Suggested Citation:
Farrell, Alexander E. and Daniel Sperling (2007) A Low-Carbon Fuel Standard for California, Part 2: Policy Analysis. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-07-08

The Low Carbon Fuel Standard (LCFS) can play a major role in reducing greenhouse gas emissions and stimulating improvements in transportation fuel technologies so that California can meet its climate policy goals. In Part 1 of this study we evaluated the technical feasibility of achieving a 10 percent reduction in the carbon intensity (measured in gCO2e/MJ) of transportation fuels in California by 2020. We identified six scenarios based on a variety of different technologies that could meet or exceed this goal, and concluded that the goal was ambitious but attainable. In Part 2, we examine many of the specific policy issues needed to achieve this ambitious target. Our recommendations are based on the best information we were able to gather in the time available, including consultation with many different stakeholders. The recommendations are intended to assist the California Air Resources Board, Energy Commission, and Public Utility Commission, as well as private organizations and individuals, in addressing the many complex issues involved in designing a low carbon fuel standard. Choices about specific policies and calculation of numeric values for use in regulation must, of course, be made by these regulatory agencies. The analysis we present here is only illustrative.

The need to significantly reduce greenhouse gas (GHG) emissions from the transportation sector opens up the possibility that new fuels and new vehicles may become economical and widely used. The introduction of new transportation fuels that do not require petroleum will have a cobenefit: reduced oil imports to the state and the nation. It is important to note that these new fuels will compete on a very uneven playing field: the size, organization, and regulation of these industries are radically different. It is unreasonable to think that these differences will be eliminated by the LCFS. The LCFS should be designed to reduce the barriers and disincentives facing energy companies that might offer low carbon fuels to consumers.

Technological innovation is crucial to the success of the LCFS and to the achievement of California’s climate change goals. At the same time, imposing a new regulatory requirement will cause markets to shift (or rationalize) their existing production and sales so that improvements appear on paper to have been made, when in reality no significant change has occurred. Obviously, this rationalization does not represent the type of innovation needed to support the state’s climate change goals. Implementation of the LCFS must recognize and manage both of these effects, rewarding innovation while also minimizing unproductive “rationalization.” For this reason, we suggest that the LCFS require modest reductions in carbon intensity in the early years, and steeper reductions later as innovations and new investments bring more low carbon transportation fuels to market.

The LCFS should not be seen as a singular policy. It can provide complementary incentives to an economy-wide GHG emission cap, should the state choose to impose one. Implementing the LCFS requirement with a provision for trading and banking of credits will tend to keep costs low. And the LCFS should also be coordinated with other climate change policies. In addition, the LCFS may have implications for broader issues, such as environmental justice and sustainability, and should be implemented with these issues in mind. Considerable increases in the administrative capability of the regulating agencies will be needed in order to successfully implement the LCFS, and this capability should be assisted by continued research support.

One of the most challenging issues in the implementation of the LCFS is the climatic effect of land use change due to expansion of biofuel production. Because food and energy markets are global, all agricultural production contributes to the pressure to clear new land for crops. Recent scientific investigations suggest that enormous amounts of greenhouse gases can be released when lands are converted to more intensive cultivation (and also cause other adverse effects such as reduced biodiversity and changed water flows). These land use effects have been largely ignored in earlier lifecycle greenhouse gas assessments of biofuels. If biofuels are to reduce greenhouse gas emissions relative to fossil-based gasoline and diesel, then biofuels must: i) use advanced production methods (some of which are available now), ii) be derived from feedstocks grown on degraded land, or iii) be produced from wastes or residues. Land use change effects should be included in the LCFS, though cautiously at first, with the understanding that further research may change our understanding of this issue and therefore how it should be regulated.

The LCFS provides a durable framework for reducing the large amount of greenhouse gases, especially CO2, that are emitted from today’s petroleum-based transport fuel system. It will facilitate the introduction of low-carbon fuels and restrain the trend toward investments in more carbon intense transport fuels. These unconventional resources, including heavy oil, tar sands, oil shale and coal, have higher, sometimes much higher, carbon emissions than fuels made from conventional petroleum. The LCFS is a response to this recarbonization of transportation fuels, as well as the many market failures blocking innovation and investments in low-carbon alternatives to petroleum.