The study is a collaboration between researchers from the following institutions: Institute of Transportation Studies, University of California, Davis; Department of Agricultural and Consumer Economics and Energy Biosciences Institute, University of Illinois, Urbana-Champaign; Margaret Chase Smith Policy Center and School of Economics, University of Maine; Environmental Sciences Division, Oak Ridge National Laboratory; International Food Policy Research Institute; and Green Design Institute of Carnegie Mellon University.

Building on LCFS policies already adopted in Europe, British Columbia, and California, the researchers looked at potential costs and benefits of reducing the carbon intensity of transportation fuels by 10 to 15 percent by 2030. Very broadly, they found that an LCFS would buffer the economy against global oil price spikes, trim demand for petroleum, and lessen upward pressure on gas prices. It would also create fresh opportunities for new fuels to compete in the marketplace, save consumers money, reduce greenhouse gas emissions from the transportation sector, and boost energy security.

The researchers—some of whom were deeply involved in the creation of the California LCFS—made recommendations reflecting some significant changes from existing LCFS regulations, notably in the handling of crude-oil derived fuels (especially fuels from heavy or unconventional crudes such as oil sands crude) and in dealing with indirect land use change (ILUC). (California’s original approach to heavy carbon oils resulted in a legal challenge that is still pending; the EU’s adoption of a similar approach has resulted in protracted discussion and negotiation with Canada that has yet to be resolved, either.)

We did not shy away from controversy. We did address the crude oil issue, the ILUC issue—those are probably the two big ones—economic impacts, how to design it to make it work, to make it to stimulate innovations.

We are not advocates. Our goal, our task was to create a template of what it would look like through the analysis and provide technical assistance to anyone interested. We provide the scientific foundation for how to do this. Now there will be a political process to tweak it to make it work for different interets—that’s part of the process.

In the cap-and-trade debate [in Washington] there was no real template, it was political from the beginning. It started to become a bartering process, handing out favors. We’re trying to avoid that. We are trying to make this more science-based while still fully appreciating that these are political decisions that will be made.

—Dr. Daniel Sperling, director of the Institute of Transportation Studies at the University of California, Davis, member of the California Air Resources Board, and one of the co-creators of the California LCFS

The NLCFS researchers submitted seven research reports supporting the TAR to the peer-reviewed journal Energy Policy to be published in a special issue, “Low Carbon Fuel Policy” later this summer.

Since 2007, variations of an LCFS policy have been adopted by California (LCFS); the European Union (Fuel Quality Directive, FQD); and British Columbia (Renewable and Low-Carbon Fuel Requirement Regulation, RLCFRR). Other states in the US have been exploring the adoption of an LCFS policy, including states in the Midwest and the Northeast/Mid-Atlantic region, and the states of Oregon6 and Washington.

The design of an LCFS is premised on the use of technology-neutral performance targets and credit trading, with the intent of harnessing market forces and providing industry with flexibility. It is also premised on the use of life-cycle measurements of GHG emissions, to assure that emissions are regulated effectively and scientifically. An LCFS is a hybrid of a regulatory and market policy instrument. It does not include mandates for any particular fuel or technology and as such does not attempt to pick winners or losers. Instead, it defines an average emissions intensity standard—measured in grams CO₂ equivalent per mega-joule of fuel energy (gCO₂e/MJ) that all energy providers must achieve across all fuels they provide. Many options exist for meeting the standard. Regulated parties are free to employ any combination of strategies that suits their particular circumstances and perspectives—including the purchase of credits from other companies.

The breadth and reach of an LCFS, and the challenge of implementing an innovative policy, means that adoption of a national LCFS will not be easy or straightforward and will require careful analysis and design. It is necessary to address the cost-effectiveness of the policy (compared with other similar GHG policies) and to analyze ease of administration, fairness, equity, market flexibility, and impacts on energy security and sustainability. We have done so in a companion report, National Low Carbon Fuel Standard: Technical Analysis Report (TAR). This Policy Design Recommendations (PDR) report builds on insights and findings from the TAR

—NLCFS Policy Design Recommendations

The researchers made 13 summary policy recommendations for developing a national LCFS policy:

