“The stronger the LCFS, the greater the benefits.” That’s the main finding of a report released this week commissioned by Ceres and other organizations and completed by ICF. The consultancy found that cap-and-trade and LCFS policies are complementary to one another, helping the state to meet its GHG and petroleum reduction goals economically and more effectively relative to cap-and-trade alone. And the more ambitious LCFS targets are after 2020, the greater the economic, emissions and petroleum reduction benefits under the Cap-and-Trade Program (CTP) will be. The reason is that the CTP lacks an adequate price signal to encourage fuel diversification. ICF says refiners and oil producers typically buy allowances rather than reduce emissions, and pass the costs on to consumers, which does nothing to encourage fuel diversification.
Strengthening the LCFS from its current 10% carbon reduction goal to a 20% reduction goal by 2030 would cut cap-and-trade allowance prices in the 2030 timeframe by 50%. Because the LCFS directly reduces GHG emissions from the transportation sector, it lessens pressure on the overall emissions cap, and ensures other sectors participating in the program are not obligated to reduce more than their fair share of emissions. This helps lower CTP allowance prices, which in turn lowers the cost burden economy-wide, according to ICF.
Over time, ICF says, strong LCFS standards would significantly reduce dependence on oil. A 15 to 20% reduction in the carbon intensity of fuel by 2030 would reduce oil consumption by 18 to 26% without raising cap-and-trade compliance costs. In addition, it would broaden the mix of available transportation fuels, replacing 11 to 17% of gasoline use, along with displacing 28 to 48% of the state’s diesel demand.
The figure below highlights the need for fuel diversification, ICF says, in part because of the potential challenges associated with achieving the more stringent carbon intensity targets assumed for LCFS compliance. The figure shows the balance of credits and deficits on a cumulative and annual basis in the scenario with a 15% carbon intensity reduction target. The green bars represent the balance of credits and deficits generated on an annual basis, while the orange line represents the cumulative or total credits generated or banked over the program’s life. If the orange line falls below the zero axis, then it indicates that the program will not clear.
ICF concluded the report with this statement about the LCFS:
“The LCFS also provides the clearest and most inclusive policy signal to low carbon fuel providers, and avoids the shortcomings of most policies or regulations that focus myopically on one particular strategy over another, such as a biofuel blending mandate. Further, it allows for the most efficient allocation of capital and investment without relying on government intervention directing investment to a particular fuel. The lack of competitiveness in the transportation fuels market in California is highlighted by price spikes resulting from refinery outages and other events. Given that the transportation sector is nearly 95 percent dependent on petroleum‐based fuels, it is to be expected that the early stages of a transition to greater alternative fuel use, spurred by the LCFS program, will have some ‘start‐up’ costs that do not fully translate into benefits until the post‐2020 timeframe. By 2030, ICF anticipates that increased utilization of infrastructure assets, increased competitiveness in fuel markets, increased economies of scale in alternative fuel production, and continued incremental technological improvements will yield downward pressure on petroleum based fuel pricing.”