TERU Focus Report - Update on California's LCFS

3rd ARB Public Workshop on Changes to Proposed Regulatory Amendments
October 16, 2011 -- Michael Theroux

Introduction

The California Air Resources Board (ARB) held its third and final Public Workshop on Friday, October 14, 2011 to discuss proposed amendments to the Low Carbon Fuel Standard (LCFS) regulation. The Board approved the LCFS regulation on April 23, 2009, which became law on January 12, 2010 (2010 regulation). ARB staff has subsequently organized and overseen an Advisory Panel and numerous topical Work Groups for detailed analysis and development of LCFS implementation, and has sought broad stakeholder involvement through public meetings and comment periods. ARB staff has amended the 2010 regulation based upon the recommendations of the Panel, the Workgroups and feedback from stakeholders; the proposed regulation was presented at the workshop.

Friday’s workshop presented for discussion the key changes that have been made since the last public meeting in September. An abbreviated comment period ending October 24, 2011 has been set to solicit responses to the proposed changes to allow staff time to finalize the proposed regulatory amendments scheduled for presentation at the Board's December 15, 2011 hearing. A formal Rulemaking phase and 45-day comment period begins October 25th in advance of the Board hearing; a separate track to the ARB's Rulemaking website will be established and accessible at that time. If the proposed regulation is approved by the Board, it is due to the Office of Administrative Law (OAL) by January 6, 2012. 

Background Materials

In addition to Teru Talk's Interim Guide to the LCFS, numerous ARB documents are available that can help provide context for the proposed regulatory changes at this stage of the LCFS program. Among the documents posted to the ARB website are the current language as proposed for the LCFS regulation, credit allocation and transfer forms, and supplements to the pathway documents for California Reformulated Gasoline Blendstocks for Oxygenate Blending (CARBOB), California Reformulated Gasoline (CaRFG) and Utra-Low Sulfur Diesel (ULSD).

Updates and Revisions to the Draft Regulatory Language

As noticed in the Agenda, the workshop covered the following topics in varying levels of detail. For each topic, key changes since the September meeting were identified and briefly explained, with a question and answer period following.

·   Land Use Change (LUC) Carbon Intensity – (a) Staff have removed revisions from land use change regulatory values, as these will be considered next summer in a separate hearing - but this doesn't change the intended January 1, 2013 effective date. (b) Purdue University has revised the Global Trade Analysis Project (GTAP) Resource #3729, making significant changes to the model since the September LCFS meeting discussion. (c) The ARB is planning to initiate a technical peer review of the GTAP modeling soon.

In response to stakeholder questions, staff noted that additional workshops would be scheduled for 2012 after the Board had completed its hearing. Questions about modeling review clarified that only the GTAP would be assessed by a proposed peer review, and that staff had not yet assessed how the recent Purdue model changes might have numerically impacted carbon intensity (CI) values.

·   Low-Energy-Use Refineries discussions and any potential changes have been postponed.

·   Revised Draft Regulatory Language (see Proposed Regulation Order) – Staff discussed changes and additions to definitions to increase program internal consistency: the new subsection for the LCFS Reporting Tool (LRT) definitions have now been included in the main glossary and new terms will also be added to users guides. There have been clarifications on the use of the terms CNG, LNG, and Biogas. 

·   High Carbon-Intensity Crude Oil (HCICO) occasioned the most debate with five main points: (a)  Accurate accounting at and above baseline; (b) Discourage increased emissions; (c) Emissions reduction innovation promoted, i.e. credits; (d) Avoid or limit crude oil "shuffling;" and (e) Decision to Use "California Average Approach".

The most significant recent change is related to the ARB decision to propose a crude oil accounting system based on a rolling average strictly for California crude, the "California Average Approach". The oil and gas industry would prefer accounting to accept that "Crude is Crude", and treat all crude oil CI valuation the same regardless its origin.

Staff has proposed that a new baseline data year of 2009 be established now, and updated regularly to the most recent complete year's data in the future. Look-up tables will be adjusted for CI values based on 2009 data instead of 2003 data. A Pros and Cons debate was extensive and inconclusive.

Tesoro offered that any refinery that changes its "crude slate" will incur deficits for higher intensity crudes, compared to past year's data – ARB can't expect industry to make any decision as a group to self-penalize for bringing in crude. The idea that industry can change crude acquisition complement without incurring a deficit is false; when imported crude is judged differently from California-sourced crude, it impacts the marketplace and could be unfair to in-state product development.