1. Adopt complementary policies to maximize the benefits of an LCFS.
2. Modify RFS2 to incorporate elements of an LCFS, or replace it with an LCFS.
3. Initially include within the scope of the LCFS all fuels used in on-road vehicles.
4. Set a target of reducing the carbon intensity of gasoline and diesel by 10 to 15 percent by 2030.
5. Regulate the parties responsible for producing, importing, or supplying fuel.
6. Use energy efficiency ratios to adjust the carbon intensity ratings of fuels for diverse propulsion technologies.
7. Create separate fuel pools for gasoline and diesel.
8. Regulate fuels according to their life-cycle GHG emissions.
9. Address GHG emissions from land use change (LUC) through short-term and long-term policies.
10. Treat all crude oils as part of the overall pool of transportation fuels.
11. Harness market forces using LCFS credits.
12. Implement performance-based sustainability standards.
13. Harmonize global LCFS policies.

Adopt complementary policies to maximize the benefits of an LCFS. No single policy, including a carbon tax or an LCFS policy, can overcome all the market conditions and failures that inhibit the commercialization of nonpetroleum transportation fuels, the report states. Additional, complementary policies to address key underlying issues that are difficult to address with broad policy solutions such as a carbon tax or an LCFS are needed.

Such policies might include regulations that accelerate investments in new vehicle and fuel types; basic energy and vehicle R&D; incentives for vehicles that use low-carbon fuels; policies to decarbonize electricity generation; and sustainability requirements for fuel/feedstock production.

Modify RFS2 to incorporate elements of an LCFS, or replace it with an LCFS. The most conspicuous example of an overlapping policy, according to the report, is the national Renewable Fuel Standard, most recently updated in 2007 (RFS2). RFS2 requires specified volumes of several types of biofuels, defined in terms of (life-cycle) carbon intensity thresholds. In contrast, an LCFS would apply to all transport fuels, not just biofuels, and would base the requirements on their life-cycle carbon intensity.

This broader approach using a continuum of carbon intensities would provide a stronger incentive for innovation for a broader range of fuels (including electricity, natural gas, and hydrogen), the NLCFS team suggests.

The supporting studies find that implementing an LCFS alone or with RFS2 would be superior to RFS2 alone in reducing GHG emissions, improving market incentives and flexibility, and lowering domestic and international land use impacts.

The report suggests that if an LCFS is to be adopted, two options are possible relative to RFS2: modify RFS2 to incorporate elements of an LCFS, or replace it with an LCFS.

I personally don’t think we should get rid of the RFS. RFS has made a positive contribution and now it’s time to upgrade refine it, improve it. Taking some of these [LCFS] features and adding them to the RFS—an enhanced RFS—that’s fine with me.

—Dr. Dan Sperling

Initially include within the scope of the LCFS all fuels used in on-road vehicles. Including more fuels results in greater GHG reductions and would enable more flexibility in identifying low-cost mitigation options and increasing opportunities for regulated parties to buy LCFS credits from a greater pool of options, the policy report suggests. All of this helps achieve LCFS targets in the most cost-effective manner.

Fuels currently used in on-road vehicles account for about 80% of transportation fuel use in the US, and are easy to track. Although electricity, hydrogen, and natural gas currently account for less than 1 percent of total transportation fuel use in the United States, their use will be expanding. They will be used to generate credits for sale to petroleum fuel suppliers (depending on verification that their carbon intensity is lower than that of gasoline and diesel).

Including maritime and aviation emissions within an LCFS would be challenging because ships and planes operate across national boundaries. It may take a decade or more to establish a global policy framework to regulate shipping and aviation GHG emissions, the report suggests, but adds that just as the EU acted unilaterally in capping aviation GHG emissions, regional and national policy initiatives could be considered in the absence of international action.

Conventional transportation fuels used for off-road vehicles and outside the transportation sector (for example, diesel fuel used for home heating) could be included in a national LCFS, but implementation could be complex. The NLCFS report suggests not including these initially.

Set a target of reducing the carbon intensity (CI) of gasoline and diesel by 10 to 15 percent by 2030. The NLCFS report recommends a target of reducing carbon intensity (CI) by 10 to 15% by 2030. Carbon intensity is defined as life-cycle GHG emissions (converted to carbon equivalence and expressed as gCO₂e/MJ); the 10 to 15% reduction is with respect to gasoline and diesel, the baseline fuels.

