CA Low-Carbon Fuel Standard Questioned

OMAHA (DTN) -- California's controversial low-carbon fuel standard may not be able to survive long term unless more biodiesel and corn-based ethanol are allowed into the state's market quickly, according to a new study.

The analysis, conducted by scientists at Johns Hopkins University and published in "Applied Energy," finds the blending of low-carbon fuels would have to dramatically increase in a short time to meet the law's requirements.

Geoff Cooper, senior vice president of the Renewable Fuels Association, said California likely will need to reduce its carbon intensity values for corn ethanol by another 20% to 25% in order to meet the law's demands. It is something that biofuels groups have been trying to encourage the state to do for years, and it ultimately would allow Midwest corn ethanol producers greater access to the California market.

For years, biofuel and oil industry groups have challenged the policy in court. By and large, corn ethanol produced in the Midwest is excluded from entering the California market. There are exceptions. Some Midwest companies have found a pathway into the state by producing corn ethanol using methods that result in lower carbon emissions.

"Recent rulemaking activities held at the California Air Resources Board suggest that there may be underlying concerns regarding the long-term feasibility and cost of compliance with the LCFS," the study concludes.

"The fear is of a large spike in the LCFS credit price, something that could dramatically increase the burden of compliance for obligated parties (i.e., oil refiners in California). Regulatory actions are currently being designed around the idea of a price cap on the price of an LCFS credit."

Cooper said the study confirms what ethanol industry leaders have been saying for years.

"While we don't agree with all of the assumptions and conclusions in the study, it does confirm what RFA and many others in the biofuels industry have been saying since the LCFS was first adopted," he said. "That is, the study underscores our belief that compliance with the LCFS in the 2016-2020 timeframe will be extremely difficult and costly, or simply unachievable, unless meaningful changes are made to the program."

CRACKS IN LAW

Johns Hopkins finds obligated parties such as gasoline blenders should have banked nine times more credits in the beginning years of the program than "they did in reality."

In addition, biodiesel blending will need to increase "dramatically within a short period of time," the study said. For instance, by 2016 all diesel fuel would need to be increased from B5 to B20.

"This rate of change casts doubt on whether these targets are achievable," the study said.

What's more, the carbon intensity of biofuels entering California will need to decrease by in some cases 25% or more, the study said.

"This may be possible, but CARB would need to hasten the biofuel pathway approval process so that more low-carbon-intensity fuels can participate in the LCFS," according to the study.

In addition, Johns Hopkins said the current E10 blend wall where total ethanol production exceeds the available market, may be preventing the use of corn-based ethanol to meet LCFS requirements in California.

"The ethanol blend wall is still working to prevent the incorporation of more ethanol into the transportation system," the study said. "In addition to these technical issues, it will be necessary to swap more corn ethanol in California for sugarcane ethanol from Brazil."

The state's standard considers sugarcane ethanol to have less than half of the associated emissions compared to petroleum gasoline.

California's assumptions about importing sugarcane ethanol from Brazil to comply with the law have proven to be incorrect, Cooper said.

"CARB's modeling scenarios of LCFS compliance are overly reliant on huge import volumes of sugarcane ethanol, which to date have simply not materialized," he said.

CREDIT COST CONTAINMENT

California regulators recently designed and are implementing a new credit cost-containment mechanism.

If attempts in Congress are successful at repealing the Renewable Fuels Standard, the study said the effects could be detrimental to California's law -- leading to an LCFS credit price increase of more than 50%, the study said. The average price per credit as of March 8, 2016, was $122. It has fluctuated from about $60-$120, according to the California Air Resources Board.

California's fuel market is considered to be a potential boon for biofuels producers. The state's fuel consumption represents about 11% of all gasoline and 8% of all diesel fuel in the United States.

Though it is expected the biodiesel industry in the United States will see expanded production in the years to come, the study said there continues to be technological barriers to blending more of the biofuel.

"It is true that many manufacturers warranty their engines up to levels that are greater than biodiesel blends 5%; however, according to CARB data, biodiesel blending reached 5% only for a short period of time (fourth quarter of 2013)," the study said.

"It is difficult to envision a situation in the near future where biodiesel blending could reach higher than 5% for a sustained period of time. Indeed, it turns out that a baseline scenario that included a 5% cap on the blending of biodiesel is infeasible."

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @ToddNeeleyDTN

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