Western States Petroleum Association (WSPA) said that an approach that gives NO differentiation at all is supported by industry, treating all crude the same: (a) simplifies the process; (b) provides certainty; (c) has the best chance to not cause market impacts; (d) provides equal treatment among refineries wherever they are located; (e) avoids blending accounting; (f) eliminates the need for complex crude CI accounting systems; (g) eliminates any form of crude shuffling; (h) improves energy security; (i) allows GHG management in disparate air basin jurisdictions.

The Natural Resources Defense Council (NRDC) agrees with the proposed principles, but noted that with a shift in baseline from 2006 to 2009, there is a 1.6gm/MJ increase in three years, by the same amount scheduled as a decrease between 2013 and 2016. The NRDC would also not choose the California  Average, but prefers a Refinery-specific approach.

The ARB has been developing a new list of non-HCICO screened sources, contracting with Stanford University to arrive at better modeling for all crudes; this should be available mid-2012. Lists will become obsolete when new regulations identify CI values per crude.

·   Enhanced Regulated Party – Staff has changed import, export, transloading and other entity definitions for consistency with other regulations. There are still unclear areas regarding ownership changes at the point of entry into California and staff seeks stakeholder input.

·   Opt-In and Opt-Out Procedure – Again, there are difficulties that may require additional categories be added to the current way importers and producers are characterized, and staff asks for language suggestions.

·   Credit Trading – Discussion of this topic centered on valuation of credits, especially when Electricity is considered a transport fuel. Staff noted that valuation of credits will eventually be set by the Market, but at present are about $15 per credit, given the only measurement points available (in ethanol credit trading).

·   Certification - Look-up table changes will continue to require legislative amendment because LCFS fuel pathways are considered "Rules of Applicability", and may only be modified by the more formal regulatory change process, not simply by Executive determination. Method 2A and 2B are not Rules of Applicability, therefore can be modified by executive / staff changes. Staff has proposed to eliminate the current minimum production requirement of 5,000 gallons per year, while adding methods of CI accenting for co-products as an equivalent process to the way co-products are treated in the federal Renewable Fuel Standard (RFS2).

·   Electricity Regulated Party – This topic brought about considerable lengthy discussion. Five main changes were considered: (a) All credit revenue resulting from electric vehicle (EV) programs implemented by the investor owned utilities must be used for new public good, public benefit education and project development; (b) In a specific example, public access charging and multi-family housing charging sourced credits must use revenues for public education on EV, and in addition to current efforts; (c) Additional reporting requirements for credits will be implemented, with a new annual compliance form; (d) Contract required between first in line and regulated party; (e) For instances of transportation electricity not otherwise provided for in regulations, the distribution entity can opt in for credits.

Clarifications: There is now no formal Dispute Resolution procedure proposed. Instead, disputes will be managed in direct discussions between regulated parties, staff and the Executive Officer. As with most brokerage house transactions, LCFS credit trading can be by "blind trade", without seller / buyer disclosure. Definitions will be increased in number and detail, including for "community choice aggregators". Staff agreed to revisit applicability of the opt-in process to electric vehicle service providers (EVSPs) who are presently not included, probably because there are too few business models active in California. Where credits are related to fleet management, there is no requirement to use funds generated specifically for EV educational activities. Use of credit-generated funds to benefit future customers (e.g., installation of additional charging stations and programs) will be further assessed, as will potential conflicts with Public Utility Comission provisions and policies. There is no parity between Cap and Trade credits and LCFS credits at this time, because the Cap & Trade does not recognize LCFS credits in their program.

·   Energy Efficiency Ratio (EER) – Staff noted that three were no new basic data, but the factor of 1.3 for calculations has been removed and replaced by calculated individual vehicle model EERs. Reference vehicles will necessarily change over time as new technology gets more efficient. Staff agrees that there is reason to reconsider the way base year accounting is defined, and a need to set a Baseline Model Year. As values are updated going forward, issues will move through the assessment process from staff recommendations toward executive decision with a hearing.

·   Reporting Requirements remain essentially the same, with the addition and improvement of various forms as mentioned already. 

Public Comment

Comments on proposed changes and matters discussed in this final workshop are due October 24, 2011 in order to get the ARB's own review completed and reports submitted on time to the Office of Administrative Law (OAL) in January. The formal 45 day rulemaking and comment period prior to the formal Board hearing starts October 25, 2011.

Questions should be directed to Floyd V. Vergara, Chief, Alternative Fuels Branch at (916) 327-5986 or via email at , or Ms. Aubrey Sideco, Air Resources Engineer, Substance Evaluation Section, at (916) 324-3334 or via email at .