The carbon intensity (CI) of petroleum fuels has been increasing over time because heavier and more unconventional crude sources are being used, which require more energy for extraction and processing. The CIs of gasoline and diesel are expected to increase from 93.1 to 96.3 gCO₂e/MJ for gasoline and from 92.0 to 97.1 gCO₂e/MJ for diesel over the period 2005–2035. However, the average CI of the transportation fuel mix will remain relatively flat or decrease gradually, due to the mandated mix of biofuels under RFS2.

As a result, the stringency of an LCFS policy will vary depending on the baseline selected, ranging from the least stringent (that is, highest CI baseline if using the actual 2012 petro-gasoline and petro-diesel fuel CIs) to the most stringent (that is, lowest CI baseline if using the actual 2005 gasoline and diesel fuel CIs). We recommend using a baseline CI of regulated transportation fuels for the most recent year for which there is data, such as the CI of 2011 fuel mix for the gasoline and diesel fuel pool). This translates to a medium-level stringency reflecting the actual baseline CI of the regulated fuel pool(s).

—Policy Design Recommendations

Regulate the parties responsible for producing, importing, or supplying fuel. Regulated parties should generally be those parties responsible for producing or importing fuel for consumption in the US transportation sector, the report suggests. For petroleum fuels used in transportation (gasoline, diesel, jet fuel, bunker fuel), the regulated party should be oil refiners or importers, along with blenders when biofuels are mixed with petroleum fuels.

Gasoline and diesel fuel producers can choose among five methods to meet LCFS targets:

1. Reduce the CI of gasoline and diesel.
2. Increase use of alternative fuel blends in gasoline and diesel.
3. Substitute lower-CI for higher-CI biofuels in blends (for example, substitute low-carbon ethanol for corn ethanol).
4. Sell more alternative fuels (for example, E85, B100, and CNG).
5. Purchase credits from other regulated parties or use credits banked in previous years.

Use energy efficiency ratios (EER) to adjust the carbon intensity ratings of fuels for diverse propulsion technologies. Some advanced fuel-engine combinations have superior efficiency and thus deliver more vehicle miles traveled for the same amount of energy compared with gasoline internal combustion engine (ICE) vehicles, resulting in lower carbon emissions on per mile basis (gCO₂e/VMT). A key example is the difference in efficiency for all-electric drive and fuel-cell vehicles. (Earlier post.)

To appropriately recognize actual emissions displaced by low-carbon fuels, fuel carbon intensity (CI) should be adjusted to account for the superior efficiencies of advanced vehicular propulsion systems.

—Policy Design Recommendations

Although proposed programs have adjusted the effective CI of fuels using energy efficiency ratios (EERs), the efficiencies of gasoline and diesel vehicles will also increase substantially—i.e., the efficiency differences between advanced vehicles and gasoline/diesel vehicles will shrink over time. Key issues thus are how to calculate EERs (including issues of accounting for varying efficiencies across fleet and time) and how often to update them, the report notes.

These adjustment factors—energy efficiency ratios (EERs)—are best calculated by comparing the fleet-average efficiencies of the alternative power train with the corresponding fleet-average efficiencies of baseline fuel-vehicle technologies that the alternative fuel-vehicle technology will displace. The values should be updated on a regular basis to ensure they adequately reflect the evolving efficiency of vehicles on the road.

—Policy Design Recommendations

Create separate fuel pools for gasoline and diesel. The NLCFS team recommends establishing at least two separate fuel pools for gasoline and diesel, with the potential to establish additional fuel pools for jet and maritime fuels.

A single fuel pool could create incorrect incentives to increase diesel fuel sales if diesel earned a more favorable CI rating as a result of its EER value against gasoline.

If a dual-pool approach is found to be too complex and difficult to track and verify, the NLCFS team suggested an alternative: viewing the transportation sector as an aggregation of multiple fuel pools but regulated as one.

Regulate fuels according to their life-cycle GHG emissions. To calculate life-cycle GHG emissions requires defining modeling approaches, system boundaries, and data sources. Harmonizing the methodology across different jurisdictions will be important. The NLCFS made a number of methodology recommendations:

• System boundaries. A national LCFS policy should adopt a standardized life-cycle assessment (LCA) method for measuring fuel CI that reflects best practices and is transparent and consistent across fuel types. Indirect emissions should be evaluated for potential inclusion when they (1) substantially impact fuel life-cycle carbon intensity (CI) and (2) are closely linked to particular fuel supply chains (e.g., ILUC).

