California Global Warming Solutions Act, Low Carbon Fuel Standard


By —— Bio and Archives September 17, 2013

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An old adage often attributed to Mark Twain identifies three kinds of lies: “lies, damned lies, and statistics.” In a recent blog post, the National Resources Defense Council (NRDC) shows why this axiom stands the test of time.

NRDC claims that “AB 32, [the California Global Warming Solutions Act] including the Low Carbon Fuel Standard, will save California consumers and businesses $50 billion over the next decade in fuel costs.” This statement is not just misleading, it is just plain wrong. The LCFS will increase the cost of fuel, not decrease it.

What is the LCFS?

In 2006, the California Legislature passed and Governor Arnold Schwarzenegger signed AB 32, the Global Warming Solutions Act, which set a goal of reducing California’s greenhouse gas emissions to 1990 levels by 2020. Pursuant to the state’s emission reduction target, in Jan. 2007 Governor Schwarzenegger signed Executive Order S-01-07 establishing the Low Carbon Fuel Standard (LCFS). The LCFS requires fuel providers to reduce the carbon intensity of gasoline and diesel fuel 10 percent by 2020.

Mandating a low carbon fuel standard is one thing; implementing one is something else. The implementation of the LCFS will make fuel more expensive and may even increase greenhouse gas emissions. The simple truth is that there is no cost-effective way to reduce the carbon intensity of fuel.

Erroneous conclusions follow flawed assumptions

Given that the LCFS mandates certain types of fuel instead of allowing people to choose their preferred fuels, it is easy to see how the LCFS would increase fuel costs. But the NRDC argues the exact opposite—that the AB 32 measures, including the LCFS, will save Californians $50 billion in fuel costs by 2020.

NRDC, however, is less than transparent about where the $50 billion figure comes from. The source link they provide merely refers readers to another NRDC blog post. From there, NRDC links to two studies. The first, the California Air Resource Board’s (CARB) 2008 AB 32 Scoping Plan, merely claims that all of California’s energy efficiency programs have saved more than $50 billion over the last 30 years, not that AB 32 in general, or the LCFS in particular, would save consumers $50 billion over the next decade.

As IER has previously discussed, the Scoping Plan is not based on sound economics. For CARB to find benefits from the LCFS, they “chose to assume that alternative fuels could be produced at prices at or below the pretax wholesale cost of petroleum fuels on an energy equivalent basis,” as IER Senior Fellow Dr. Robert Michaels explains. In addition, here is IER Senior Economist Dr. Robert Murphy expounding on CARB’s flawed reasoning:

Yet all serious economists on both sides of the issue understand that government policies to reduce emissions carry large, upfront costs, in terms of forfeited growth and lower incomes. Moreover, unilateral policies implemented at local levels will have virtually no impact on global emissions, and hence on climate change. California’s AB 32 will impose serious harms on its economy, with virtually no offsetting environmental benefits. Its Economic Supplement reaches the opposite conclusions by assuming that government experts have spotted billions of dollars in cost-saving measures that the actual businesspeople stubbornly refuse to implement.

In short, CARB’s Scoping Plan provides no evidence that the LCFS will reduce costs to consumers. If anything it will increase them because ethanol is more expensive than regular gasoline on an energy equivalent basis.

NRDC also cites a study from the Environmental Defense Fund (EDF) which claims that AB 32, including the LCFS, could save Californians as much as $39.2 billion in fuel costs by 2020. However, NRDC fails to point out that this finding is based on a hypothetical, sudden, and dramatic price shock occurring in 2020 that doubles the price of gasoline and lasts for an entire year. Under this doomsday scenario, oil and natural gas prices double suddenly on January 1, 2020. The alleged savings come from reduced demand for fossil fuels due to AB 32 measures. Absent this large price shock, the fuel savings from AB 32 do not occur. Instead of disclosing this important caveat, NRDC passes off a doubling of gasoline prices as a foregone conclusion. Even so, it is unclear how NRDC comes up with the remaining savings to reach $50 billion.

NRDC fails to identify another key assumption in the EDF study. EDF’s projected energy savings due to a large price shock can be broken down into two broad categories: importation effects and retail effects. The importation effects are “the avoided value of energy imports, which is the difference between California energy demand and in-state production” and the retail effects are defined as “the avoided payments by energy consumers, such as drivers buying gas, airlines purchasing jet fuel, and industrial facilities obtaining boiler oil.”

In EDF’s report, importation effects comprise $29.6 billion out of the total $39.2 billion in fuel savings. EDF finds that in the event of a large price shock, Californians would spend $29.6 billion less on imported oil and natural gas with AB 32 measures in place, including the LCFS, than without AB 32 measures.

EDF weighs predicted shifts in consumer demand against projected in-state fuel production to determine projected importation costs. This assumption is critically flawed. If EDF is going to include these importation effects, it has to consider the foregone value of the energy that California is not producing. EDF does not want to consider the billions of dollars California is forgoing by not allowing more offshore oil and natural gas development or the development of the Monterey Shale.

