Implementing Sustainability Requirement within the Low Carbon Fuel Standards A Performance-Based Approach

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1 Implementing Sustainability Requirement within the Low Carbon Fuel Standards A Performance-Based Approach Sonia Yeh Institute of Transportation Studies University of California, Davis IAEE European Conference Vienna, Austria 7-10 September 2009

2 Current Policies Only Slightly Reduce Future Transportation Emissions -US Source: AEO

3 3 Strategies to Reduce GHG Emissions from Transport Sector

4 Many Possible Policy Approaches and Many Possible Low Carbon Fuels Volumetric mandates e.g. US Renewable Fuel Standard Fuel subsidies eg, corn ethanol and biodiesel Carbon taxes or cap and trade Feebates for fuels 4

5 Cap & Trade (and Carbon Taxes) Have Little Effect on Transport Emissions Analyses of proposed cap-and-trade programs suggest that only a tiny fraction of emission reduction (<5%) will come from the transport sector Gasoline price increase by $0.69 in 2050 will not induce any change Source: EPA Analysis of H.R Appendix (June 2009) 5

6 Why Cap-and-Trade is NOTan Efficient Policy? Unique market barriers for the transport sector Infrastructure hurdles(the chicken-and-egg problem) for many alternative fuels Consumers inelastic demand to gasoline prices Failure to incorporate significant social externalitiessuch as air pollution and energy security into fuel use and vehicle purchase decisions Market power Leakageissue associated with high-c fuels: oil sands and some biofuels More effective and direct policy is needed to overcome market barriers in order to gain large reductions in oil use and GHG emissions over the long-term

7 What is LCFS Performance based: GHG intensity reduction target for transport fuels AFCI(gCO2- eq/mj) = i n i n E E i i CI Lifecycle measurement for carbon intensity i EER i Total GHG emission Total transportation fuels produced/displaced Adjustment for superior efficiency of electric and fuel cell propulsion technology Coverage of entire fuel pool, not fuel/technology specific: Government does not pick winner/losers Harnesses market forces: Allows trading of credits among fuel suppliers, which stimulates investment and continuing innovation in low-carbon fuels 7

8 California LCFS Program and Key Features Adopted April 2009; takes effect Jan 2010 Applies to on-road transport fuels (but can generate credits from low-carbon fuels used in off-road vehicles) Excludes air and maritime (where California has limited authority) Regulated partiesare transport energy suppliers(oil providers, plus others who want to earn credits, such as biofuel, electricity, NG and H 2 providers) Separate AFCI targets for gasoline and diesel (10% reduction for each) Allows trading between these two targets Default measurements and opt-in procedure for each activity in energy chain Encourages further innovation and investment in low-carbon practices 8

9 Higher Economic Incentives for Lower-C Fuels Fuel provider: A lower carbon fuel will be able to sell more LCFS credits than the same volume of fuel with higher carbon intensity Regulated party: The breakeven cost difference at a given compliance cost target can be a lot higher for low-ghg fuels Cost difference between low w-c fuel and reference fuel ($/gg ge) $200/tonne CO2e $100/tonne CO2e $50/tonne CO2e Cellulosic ethanol from waste Crop-based cellulosic ethanol Carbon intensity (CI) of low-carbon fuel (gco2e/mj) Corn ethanol Color bars shows the range of California default carbon intensity values (including indirect land use change) for the three major types of biofuel categories: corn ethanol, crop-based cellulosic ethanol and cellulosic ethanol from waste.

10 Other Jurisdictions Adopting the LCFS EUmoving toward an LCFS; its Fuel Quality Directive is very similar to California LCFS (amended Dec 2008) US States: 11 northeastern and mid-atlantic states signed a MOU in January 2009 committing to cooperate in developing a regional LCFS Canada: British Columbia has passed the Greenhouse Gas Reductions (Renewable and Low Carbon Fuel Requirements) Act, US: Early version of Waxman-Markey climate bill contained an LCFS 10

11 Key Challenges of a National LCFS 1) Leakage and shuffling 2) Energy security The first two are common issues for the LCFS, C cap-and-trade, and C taxes 1) Indirect land use change 2) Environmental and social sustainability The later two issues are not LCFS specific, but rather issues associated with biofuels. 11

12 Challenge 1. Leakage and Shuffling Concern: Regulated parties export high-carbon fuels to non- LCFS countries Canada exports gasoline from oil sands to China Iowa sends high-carbon ethanol to Canada Thus, no net benefit Further research is needed to know: How likely are these concerns to occur? What are the magnitude of the impacts? What policies could reduce leakage? Cover oil sands upstream emissions under Canadian s cap and trade, and treat oil sands as regular rule Need a function cap and trade in Canada * GHG emissions associated with Indirect land use change is also a leakage problem, but is mentioned separately later.

