At the Argus LCFS conference earlier this year, Rajinder Sahota, the Deputy Executive Officer for Climate Change and Research (and the head of the LCFS program) mentioned that linking LCFS programs could be beneficial. This idea has been thrown out many times over the history of the North American LCFS programs but it’s always hand-waved away as being too difficult. But now hard would it really be?
Why link Programs?
1) Economic efficiency
Climate change is a global problem and at some point in the future we are going to have to have a global carbon price. Right now in the low carbon fuels space we have at least 11 different prices (that I know of): California LCFS, Oregon CFP, Washington State CFS, British Columbia, LCFS, Canada CFR, German THG, Netherlands hBE, Austrian KVO, French TIRUERT, and Denmark Biobrændstofloven. Within some of these programs, like the Canada CFR, there are potentially two different prices (Gaseous and Liquid). And that’s just carbon prices for low carbon fuels and electric vehicle charging – it doesn’t include all the carbon reduction programs for carbon offsets and other markets. It’s a mess. It’s great if you’re a trader and understand all of these programs (because you can find arbitrages between them) but it’s terrible for economic efficiency because if you’re a company selling fuel or charging vehicles in all of these markets you needs teams of experts in each program. At some point we’ll have to have a global price to increase economic efficiency, and the only way to do that is to start linking programs.
2) Political Entrenchment
Businesses need market certainty in order to make investments in low carbon fuels, hydrogen vehicle fuel production, EV charging. If there is the potential for a program to be rolled back or eliminated (due to political uncertainty) it slows down investments in the infrastructure needed for our energy transition. If programs are linked it markets it slightly harder for politicians in one jurisdiction to eliminate their low carbon fuel program because they need to think about the political fallout that the elimination of their own program would have on the other states or countries who have linked programs. Linking programs creates political pressure to keep the programs running, which results in more market certainty, which helps encourage business investment and accelerate the energy transition.
Downsides of Linking Programs
The main downside of linking programs is that because the market is pretty efficient at finding the optimal way to reduce carbon for the least amount of cost, companies may choose to put all of their investments into states that are logistically advantaged. If the dollar per metric ton is identical for all LCFS states than the only differentiating factors in producers choosing where to send their renewable fuel will be the alternative fuel price in the location (the basis) and the transportation and logistics costs of landing and blending the fuel. It’s really hard to say how this would play out. California and Washington are advantaged over Oregon when it comes to deepwater ports for importing fuel by sea. But ships have to be Jones Act to land renewable fuel from the Gulf Coast into California, Oregon, and Washington, making them potentially disadvantaged to a future LCFS state like New Mexico or Minnesota, which have potentially easier rail access.
The flip side of this argument is that by linking programs the market will find the best way to reduce carbon in each market. Perhaps in California this mean more electric trucks, since they have large ports with warehouses and lots of short-haul trucking; perhaps in Washington it means more light duty electric vehicles because their grid is comparably cleaner with all of their hydro power.
LCFS Math Overview
Generating credits and deficits in LCFS programs typically involves this formula:
Credits/Deficits (MT per unit of fuel) = (((Benchmark Fuel CI * (1 – Compliance Target )) – ( Fuel CI / EER )) * (Fuel Energy Density * EER) * 10^-6
For example in 2024 in California if you charged an electric vehicle using grid electricity your factors would be:
Benchmark Fuel CI (CaRFG): 87.01 gCO2e/MJ (Table 1)
Compliance Target for 2024: 12.5% (here)
Fuel CI: 80.55 gCO2e/MJ (annual pathway)
Fuel Energy Density: 3.60 MJ/kWh (Table 4)
EER (LDV): 3.4 (unitless) (Table 5)
((99.44 *(1-.125 )-(87.01/3.4)) * (3.6*3.4) * (10^-6) = 0.00075 MT per kWh
Which at the current price of about $77/MT would be be about 6 cents per kWh.
