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Status Review of California's Low Carbon Fuel Standard (LCFS), 2011 - August 2012

UCD-ITS-RP-12-33

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California’s low-carbon fuel market is growing. Regulated parties in the State’s LCFS exceeded the requirements for 2011 and Q1 of 2012 by a substantial margin. Based on available data, average compliance cost in August 2012 is $13/MT CO2e, adding about 0.1 cents per gallon to the production cost of gasoline. Summer drought increased costs of corn ethanol, but the full impact of the drought on CA-LCFS compliance and compliance costs will not be known for some time.

We find that regulated parties in the California LCFS (CA-LCFS) exceeded the standard in 2011 and the first quarter (Q1) of 2012 by a substantial margin. Companies achieve compliance when credits equal deficits. Regulated parties generated 1.58 million credits (metric tonnes CO2e reduction) in the first 15 months, nearly double the amount of deficits (0.78 million), for a net surplus of 0.80 million credits to exceed the required reduction level by about 0.8 million metric tonnes CO2e. Companies relied on ethanol to generate 86% of the credits. The CI of ethanol fuels used to generate CA-LCFS credits in 2011 and first quarter of 2012 averaged around 84 gCO2e/MJ, compared to baseline values of 95.6 for gasoline.

Because no central trading mechanism exists, we used available information on actual trades, bids, and offers in August 2012 to estimate that CA-LCFS carbon credits were valued at $10-18/metric tonne (MT) CO2e, with an average of $13/MT CO2e. At this price ($13/MT CO2e) and given the 2012 requirement of 0.5% CI reduction, companies who choose to meet their obligation purely by purchasing CA-LCFS credits for compliance would incur an added cost of about 0.1 cents per gallon of gasoline produced.

The special topic addressed in this review is the effect of the 2012 U.S. summer drought. We find that poor yields due to extreme drought in the Midwestern U.S. raised corn prices about 60% from mid-June through August, causing ethanol prices to rise about 60 cents per gallon. The actual impacts of the drought on this year’s CA-LCFS compliance and on other food/fuel prices are not yet clear. Even with current higher corn prices, corn ethanol is still less expensive than gasoline on a per gallon basis and considerable amounts are being exported. Given that companies have until March 31, 2013 to acquire additional credits to meet 2012 compliance requirements, and corn and sugarcane ethanol markets are still adjusting to the drought's effects, it is too soon to gauge the drought’s overall impact on CA-LCFS compliance and compliance cost.

We will continue periodic publication of the LCFS Status Review and provide in-depth analysis on critical issues associated with the performance of the CA-LCFS as more data become available.

Suggested Citation: Yeh, Sonia and Julie Witcover (2012) Status Review of California's Low Carbon Fuel Standard (LCFS) 2011 - August 2012. Social Science Research Network Working Paper Series. Available online at http://ssrn.com/abstract=2174817.

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