Creating a Large, Guaranteed Market for Advanced Biofuels Through a Low Carbon Fuel Standard

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1 Creating a Large, Guaranteed Market for Advanced Biofuels Through a Low Carbon Fuel Standard Adopted in April 2009, California s Low Carbon Fuel Standard (LCFS) will guarantee a market of up to 3.4 billion gallons/year of low-carbon biofuels by The LCFS uses a performancebased, fuel-neutral approach to reduce the carbon intensity of transportation fuels over time. 1 Eighteen other states, the European Union and Canadian provinces are also moving forward with low carbon fuel standards that will likely share many of the design elements of the California plan. 2 How a Low Carbon Fuel Standard Works In California, the LCFS requires oil refineries and importers to achieve a 10% reduction in the carbon-intensity of their fuels by 2020 (Figure 1). Companies that produce low-carbon fuels such as advanced biofuels, electricity, natural gas, and hydrogen will thrive for two reasons: (1) the LCFS provides a guaranteed market for their fuels and (2) their products can generate LCFS credits, each of which represents one metric ton of GHG emissions reduction. Oil companies are obligated to hold enough LCFS credits on an annual basis to meet the standard. Figure 1: LCFS requirements in terms of fuel carbon intensity. Carbon Intensity (grams CO2e/MJ of fuel) Gasoline Standard Diesel Standard % reduction from 2010 baseline 1 International bunker fuels and aviation fuels are not currently included in the California LCFS. 2 These states include Oregon, eleven Northeast and Mid-Atlantic states, and six Midwest states signing onto the Midwest Greenhouse Gas Accord (not including three observer states). NORTHERN CALIFORNIA & ROCKY MOUNTAINS NEW YORK & NEW ENGLAND SOUTHERN CALIFORNIA 111 Sutter Street, Fl West 20th Street 1314 Second Street San Francisco, CA New York, NY Santa Monica, CA TEL FAX TEL FAX TEL FAX

2 The LCFS Increases the Market for Advanced Biofuels The California Air Resources Board (CARB) estimates that by 2020 the LCFS would likely result in the use of 2.4 to 3.4 billion gallons of advanced biofuels in California. 3,4 In comparison, the federal Renewable Fuel Standard 2 (RFS2) mandates specific volumes and types of biofuels to be used nationwide and is estimated to result in a market size of approximately 1.7 billion gallons for California. 5 Furthermore, under the federal RFS2, cellulosic biofuels, some of which may be able to reduce GHG emissions 90% relative to gasoline, receive no additional incentives over and above incentives provided to biofuels that only reduce emissions 60% relative to gasoline. Figure 2: Advanced Biofuel Volumes; California LCFS versus Federal RFS2. (Cellulosic, biodiesel, advanced renewable diesel from ARB estimates included for the comparison. Sugarcane ethanol not included.) The LCFS Creates a Long-term, Stable Market Signal to Industry and Investors The creation of an LCFS credit market will help drive investments into advanced biofuels development. By creating a guaranteed market for advanced biofuels and by providing value for 3 These volumes represent high and low cases for the LCFS. CARB (2009a), Initial Statement of Reasons, Vol 2, Tables E-1a, E-4a, E-6a, E-7a 4 According to federal definitions under the Renewable Fuel Standard (as modified by the Energy Independence and Security Act of 2007), Advanced biofuel refers to any renewable fuel other than ethanol derived from corn starch and which achieves at least a 50% GHG emission displacement. Advanced biofuels can include, for instance, biomass-based diesel, biogas, butanol or other alcohols produced through conversion of organic matter from renewable biomass. Cellulosic biofuel is a subset of this advanced biofuel category and refers to any renewable fuel, not necessarily ethanol, derived from any cellulose, hemicellulose, or lignin each of which must originate from renewable biomass and achieve at least a 60% GHG emissions displacement compared to the fuel replaced. P. 22, EPA Notice of Proposed Rulemaking, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program, RIN 2060-A081, May 26, 2009, 5 CARB (2009a), VII-1. VIII-38. This estimate is based on California receiving a proportional share of the RFS2 fuel volumes in Environmental Entrepreneurs Page 2 of 5

