California Air Resources Board Releases Updated Draft Scoping Plan (Part 3) | Latham & Watkins LLP

CARB doubles down on the LCFS program and liquid transportation fuels.

On May 10, 2022, the California Air Resources Board (CARB) released its Draft update of the 2022 framework plan (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 a scoping plan every five years that outlines the approach California will take to reduce emissions greenhouse gas (GHG) emissions to meet the goal of reducing emissions to 1990 levels by 2020. Senate Bill (SB) 32 subsequently strengthened the emissions reduction goal state GHG emissions to at least 40% below 1990 levels by 2030. Our first Publish in this series discusses CARB’s proposed scenario for achieving state GHG goals, which adopts a 2045 carbon neutral goal. Our second Publish explores how the cap and trade program figures into the draft framework plan. In this third article, we look at how California’s Low Carbon Fuel Standard (LCFS) program takes into account the state’s GHG reduction goals and how the LCFS program might change in the near future. The draft scoping plan states that CARB will initiate regulations on the LCFS to ensure it continues to support low-carbon fuels that will replace petroleum fuels.[1]

California’s LCFS program was adopted in 2009 as one of the key measures to reduce GHG emissions in California under AB 32. The original goal of the program was to reduce carbon intensity (CI) of transportation fuel used in California by 2020 by at least 10% from a 2010 baseline. CI is a measure of the amount of carbon dioxide equivalent (CO2(e) emitted per unit of energy supplied by that fuel, taking into account GHG emissions throughout the fuel’s life cycle, including production, transport to market and consumption. The LCFS program sets annual IC standards that decrease over time. Transportation fuels sold in California that have an IC lower than the LCFS program benchmark established by the CARB generate LCFS credits, where one credit represents one metric ton of CO2and reduced. Transportation fuels sold in California with CIs above the benchmark generate deficits. A loss-making fuel supplier must generate or earn an equivalent number of LCFS credits on an annual basis, creating demand for low IC fuels in California.

The LCFS program was modified most recently, and more importantly, in 2018 in response to the 2017 Framework Plan, which “clearly indicated that the development of a more ambitious LCFS is an essential part of the State’s efforts to achieve the SB 32 lens.[2] In line with California’s 2030 GHG target, the Amendments strengthened and extended the IC’s benchmarks to a 20% reduction below the 2010 baseline by 2030 and annually thereafter . In addition to strengthening 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 Credit: These additional provisions allow an entity to generate LCFS credits for the deployment of zero-emission vehicle (ZEV) refueling infrastructure, including hydrogen stations and electric vehicle fast-charging sites ( VE). LCFS credits are generated based on station or charger capacity, minus the amount of fuel dispensed (which generates LCFS credits within a CARB-approved fuel path). Capacity-based credit provides a revenue stream for service stations as ZEV population and station usage increases.
  • CCS Protocol: The 2018 amendments adopted a protocol for crediting carbon capture and sequestration (CCS) projects. CCS projects must incorporate monitoring, reporting and verification requirements to demonstrate that GHG reductions are permanent in order to generate LCFS credits.

In 2019, the transportation sector was the largest sectoral source of GHG emissions in the state, accounting for over 50% of statewide GHG emissions.[3] The draft blueprint addresses three ways to reduce transport emissions: (1) new technologies; (2) innovative fuels; and (3) a decrease in vehicle-kilometres travelled. Transportation technology and fuels both involve the LCFS program.

In terms of technology, the draft framework outlines that vehicles must switch to zero-emission technology in order to decarbonise the transport sector. Executive Decree N-79-20 set a goal that 100% of new passenger car and truck sales in the state will be ZEVs by 2035, which is reflected in the draft framework plan. This same decree also sets a target that 100% of medium and heavy trucks will be ZEV by 2045 when possible, 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, short-term increases in the percentage of sales of new vehicles that are ZEVs.

The draft blueprint notes that easy access to refueling infrastructure is necessary to achieve the level of ZEV adoption required to achieve state goals. While some existing public funding mechanisms are available for ZEV refueling infrastructure deployment, “[p]Private 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 framework plan, and:

Promote private investment in the transition to ZEV technology, underpinned by regulatory certainty, such as infrastructure credits in the Low Carbon Fuel Standard for hydrogen and electricityand grants for hydrogen stations 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 main fuels for ZEVs, the draft blueprint recognizes the need for low carbon liquid fuels during the transition to ZEVs. This recognition is pragmatic because gasoline and diesel vehicles are on the road today, and those sold prior to the aforementioned 100% ZEV mandates, will continue to operate as the California fleet renews. Additionally, the draft guidance plan notes that low-carbon liquid fuels can be used to reduce GHG emissions from sectors that cannot easily switch to ZEVs, such as aviation, locomotives and marine applications. As shown in Figure 4-2, taken from the draft blueprint, 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 with fostering a growing alternative fuels market in California and states that the LCFS program’s market signals are in part responsible for fuels such as renewable diesel, sustainable aviation fuel , renewable gas and electricity. market share and displacing petrol and diesel in vehicles.

“Strategies for Success” in the Transportation Fuels Category Guidance Plan project includes initiating a public process to assess increasing the rigor and scope of the LCFS program, which could include proposing CI targets accelerated by 2030; further cuts to the post-2030 CI targets (which are currently held constant at 2030 levels) to align with the final 2022 framework plan; fully integrate current opt-in sectors into the LCFS program (eg aviation fuels); and providing capacity credits for hydrogen and electricity used to fuel heavy vehicles.[5]

The success of the LCFS program as a market-driven means to reduce the CI of transportation fuels is highly dependent on the value of LCFS credits. While in May 2021, LCFS credits were trading at 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 steadily declined over the past two years due to a variety of factors, including the commissioning of new low-carbon fuel production facilities and market expectations for future credit supplies. LCFS from facilities announced but not yet built. It remains to be seen whether low-carbon fuel generation facilities and ZEV infrastructure projects can secure project financing, be built, and remain profitable when LCFS credit prices drop. Given the Draft Framework’s acknowledgment of the role of the LCFS program in encouraging and supporting the scaling up of alternative fuels, future LCFS regulations may also assess provisions to provide a regulatory certainty and maintain LCFS credit prices at a level that will continue to attract private investment.

Endnotes

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


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