production, transportation to market, and consumption. The LCFS Program sets annual CI standards that decline over time. Transportation fuels sold in California that have a lower CI than the LCFS Program benchmark established by CARB generate LCFS Credits, where one credit represents one metric tonne of CO2e reduced. Transportation fuels sold in California with CIs higher than the benchmark generate deficits. A fuel supplier with deficits must generate or acquire an equivalent number of LCFS Credits on an annual basis, creating demand for low-CI fuels in California.

The LCFS Program was most recently, and most significantly, amended in 2018 in response to the 2017 Scoping Plan, which “made it clear that developing a more ambitious LCFS is a critical part of the state’s efforts to achieve the SB 32 goal.”[2] In alignment with California’s 2030 GHG target, the amendments strengthened and extended the CI benchmarks to a 20% reduction below the 2010 baseline by 2030 and in each year going forward. In addition to strengthening the CI targets, the 2018 amendments made the following major changes to the LCFS Program:

  • Covered Fuels: The amendments expanded the fuel types covered by the LCFS Program to encourage further GHG reductions by including alternative jet fuel, propane, compressed natural gas, and renewable natural gas.
  • Capacity-Based Crediting: These added provisions allow an entity to generate LCFS Credits for the deployment of zero-emission vehicle (ZEV) fueling infrastructure, including hydrogen stations and electric vehicle (EV) fast charging sites. LCFS Credits are generated based on the capacity of the station or charger, minus the quantity of dispensed fuel (which generates LCFS Credits under a CARB-approved fuel pathway). Capacity-based crediting provides a revenue stream for fueling stations while the ZEV population and usage of the station increases.
  • CCS Protocol: The 2018 amendments adopted a protocol to allow crediting of carbon capture and sequestration (CCS) projects. CCS projects must incorporate monitoring, reporting, and verification requirements to demonstrate that the GHG reductions are permanent in order to generate LCFS Credits.

As of 2019, the transportation sector was the largest sector source of GHG emissions in the state, accounting for more than 50% of statewide GHG emissions.[3] The Draft Scoping Plan addresses three ways in which transportation emissions may be reduced: (1) new technology; (2) innovative fuels; and (3) a decrease in vehicle miles traveled. Transportation technology and fuels both implicate the LCFS Program.

In terms of technology, the Draft Scoping Plan emphasizes that vehicles must transition to zero emission technology in order to decarbonize the transportation sector. Executive Order N-79-20 set a goal that 100% of in-state new passenger car and truck sales will be ZEV by 2035, which is reflected in the Draft Scoping Plan. That same Executive Order also sets a goal that 100% of medium-duty and heavy-duty trucks will be ZEV by 2045 where feasible, and by 2035 for drayage trucks. As shown in Figure 4-1, copied below from the Draft Scoping Plan, meeting the state’s goals for decarbonizing the transportation sector will require rapid, near-term increases in the percentage of new vehicle sales that are ZEV.

The Draft Scoping Plan notes that easy access to refueling infrastructure is required to achieve the level of ZEV adoption required to meet the state’s goals. While certain existing public funding mechanisms are available for the deployment of ZEV refueling infrastructure, “[p]rivate investment in reliable, affordable and ubiquitous refueling infrastructure must drive the transition as the business case for ZEVs continues to strengthen.” To that end, the “Strategies for Achieving Success” in the transportation technology category include an effort to align the LCFS Program with the Draft Scoping Plan, and:

Promote private investment in the transition to ZEV technology, undergirded by regulatory certainty, such as infrastructure credits in the Low Carbon Fuel Standard for hydrogen and electricity, and hydrogen station grants from the California Energy Commission’s Clean Transportation Program pursuant to Executive Order B-48-18. (emphasis added)[4]

In terms of transportation fuels, while electricity and hydrogen are currently the primary fuels for ZEVs, the Draft Scoping Plan acknowledges the need for low-carbon liquid fuels during the transition to ZEVs. This acknowledgement is pragmatic because gasoline- and diesel-powered vehicles are on the road today, and those sold before the aforementioned 100% ZEV mandates, will continue to operate as the California fleet turns over. Additionally, the Draft Scoping Plan notes that low-carbon liquid fuels can be used to reduce GHG emissions from sectors that cannot easily transition to ZEVs, such as aviation, locomotives, and marine applications. As shown in Figure 4-2, taken from the Draft Scoping Plan, the projected transportation fuel mixes in 2035 and 2045 indicate a substantial decrease in liquid petroleum fuels with increases in electricity, biofuels, and hydrogen.

The Draft Scoping Plan credits the LCFS Program for fostering a growing alternative fuel market in California, and states that the market signals from the LCFS Program are in part responsible for fuels like renewable diesel, sustainable aviation fuel, renewable gas, and electricity all gaining substantial market shares and displacing gasoline and diesel in vehicles.

The Draft Scoping Plan’s “Strategies for Achieving Success” in the category of transportation fuels includes initiating a public process to evaluate increasing the stringency and scope of the LCFS Program, which could include proposing accelerated CI targets between now and 2030; further declines in post-2030 CI targets (which are currently held constant at the 2030 levels) to align with the Final 2022 Scoping Plan; fully integrating current “opt-in” sectors into the LCFS Program (e.g., aviation fuels); and providing capacity crediting for hydrogen and electricity used for heavy-duty vehicle fueling.[5]

The success of the LCFS Program as a market-driven means to reduce the CI of transportation fuels relies heavily on the value of LCFS Credits. While in May 2021 LCFS Credits were trading for an average price of $190,[6] in the week of May 23-29, 2022, CARB reports an average Credit price of $105.03.[7] Credit prices have been steadily declining over the last two years due to a variety of factors, including new low-carbon fuel production facilities coming online and market expectations about future supplies of LCFS Credits from announced, but not yet built, facilities. It remains to be seen whether low-carbon fuel production facilities and ZEV infrastructure projects can secure project financing, be constructed, and remain profitable when LCFS Credit prices are falling. Given the Draft Scoping Plan’s acknowledgement of the LCFS Program’s role in encouraging and supporting the scaling up of alternative fuels, the upcoming LCFS rulemaking also may evaluate provisions to provide regulatory certainty and maintain LCFS Credit prices at a level that will continue to attract private investment.

Endnotes

[1] Draft Scoping Plan at 225.

[2] CARB, Staff Report: Initial Statement of Reasons for the Proposed Amendments to the Low Carbon Fuel Standard Regulation at EX-1 (Mar. 2018), available at: https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2018/lcfs18/isor.pdf?_ga=2.163810422.838982876.1653944403-1700096536.1646153403.

[3] Draft Scoping Plan at 147.

[4] Id. at 150-51.

[5] Id. at 154.

[6] CARB, Monthly LCFS Credit Transfer Activity Report for May 2021 (June 8, 2021), available at: https://ww2.arb.ca.gov/sites/default/files/classic/fuels/lcfs/credit/May%202021%20-%20Monthly%20Credit%20Transfer%20Activity.pdf.

[7] CARB, Weekly LCFS Credit Transfer Activity Reports, available at: https://ww2.arb.ca.gov/resources/documents/weekly-lcfs-credit-transfer-activity-reports.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP
Contact
more
less

Latham & Watkins LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.