OPIS’s Low Carbon Fuel Standard (LCFS) conference was an excellent event. Speakers ran attendees through the ins and outs of LCFS and highlighted the impact it has had on the market. Some of the highlights that are worth noting include:
- It is clear that the market is educating itself still on LCFS. Compliance regulations are still evolving, and there was good dialog on where to make improvements. Mike Waugh, the Chief of the California Transportation Fuels Branch and the first morning’s keynote speaker, was an open book on where he and his staff are focused in terms of improving existing regulations. Cost containment mechanisms, credits for mass transit, and provisions for low-emission refineries were on the short list for consideration and recommendation.
- Method 1 Carbon Intensity (CI) pathways are quite narrowly defined – maybe too narrowly defined. Regulations mandate that all pathway inputs into finished products must contribute to the CI calculation. This makes sense as the entire supply chain ultimately impacts carbon contribution into the environment, but specificity of the pathways within Method 1 have created a backlog of new pathway requests – approximately 130. These requests fall under an area called Method 2 in which companies must apply for new pathways to receiving a CI calculation and eventual Method 1 status (designates full participation in the program – credits are not guaranteed if under Method 2). Given the multitude of biofuel sources, this backlog of new pathways will grow. Some discussion occurred where categories or groups that have Method 1 approval may alleviate this issue – a position supported by Lisa Mortenson, CEO of biodiesel producer Community Fuels.
- The California Independent Oil Marketers Association (CIOMA) clearly is against LCFS and wants to call a “time out” to examine the regulation more closely. Jay McKeeman, the VP of Governmental Affairs, pulled no punches in attacking LCFS for causing jobber confusion in terms of inherited obligations when blending below the rack. Jay claimed this was a disincentive to blending. Jay also raised the specter of fraud, which Mike Waugh refuted as his staff have seen little evidence of it to date. Jay even suggested that LCFS will cause fuel shortages similar to ones seen in late 2011; he posited that suppliers may export unbranded fuel if compliance costs cause other markets to become more profitable. As a neutral bystander, I can say there were legitimate concerns raised. In particular, I also worry that achieving a 10% reduction in CI levels by 2020 may further isolate California from the rest of the United States and provide little slack when supply and demand disruptions occur. A number of points were more speculative though and had the likely intent of inciting FUD (fear, uncertainty, and doubt); the goal being to blunt the growth and possible spread of LCFS.
LCFS is a standard in Oregon, and it is something that Washington will adopt. British Columbia has their version of it already in place. Together, they create a large, similarly regulated market and an interesting experiment in governmental market intervention that other states are watching. The environmental end goal is admirable. The real question is whether the consortium of Western states can create more social benefit than economic cost in the end.
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