• Spatial boundaries. Data inputs for LCA measures should be disaggregated enough spatially to capture regional variability in supply chain emissions in ways that will incentivize greater use of low-carbon feedstock/technology. The NLCFS group recommends using state boundaries for setting default CI values for biofuels, and load-balancing area or higher levels of aggregation for electricity CI values.

• Uncertainty and variability. NLCFS recommend that sources of uncertainty and variability be systematically identified, carefully evaluated and updated regularly to determine default values and to help design a more robust GHG reduction target given uncertainties.

• Default values and opt-in mechanisms. Default values should be assigned to each energy path to ease the reporting requirements of energy providers. If energy providers (the regulated companies) can supply their fuel with lower emissions than the default values, they should be allowed to opt in with their superior measurement value. They would do so by documenting their lower emissions. Allowing companies to opt in encourages innovation by rewarding producers for reducing emissions.

The use of default values leads to an “adverse selection” bias, which occurs when only fuels with CI values lower than the default opt in with their lower values while fuels with CI values higher than the default choose the default values. This results in systematic underestimation of actual emission reductions by the LCFS (and less stimulation of innovation).

To minimize adverse selection bias, the downside of using default values and opt-in mechanisms, we recommend (1) disaggregating fuels according to production method and other parameters that have high impacts on GHG emissions; (2) minimizing the adverse selection bias by periodically updating the distribution of fuels to eliminate fuels that have already been using lower CI opt-in values; and (3) placing the default CI value at the high end of the distribution, such as the 70^th percentile and above, thereby incentivizing more reduction.

—Policy Design Recommendations

Address GHG emissions from land use change (LUC) through short-term and long-term policies. Additional emissions can be caused when large amounts of land are diverted from other uses (such as agriculture) into energy production—which is the case with many biofuels and some fossil fuels.

The impacts of these land use changes (LUC) are complex and difficult to quantify accurately—but accounting for them is important to assure that investments are directed at those feedstocks with less impact. The effects can be large for land-intensive crops such as corn but are much smaller for grass and tree feedstocks (if they are grown on marginal, degraded land and/or if they avoid direct competition with food crops) and zero for biofuels made from waste materials (crop and forestry residues and municipal solid waste). Oil sands production induces small LUCs associated with soil and forest carbon emissions from peatland conversion. We recommend adopting a flexible policy taxonomy that includes short-term and long-term policies...Despite relatively large scientific uncertainty about LUC impacts, we recommend using iLUC factors selected from science-based ranges so that LUC policy has a transparent basis in emissions and integrates easily with existing policies.

—Policy Design Recommendations

• Short-term policies would encourage immediate action to reduce use of productive land and other adverse impacts. They would encourage (1) using feedstock that does not require additional land, such as wastes and agriculture residues, or feedstock that requires less land, such as cellulosic feedstocks and algae; and (2) adopting measures that lower LUC risk from land-using feedstock by (a) enhancing carbon sequestration and storage, (b) encouraging the use of marginal, degraded, and abandoned land, and (c) prohibiting the conversion of high- carbon, high-biodiversity, and environmentally sensitive areas.

• Long-term policy measures would combine short-term mitigation strategies with other incentive mechanisms that offer the greatest potential for mitigating LUC over the long term.The goal is to enhance economic productivity without compromising environmental or ecosystem services.

Treat all crude oils as part of the overall pool of transportation fuels. Fuels from certain petroleum resources—such as oil sands, oil shales, and other heavy crudes, together identified as high-carbon-intensity crude oils—can generate substantially greater GHG emissions than most, but not all, conventional crude oils. [A new study by Bergerson et al. found that on a well-to-wheels basis, lower emitting oil sands cases can outperform higher emitting conventional crude cases. (Earlier post.)]

Petroleum is not a uniform or homogenous liquid; it is a diverse mix of liquids comprised of chains of hydrogen and carbon molecules. Initially California and the European Union (EU) created a separate category of high-carbon-intensity crude oils within their LCFS and FQD. The EU has persisted with a unique category for oil sands with a distinct set of regulations and targets. This approach does not consider the reality that the CI of crude oils varies considerably, with some conventional crudes, for instance, having higher CI values than some oil sands. It also runs the risk of legal challenge from Canada, since targeting oil sands can be construed as discriminating against a product of that country.