13 Challenge 2. Energy Security To increase energy security, we need to 1) reduce the oil intensity of the US economy, 2) increase the economy s ability to substitute alternative energy sources for oil, and 3) increase domestic production of oil from conventional and unconventional resources. LCFS responds to climate goals (by reducing GHGs), but there are debate about the effects on energy security Encourages use of alt fuels and thus reduces imports and increases energy security But also discourages production of fuels from oil sands, heavy oil, oil shale, and coal How to adjust LCFS to be responsive to energy security? LCFS does not ban oil sands. It encourages more efficient production of oil sands, and use of lower carbon process energy (co-gen, CCS, NGCC, oxyfuel, etc) 13

14 Challenge 3. Indirect Land Use Change (a Special Leakage Problem) When lands with rich soil and biomass carbon deposits are initially converted to agricultural production, a large amount of carbon is emitted. This initial carbon debt can take years or even decades of cultivation to pay back Massive consumption of biofuels in the U.S. could lead to Increasing inputs to increase yields: more fertilizer use Expansion of cultivated land area Conversion of lands to plant biofuel feedstock: Direct LUC Conversion of lands (within and outside of the US) to replace diverted ag production due to price effect: Indirect LUC The iluc effects cannot be directly observed or easily measured 14

15 Magnitude of ILUC (Preliminary) Direct GHG emission Indirect GHG emission 10% below the current average fuel GHG intensity Vehicle efficiency adjusted fuel carbon intensity (gco2e/mj) Gasoline (CaRFG) Ultra low sulfur diesel (ULSD) Compressed Natural Gas (CNG) Ethanol - conventional corn Ethanol - low-c corn Ethanol - cellulosic Ethanol - sugarcane Soybean biodiesel Waste-derived biodiesel Electricity - California average Hydrogen - natural gas reforming Bio-methane Error bars represent range of direct lifecycle emissions using different technologies, feedstocks, and energy sources. Uncertainty of iluc emissions are not shown, but are much larger than uncertainties of direct emissions. 15

16 Challenge 4. Concern for Sustainability of Fuels GHG reduction Large amount of soil carbon will be released during land use conversion, both directly and indirectly, especially from natural forestlands, wetland, and peatlands. Food vs fuel: increased demand for SOMEbiofuel puts pressure on food prices Biodiversity: Avoid areas with high biodiversity and high conservation values Many (especially the EU, NGOs, and industry groups) adopt sustainability requirements 1/12/

17 Recent Sustainability Requirements of Major Biofuel Programs Policy California -LCFS US -RFS EU -REDand FQD UK -RTFO Program Intensity target Volumetric target Blend target Blend target Sustainability GHG GHG, no non-ag Biodiversity and C stock Carbon, biodiversity, Criteria land conversion and no-go area; Social soil, water and air; biomass from federal land issues Workers rightsand land rights Environmental GHG-only -- Member countries Meta-standard: Reporting adopt multilateral/ mandatory reporting Social bilateral agreement or & voluntary Reporting reporting obligation certification Government monitoring and reporting GHG GHG, impacts on the (US) environment and Environmentalimpacts (GHG, air, water, soil), labor rights and resources and social problems. indirect effects. GHG, potential indirect impacts such as indirect land-use change or changes to food and other commodity prices

18 A Proposed Expanded Sustainability Requirement for California LCFS (Draft) Roundtable for Sustainable Biofuels (RSB) Version 0.5 Quarterly Reporting Requirement Annual Reporting Requirement Government Monitoring and Reporting Legality Planning, Monitoring and Continuous Improvement Greenhouse Gas Emissions California LCFS regulations Human and Labour Rights Rural and Social Development (for large fuel suppliers) Local Food Security Conservation Soil minimum minimum and requirement progress requirement Water Air Use of Technology, Inputs, and Management of Waste Land Rights

19 Key Recommendations for California LCFS Sustainability Requirement (Draft) Stakeholders should collaborate to establish a performance-based sustainability frameworkthat sets reasonable expectations and clear measures of compliance and methods of enforcement, encourages innovation, and rewards practices exceeding a minimum standard; Incentives mechanism is important Compatible with WTO rules The sustainability framework should, in principle, adopt a lifecycle approach and apply to all fuels, feedstocks, and production and conversion technologies. In the short term, however, the standards may apply only to non-baseline LCFS participating fuels, to address acute concerns for new fuels, reduce administrative burden and recognize existing regulations on baseline fuels. Careful coordination and integration among diverse international initiatives is required to improve coherence and efficiency of sustainability standards between countries.

20 Summary LCFS appears to be most effective policy for orchestrating transition to low carbon fuels Includes all fuels and fuel neutral GHG Performance standard Relies on market forces Durable framework for reducing long-term GHG emissions for transport Transforming US RFS into a federal LCFS would provide additional flexibility and incentives for innovation LCFS without a cap on high-carbon fuels and indirect land use change will result in significant leakage and economically inefficient Need to address key challenges in indirect land use change, leakage, energy security and the sustainability safeguard. 20