Could the RFS Move Toward a Low Carbon Program Like LCFS?

The idea of revising the Renewable Fuel Standard (RFS) to operate more like the Low Carbon Fuel Standard (LCFS) appears to be getting a fresh look.

The rise in prices for  California’s LCFS credits may be a motivating factor. More about that in a minute…. 

Let’s first look back to early August 2016.

Hillary Clinton’s presidential campaign had to do some damage control after reports emerged that her aides met with California officials. The reported discussions involved whether – should she win the White House – the Renewable Fuel Standard ought to be replaced with something that looked a lot like the state’s Low Carbon Fuel Standard.

The campaign moved quickly to tamp down the importance of the talks, with a spokesman telling Iowa’s largest newspaper, the Des Moines Register, that the candidate doesn’t favor replacing the RFS with a program that would require lower-carbon fuels. Clinton, he added, was “committed to get the RFS back on track and making sure the U.S. remains a leader in advanced biofuels.”

While we’ll never know how the RFS would have fared under a Clinton administration, we do know that even the possibility that a presidential candidate was considering changing the RFS to an LCFS-like program set off alarms within an ethanol industry that had spent much of the previous eight years fending off efforts by the oil industry and some in the environmental community to change the RFS.

But two-and-a-half years later, the idea of making the RFS look more like an LCFS program seems to be getting a reprise, including from some in the biofuels industry.

Though it would be easy to overstate the level of interest in the idea, it’s clear that LCFS-type programs are expanding at a time when the RFS appears to be increasingly embattled.

A Quick History of LCFS and What Its Status Is Now

Unsurprisingly, the LCFS began in California, which has long been on the cutting edge of environmental policies. The state’s program began in 2011, with the goal of reducing the carbon intensity (CI) of transportation fuels 10% by 2020.

British Columbia adopted a similar program in early 2008, the European Union approved its version of an LCFS later that year and Oregon followed suit in 2016.

And interest in LCFS-like programs is not limited to the West Coast.

Canada likely will be the next adopter, as regulators in December said they intended to implement a national Clean Fuel Standard (CFS) for transportation fuels by January 2022.

The Transportation & Climate Initiative, a coalition of nine Northeast and Mid-Atlantic states and the District of Columbia in December said it plans to design by the end of this year a regional low-carbon transportation policy. Exactly what the program will look like is still unclear, but state officials have said they will be looking closely at California’s LCFS as they work on the proposal.

More surprising was the announcement in December that the Great Plains Institute had joined with two Midwest states, including Iowa, (which, it’s worth noting, produces more corn-based ethanol than any other state in the U.S.) to explore decarbonization of the region’s transportation through electrification and the use of low- or negative-carbon biofuels.

But LCFS-like programs aren’t triumphing everywhere. Washington state lawmakers surprised some in April when they failed to approve a bill that would have required the use of lower carbon transportation fuels starting in January 2021. The reason? Key members of the state Senate expressed concern over the program’s impact on pump prices and the fact that the program as designed would not have increased revenue for the state.


LCFS, GHG Emissions and the Growing Advanced Biofuels Industry

So, what explains the growing interest in LCFS programs? One key reason is increased concern over climate change.

When it created the RFS in 2005 and expanded and extended it in 2007, Congress said it wanted both to reduce U.S. dependence on imported oil and cut greenhouse gas emissions by increasing the use of biofuels.

And while the debate continues over just how successful the RFS has been in reducing carbon emissions, even the strongest advocates would be hard pressed to argue that the program has met one of the primary goals Congress set for it – a significant increase in advanced and cellulosic biofuel production that can deliver higher GHG reductions than can corn-based ethanol.

While the advanced biofuels industry is only beginning to emerge from an extended infancy, it’s at least arguable that LCFS-related demand – mostly from California – has emerged as a key driver of that development.

Some recently announced projects support that.

  • Biofuels producer Aemetis said it plans to bring online in the second half of next year a 12-million-gal/year plant in Riverbank, Calif., that will produce cellulosic ethanol from almond and walnut wood waste and shells and will have a negative carbon intensity score under the state LCFS.
  • Diamond Green Diesel, a joint venture of Valero and Darling Ingredients, which last summer completed an expansion of its Louisiana renewable diesel plant to 275 million gal/year from 160 million gal/year in November, said it will jump the facility’s annual output to 675 million gal/year. The partners have made clear that they are targeting California and other LCFS markets as primary destinations for their fuel.
  • Boston-based World Energy in October said it will spend $350 million over the next two years to convert its Paramount, Calif., facility into what it says will be one of the world’s cleanest fuel refineries, capable of producing 306 million gal/year of renewable jet, diesel, gasoline and propane.
  • And Renewable Energy Group and Phillips 66 in November said they intend to build large-scale renewable diesel plant next to P66’s Ferndale, Wash., refinery that could begin producing as early as 2021.