3 GHG emission reductions, the LCFS also will buffer producers and investors against oil price volatility. Figure 3: Implied Value Over Time of the LCFS Program For Low-carbon Fuels Based on low price and high price trajectories for the credits. The analysis assumes the requirements grow from 10% reduction in fuel carbon intensity in 2020 to 24% reduction by Total Implied Value of LCFS Credits (separate from fuel), $ million High Price Case Low Price Case Figure 4: California's Venture Capital Investments in Advanced Biofuels from 2002 to 2009 (up to 3Q for 2009). Investments (millions $, not adjusted for inflation) Algae Biodiesel Biodiesel Biomass Cellulosic Ethanol * Source: Cleantech Group ( * Up to and including 3Q09 The LCFS Results in Preference of Ultra-low Carbon, Advanced Biofuels over Conventional Biofuels Environmental Entrepreneurs Page 3 of 5

4 Under the LCFS, all fuels would be treated in a neutral manner and assessed on their carbonintensity value or score. Table 1 shows that the use of a gallon of cellulosic ethanol results in nearly five times the GHG emission reductions of corn ethanol produced in California. The LCFS thereby incents the procurement of the lowest carbon-intensity biofuels first, based on their carbon-intensity score. Table 1: Comparison of Carbon-Intensities and the LCFS Credits Generated for Different Biofuels Carbon Intensity Score (grams CO2e/MJ) CA Gasoline blendstock 95.9 Carbon Reductions (kg CO2e/gallon ethanol) Gallons purchased to obtain one LCFS credit (metric ton CO2) Corn Ethanol (California Low CI) Cellulosic Ethanol (non-food crop) The LCFS Provides Incentives for Biofuels that Avoid or Minimize Land Use Impacts Biofuel production can result in negative land use impacts from land conversion and the loss of plant and soil carbon. The LCFS will reward biofuels producers who utilize methods and practices to reduce these negative effects. A CARB guidance document, 6 indicates that these practices could include the use of feedstocks that are: Grown on abandoned, degraded farmland which could increase soil sequestration Crop residues Sustainably harvested wood and forest residues 7 Grown using double and mixed cropping Municipal and industrial waste streams 6 CARB (2009b) Establishing new fuel pathways under the California Low Carbon Fuel Standard: Procedures and Guidelines for Regulated Parties, Draft, August , citing Tilman, David, Robert Socolow, Jonathon A. foley, Jason Hill, Eric Larson, Lee Lynd, Stephen Pacala, John Reilly, Tim Searchinger, Chris Somerville, and Robert Williams. Beneficial Biofuels The Food, Energy, and Environment Trilemma. Science 325: July 17, Ibid. CARB cites that this category would include the slash that is currently left in place after timber harvesting, residues from milling and pulp production, thinnings from fire prevention operations, as well as wastes from management operations undertaken to reduce competition and hasten the growth of marketable trees. Staff also note that the Board directed the Executive Officer to work with stakeholders to define the terms biomass and renewable biomass. As part of that effort, the Executive Officer is to assess the effects of incentivizing the use of forest biomass as a fuel feedstock, as well as the protections that would be necessary to ensure the sustainable and environmentally beneficial use of forest biomass. The goal of this effort would be to certify pathways for fuels produced from forest biomass, should the use of this feedstock be found to be sustainable and environmentally beneficial. Environmental Entrepreneurs Page 4 of 5

5 Developing a Flexible System to Represent Current and New Fuel Pathways under the Low Carbon Fuel Standard To determine a fuel s carbon value, California s LCFS identifies several default fuel pathways. Each pathway represents different fuel categories and their feedstock and production methods. For example, one default pathway exists for ethanol produced from agricultural waste, forest residue, and farmed trees. Because production processes will evolve, the LCFS gives producers the flexibility to apply for new fuel pathway designations based on supporting information they provide. Low-carbon fuel providers will therefore have incentives to continually improve their overall efficiency and emissions performance. For more information, please contact Christine Luong, E2 Manager, at cluong@e2.org or (415) Environmental Entrepreneurs Page 5 of 5