California’s LCFS: Unlocking Value in Low-Carbon Liquid Fuels (Part 1)

Executive Summary

California’s Low Carbon Fuel Standard (LCFS), designed by Air Resources Board as performance based and fuel neutral, has been implemented to reduce the carbon intensity of the transportation fuel pool in California by 10% by 2020 progressing to a proposed 18% reduction target by 2030. Some expected program outcomes of include diversifying the fuel pool and reducing the state’s petroleum dependency. The transportation sector in California accounts for 37% of the GHG emissions, 80% of NOx emissions, and 95% of particulate matter (PM) emissions.

California is one of the world’s largest and most diverse fuel markets, consuming ~19.6 billion gallon equivalent of fuels in various forms. The LCFS program has accelerated low-carbon fuel adoption in California to meet the reduction goals in the first 6 years of the program. The average carbon-intensity of low-carbon fuels has dropped over 30% since 2011, while the CI of petroleum products has increased. However the path to compliance has been nuanced as the CI story for the gasoline and diesel pools have diverged. In 2016 the gasoline pool fell short of its reduction target for the first time, achieving only a 1.4% reduction vs the 2% target, whereas the diesel pool achieved a 9.6% reduction almost already meeting the 2020 10% reduction target four years early. In order to meet the 10% reduction target market share of low-carbon fuels will need to grow 2.8 billion equivalent gallons to 5 billion equivalent total gallons or 25% market share.

Contrary to industry beliefs LCFS customers are not obligated parties, the program’s real customers are fuel consumers, who bear the financial cost of carbon regulations. Understanding the engagement level of LCFS customers must be understood first to best facilitate the program’s rapidly growing compliance curve.

California has informally adopted a “market transformation” approach to reducing transportation sector emissions. This means EVs, with some token support for hydrogen drivetrains. Sometimes referred to as “trickle down carbonomics,” this strategy will be familiar to students of history as a trickle down “Reaganomics” model, or more recently as a Silicon Valley high risk VC funding strategy focused on the “early adopter” model as a path to mainstream market acceptance. Whether or not this model is appropriate in the highly political environment has been the subject of much recent debate.

Through the flagship Clean Vehicle Rebate Program (CVRP), Californians have received $448 million dollars given in state rebates for purchases of EVs (hybrids too) with a very large portion going to the wealthiest Californians as top income quartile have purchased over 10x the amount of EVs versus the bottom income quartile. Wealthier income groups are the first to purchase more efficient, newer models. The trickledown effect has not flourished as low-income, less-educated, high-dense and high-access to HOV lanes neighborhoods, otherwise known as Disadvantaged Communities, do not purchase EVs. Even though California Disadvantaged Communities suffer the worst air quality in the entire nation, they are the most likely group to vote for the complete repeal of AB 32.

California’s existing low-carbon user base is extremely diverse, representing the socioeconomic demographics of California. Because low-carbon fuels are affordable to mainstream populations, including middle- and low-income individuals, consumers are extremely loyal despite fluctuating petroleum prices. Consumers do care about price but low-carbon fuels today offer greater value than petroleum-based fuels. This user base needs to grow.

The LCFS program is, by far, the most equitable portion of AB 32, reaching a much broader constituency than other programs, which are either passing through cost (via cap-at-the-rack) and/or distributing funds to wealthiest Californians. If equity and fairness are goals of California’s carbon policies, we should be incenting what is working, and mandate that every vehicle sold in California be low carbon fuel compatible as FFV and high efficiency diesel.

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