Instead of targeting specific high-carbon crudes, we recommend treating all crudes as part of the overall pool of transportation fuels. We recommend adopting an approach that creates an incentive to buy lower-CI crudes, invest in upstream improvements (such as carbon capture and sequestration), and modify refinery designs to favor low-CI crudes. Each refinery (that is, regulated party) would be assigned a benchmark value based on its CI in the baseline year. If it exceeded this value, it would need to offset that increase by reducing GHG emissions in other ways (or buying credits). If it reduced its crude oil CI, it could apply those reductions as credits against its LCFS obligation. Some small additional shuffling of crude supply would occur— whereby companies would send their lower-CI oil to US refineries and their higher-CI oil elsewhere—but shuffling is a normal business practice for refineries in their effort to minimize their costs. It is uncertain how much additional shuffling would occur. In any case, this shuffling would diminish when other countries, starting with the EU, adopted a similar refinery-specific approach. If the shuffling appeared to be significant, the extra transport energy consumed by crude shuffling could perhaps be calculated and included (penalized) in the life-cycle measurements for that crude (though constructing a counterfactual baseline might be onerous and even impossible).

—Policy Design Recommendations

The NLCFS report says that this recommended approach for handling high-carbon-intensity crude oils has the following benefits:

• Preserves program benefits of accounting for all GHG emissions and debits associated with the use of transportation fuel uses of each regulated party equally across all fuel types.

• Ensures consistent treatment of all crudes regardless of their origins.

• Improves accounting of GHG emissions from production and transport of crude oil.

• Promotes innovation by allowing companies to earn credits using innovative methods to reduce crude carbon intensity or to shift to low-carbon fuel.

Harness market forces using LCFS credits. The report stipulates that it is desirable to harness market forces to achieve societal goals; an LCFS does so by allowing companies to buy and sell credits. If a company prefers not to invest directly in reducing GHG emissions to achieve its carbon-intensity target, it can buy credits from other companies that can reduce emissions at less cost.

Accordingly, the NLCFS recommendation includes trading and banking of credits and compliance and cost-containment mechanisms.

Implement performance-based sustainability standards. The NLCFS team recommends formulating (1) minimum sustainability requirements, including conservation (not allowing conversions of high-biodiversity and high-carbon-stock areas); and (2) reporting requirements for specified impacts or voluntary certification.

Harmonize global LCFS policies. The goal of harmonization, the report notes, is to create a consistent and acceptable approach for reducing the carbon intensity of fuels to maximize the effectiveness and efficiency of the policies, while providing individual countries and regions the freedom and flexibility to tailor the policies to their local circumstances.

Harmonization can be achieved by adopting a globally consistent certification system, starting at the feedstock level, the report suggests. LCFS policies can be further harmonized between states and regions through credit harmonization, which requires adopting unified methods (where possible) and using credit multipliers to adjust non-unified aspects.

Moving Forward

The release of the reports and the concomitant public and Congressional briefings marks the beginning of a public education process, especially involving the different stakeholder groups, said Sperling.

Many of them are just becoming aware of it [the LCFS]. GM supports LCFS because it has thought about it. As soon as others do, they’ll recognize it makes sense for them, electric utilities, the same thing. [The ethanol industry] is kind of in the middle. That’s one place where a lot of public education is needed. We are not antagonistic to corn ethanol. We need to talk to that community, to the oil companies a lot more, to get them to understand what it really means, and also to get them involved in refining it. This is a template, not a finished product. There will be a process.

—Dr. Dan Sperling

The study was funded by the Energy Foundation and the William and Flora Hewlett Foundation.

Resources

• Yeh, Sonia, Daniel Sperling, M. Griffin, Madhu Khanna, Paul Leiby, Siwa Msangi, Jamie Rhodes, and Jonathan Rubin. 2012. National Low Carbon Fuel Standard: Policy Design Recommendations. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-12-10.

• Yeh, Sonia, Daniel Sperling, Miroslav Batka, Michael Griffin, David R. Heres, Haixiao Hung, Madhu Khanna, Mathew Kocoloski, Paul Leiby, Gouri Shanker Mishra, Siwa Msang, Kimberly Mullins, Hayri Onal, Nathan Parker, James Rhodes, Jonathan Rubin, Aranya Venkatesh, Julie Witcover, and Christopher Yang. 2012. National Low Carbon Fuel Standard: Technical Analysis Report. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-12-11