LCFS is Also A Valuable Market, Credit Prices Show

While rising demand for ever-lower carbon in fuel is influencing these investment decisions, an equally important factor is the increasing value of California’s LCFS credit market.

OPIS data shows that the average value for LCFS credits has jumped from $89.03/credit in 2017 to $168.35/credit in 2018. And through the first quarter of 2019, OPIS data has the credit price averaging $194.15.

With values for Renewable Identification Number (RIN) credits continuing to trade at or near multi-year lows, it’s little wonder that biofuel producers’ attention is turning more and more toward California and other LCFS markets.

Speaking in December at an alternative jet fuel industry conference in Washington, John Cusick, a senior analyst for biofuels with The Jacobsens, said the value of California’s LCFS market could eclipse that of the RINs market as early as this year.

Cusick cited estimates that put the value of the state’s LCFS credit market at $5.9 billion this year, overtaking the RINs market, which is projected to have a 2019 valuation of $4.2 billion.

And several speakers at OPIS’ LCFS and Carbon workshop in San Francisco in December also predicted that California’s LCFS market will soon exceed the value of the RFS market.

LCFS Stability Versus RFS Uncertainty

OPIS speakers also said the state’s LCFS market enjoys another key advantage over the RFS – political stability, which is a key factor for companies making long-term investment decisions.

The decision by California legislators and regulators last year to extend the LCFS by 10 years to 2030 and double the level of carbon reductions to 20% gave investors one of the first things they look for when deciding whether to finance plants – will a market for the fuel be there when the facility is ready to produce its first gallons?

The fact that California decided to extend and expand the LCFS came at the same time the RFS was under assault from a record number of small-refinery exemptions and White House sponsored talks that included discussions of a price cap on RINs credit prices.

And the RFS is facing more uncertainty this year. New petitions for small refinery exemptions continue to be submitted to EPA while the agency considers limits to how RINs may be bought and sold, works on a proposal to reset cellulosic and total renewable fuel targets and begins to plot a path forward after 2022, when congressionally mandated annual volume goals expire.

But, LCFS Programs Have Challenges, Too

None of this, however, should be read to suggest that LCFS-type programs are not without their own set of problems. Many in the oil and refining industries, who have opposed the RFS since its inception, are no fans of low-carbon fuel programs and have mounted so-far-unsuccessful court challenges.

Further, there are still-unresolved questions over whether the programs can achieve their promised carbon-reduction goals at a cost that will not cause consumers to rebel and whether growth in electric vehicles and advanced transportation systems, such as hydrogen fuel cell vehicles, will come in anywhere near the projected numbers.

So, does the growing popularity of the low-carbon fuel model mean the RFS may be on its way out? Probably not anytime soon. The program continues to benefit from strong bipartisan support from Midwest congressional members, who have been able to frustrate any efforts to modify the program – and the smart money is likely still betting that the RFS will continue well beyond 2022.

And yet, the possibility that the RFS could be refashioned into an LCFS-like program can’t simply be dismissed.

Some policy watchers believe that, depending on the outcome of the 2020 presidential election, there’s a legitimate shot Congress will take up a major climate bill in 2021. That legislation would have to tackle the largest single source of carbon emissions – the transportation sector – and an LCFS program could be the best tool for doing that.

A key to the success of that effort may be the fact that the ethanol industry’s views toward California’s LCFS have evolved since the program got underway, in large part because it has given many corn-based ethanol producers access to a new, high-value market.

Geoff Cooper, president and CEO of the Renewable Fuels Association, a leading ethanol industry group, acknowledged as much when he sat down for an interview with OPIS earlier this year.

“I think the ethanol industry looks [at the LCFS program] as having a level of certainty and assurance around it that in recent years the RFS hasn’t had. It’s also been easier for biofuel producers to capture carbon value and monetize that and that value is being shared upstream in a way that hasn’t always been the case with RINs.”

Cooper recalled “going to battle” with California regulators as they launched the program because of concerns that the LCFS wouldn’t “create much opportunity for starch-based ethanol.”

That opposition has turned more toward support for the program, he said, “because we’ve seen that ethanol shipped west has seen a nice value add because of these programs and it has also encouraged producers to make additional investments and take additional steps” to reduce their carbon intensity scores.

“I do think at some point there will be a discussion around a national LCFS standard given what we assume will be growing interest in reducing carbon emissions.”

The bottom line? If a presidential candidate speaking in Iowa in August 2020 raises the possibility of replacing the RFS with an LCFS-type program, he or she may not get 2016-era blowback.

Find out more about OPIS pricing, news and analysis for RINs and carbon allowance and offset credits. 


Tags: Carbon, Renewables, RINs