California has long been a leader in oil and natural gas production and even today does not lack energy resources. There are an estimated 9.8 billion barrels of undiscovered, technically recoverable oil reserves off the coast of California, according to the Bureau of Ocean Energy Management (BOEM). That amounts to more than 11 percent of America’s total oil resources in the Outer Continental Shelf (OCS).

The Golden State is also blessed with abundant oil resources in shale formations. The Monterey Shale formation, for example, is estimated to contain 15.4 billion barrels of recoverable petroleum, which is more than the massive Bakken and Eagle Ford shale formations combined. But California prohibits energy producers from tapping these vast resources.

EDF can’t include “the avoided value of energy imports” without considering the value of oil that California could be producing but is not. In the last two years alone, oil production is up 40 percent in the United States—California could be leading the way but for policies that restrict energy development.

EDF assumes that offshore California and the Monterey shale will remain under lock and key when, in fact, a spike in oil and gas prices could cause California to open up energy development. Significantly mitigating California’s energy imbalance by unlocking offshore resources and the Monterey shale could dramatically undercut importation costs, the primary driver of EDF’s projected fuel savings. This would make much of the $39.2 billion savings—not to mention the illusory $50 billion—essentially evaporate. Yet NRDC makes no mention of this important assumption.

In short, neither CARB’s Scoping Plan nor EDF’s report provide any evidence that California’s LCFS would reduce costs for California motorists.

LCFS raises gasoline costs, provides negligible climate benefits

Contrary to NRDC, a more sober analysis of the evidence suggests that the LCFS imposes net costs on Californians, not benefits.

A study by the Boston Consulting Group (BCG), for instance, finds that the LCFS could raise gasoline costs by as much as $1.06 per gallon by 2020. BCG estimates that between five and seven of California’s 14 fuel refiners could cease production by 2020, potentially compromising the security of the state’s fuel supply.  These refinery closures could result in the loss of as many as 51,000 jobs.

Another study finds that CARB dramatically underestimates the impact of the LCFS on diesel prices.  The California Trucking Association (CTA) finds that the LCFS could raise wholesale diesel prices by $1.47 per gallon in 2020, whereas CARB claims the LCFS raises diesel prices by just 20 cents in 2020. When combined with California’s cap-and-trade scheme, another AB 32 measure, CTA finds that the LCFS raises diesel prices by $2.22 per gallon by 2020, a 50 percent increase.

Studies also find that a national low carbon fuel standard, as some have proposed, would raise fuel costs. CRA International, for example, finds that a nationwide LCFS would raise fuel prices by as much as 140 percent in 2015. The study explains that such a national mandate would reduce motor fuel supplies or cause fuel producers to purchase carbon dioxide offsets, either of which would raise energy costs.

In addition to raising fuel prices, the LCFS also fails to significantly impact global warming. Because global warming is a global issue, unilateral emission reductions by California or even the entire country would not significantly reduce global temperatures. Energy-related global carbon dioxide emissions are projected to increase by 46 percent by 2040, according to the Energy Information Administration (EIA). Developing countries such as China and India are expected to account for more than 70 percent of the increase in energy-related CO2 emissions. As a result, using assumptions based on the Intergovernmental Panel on Climate Change (IPCC), even if the U.S. stopped all carbon dioxide emissions immediately, it would reduce the rise in global temperatures by just 0.17 degrees Celsius by the year 2100. Furthermore, if California completely ceased emitting carbon dioxide it would reduce the rise in global temperatures by 0.0113 by 2100. Such a negligible reduction calls into question the reasoning for imposing the LCFS.

Proponents of California’s LCFS assume that renewable fuels—such as corn-based and cellulosic ethanol—reduce the carbon intensity of transportation fuel. In fact, evidence suggests that some renewable fuels actually do more harm than good from an environmental standpoint. A study published in Science, a peer-reviewed journal, finds that corn-based ethanol nearly doubles greenhouse gas emissions over the next three decades and continues to increase emissions for the next 167 years. The Energy and Resources Group of the University of California, Berkeley finds that “if indirect emissions [resulting from the production of ethanol] are applied to the ethanol that is already in California’s gasoline, the carbon intensity of California’s gasoline increases by 3% to 33%.” This has led environmental groups such as the Union of Concerned Scientists to caution, “If done wrong, the production of biomass for biofuels like ethanol could destroy habitats, worsen water or air quality, limit food production and even jeopardize the long-term viability of the biomass resource itself.” That hardly sounds like an improvement over conventional gasoline.

Conclusion

Despite their claims, NRDC offers no evidence that California’s LCFS reduces gasoline prices. In fact, ethanol is more expensive than gasoline, and has been for years. So-called “advanced renewable fuels” that NRDC touts, specifically cellulosic ethanol, are not new and virtually nonexistent. Policymakers in Sacramento and Washington do not need to impose mandates such as the LCFS and the federal Renewable Fuel Standard (RFS) to increase energy security. The domestic energy boom (on state and private lands) is taking care of that just fine.

IER Policy Associate Alex Fitzsimmons authored this post.


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The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.