So in order to match up programs we would need to match up every single one of these factors, which for 2024 are:
| Factor | California | Oregon | Washington |
| Benchmark Fuel CI for Gasoline | 99.44 | 98.06 | 98.93 |
| Target | -12.5% | -8% | -1% |
| Fuel CI | 88.55 | 132.55 | 63.39 |
| Fuel Energy Density (scientific constant) | 3.6 | 3.6 | 3.6 |
| EER | 3.4 | 3.4 | 3.4 |
| MT/kWh | 0.00075 | 0.00063 | 0.00097 |
As you can see, the EERs are the same, and the fuel energy density is the same (because it is a scientific constant), but the benchmark fuel CIs and the Targets are different in each state.
Pathways and Fuel CIs
The fuel CIs in these three markets are different because the mix of electricity generation in these states is different. California is lower than Oregon because it has a nuclear power plant (Diablo Canyon) and far more solar generation. Washington has a lower grid CI than both because they have so much hydro power.
In order to link programs there’s no need to link up the grid CIs – they should reflect the local grid conditions in the same way that biodiesel produced with different feedstocks has different CIs.
Benchmark CIs
When you buy gasoline in the United States you’re almost always buying a blend of “blendstock” and ethanol (a tiny number of stations sell ethanol-free gasoline). In most states the “blendstock” is “neat” gasoline (with summer and winter blends with different Reid Vapor Pressure to reduce emissions in the summer). As you can see in the table above, the Oregon and Washington benchmark fuel CIs for gasoline are very similar – this is because they use the same fuel but they have slightly different distribution energy use, which results in slightly different CIs.
In California, however, the blendstock is CARBOB – California Reformulated Gasoline Blendstock for Oxygenate Blending – a special formula of gasoline designed to further reduce pollution that can only be made by California refineries (although in 2016 a refinery in Singapore was able to manufacture and import it into California).
Similar to fuel CIs, there’s no need to link up benchmark CIs of the different states because with their different fuel mixes and distribution they are displacing different levels of fossil fuel carbon.
Compliance Targets
The primary different between these markets are their compliance targets. California’s program started first so it is further along in it’s transportation decarbonization journey; as such it has a stricter compliance target. Washington’s program just recently started up so for 2024 it has a more lenient target in it’s early years.
Linking these compliance targets is the primary hurdle to linking programs. In order to link programs and have fungible, tradable credit between them, each state would have to go through a rulemaking process. This would require other programs, like Oregon and Washington, to significantly accelerate their compliance curves so that they matched California. Since we just finished up a multi-year rulemaking process in California it is unlikely that we will see another rulemaking cycle in California for a few years (unless they do a “technical rulemaking” to address some of the smaller technical concerns that were brought up but not addressed during this past rulemaking).
Legal Issues
It is possible that if states tried to link LCFS programs there could be industry players that try to sue, citing the Interstate Commerce Clause (Article I, Section 8, Clause 3) of the US constitution. The Supreme Court has often interpreted the clause to give Congress the sole authority to regulate interstate commerce. Opponents might also cite the Compact Clause of the US Constitution (Article I, Section 10, Clause 3) which prohibits states to “enter into any Agreement or Compact with another State.” At the outset of the creation of the California LCFS program, CARB had was sued twice by an ethanol producer, POET. In the first case in 2009 (called “POET I”) the ethanol producer argued that CARB failed to properly follow the California Environmental Quality Act (CEQA) and the Administrative Procedure Act (APA). In the second case (called “POET II”), the company again cited CEQA. In both cases the court actually ruled in favor of POET, but the LCFS program was allowed to remain in place with small changes. It’s possible that if states tried to link programs there would be lawsuits, but it’s also possible that they would be resolved in a similar manner.
So would it be difficult to link programs? Yes. It would require states to incorporate these changes into their rulemaking and accelerate their climate targets. Regulators would also have to brace themselves for lawsuits and work hard to defend their new rules. But the benefits of linking the programs would far outweigh the temporary pain of overcoming these hurdles. As JFK said “We choose to [do these things] not because they are easy, but because they are hard.”
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