Oregon's Path To Lower Carbon Fuels Is Clear; What Does That Mean For The Price At The Pump?

The Oregon Low Carbon Fuel Standard (LCFS), a program that adds to the price of gasoline and diesel by an amount that is variable, survived a legal challenge on May 13 in the U.S. Supreme Court.

The Court chose not to review a decision handed down in September 2018 by the Ninth Circuit of the U.S. Court of Appeals that rejected a challenge to the standard's legality, which was filed by several organizations including the American Fuel and Petrochemical Manufacturers, the leading trade group of oil refiners. That means the Oregon LCFS will continue to be implemented, similar to the standard enacted by California to the south.

Both states' LCFS programs work essentially the same way. They are designed to incentivize the use of low carbon fuels. Every type of fuel that might power a vehicle is given a carbon intensity rating. Is your truck in a fleet being powered by natural gas? That is less carbon- intensive than the base number carbon intensity given for gasoline and diesel. Can you show that the natural gas came from the methane thrown off by rotting garbage in a landfill instead of from a well? That's got an even lower carbon intensity. (And yes, that can be proven, although it's complex.) Did you blend a large amount of what is called renewable diesel into your diesel product, maybe as much as a 15 percent content? That also gives you a lower carbon intensity score than if you blended biodiesel.

All of these are factors that determine the carbon intensity of the fuel that is sold under the California and Oregon LCFS programs. If you can show that you have sold a fuel with a lower carbon intensity than the benchmark numbers for gasoline and diesel, you are rewarded with LCFS credits. If all you do is sell the baseline gasoline or diesel product without blending lower-carbon fuels like ethanol or biodiesel into it, you generate deficits. To stay aligned with the requirements of reductions in carbon intensity – which are to cut greenhouse gas emissions 10 percent by 2020 from the 2010 baseline – those in the fuels industry would need to keep cutting their carbon intensity annually until it is down 10 percent by next year or buy credits from those who have generated them.

There also were legal challenges to the California LCFS that ultimately failed. Now Oregon has its path free and clear as well.

Just how much the LCFS should theoretically add to the price at the pump or at least the wholesale distribution point is a formula, according to David Hackett, president of Stillwater Associates, one of the leading consulting firms studying the impact of the LCFS. Hackett said his company's formula is to take the prevailing price of credits, which he said are now running about $188 per metric ton (mt), and multiply that figure by 0.08021, a number that is related to the carbon intensity of the baseline diesel fuel. At the $188/mt price, you currently get a price just under 16 cents per gallon.

If you're a refiner that blended a great deal of biodiesel into your diesel product, or lower-carbon ethanol into gasoline, you'll still sell your product at the pump for the prevailing market price. But your blending would have allowed you to generate and sell LCFS credits. At the opposite end of the spectrum would be any sort of marketer who sells just the baseline fuel or blends it with smaller amounts of ethanol or biodiesel. (And even ethanol, under California's rules, has different carbon intensities.) They'll pay to stay compliant by buying credits.

Last year, Stillwater Associates released a report on the retail impact of LCFS rules. By 2020, when Stillwater sees the cost of an LCFS credit rising to $225/mt, the consulting firm said it would expect the LCFS to add 20 cents per gallon to the price of diesel fuel and 21 cents to the price of diesel. By 2030, when it sees the LCFS credit price rising to $303/mt, diesel would see a 71 cents per gallon boost because of that price. Gasoline would be slightly less.

One thing to note – the LCFS regulation is separate from the California cap and trade regulation, which also uses a credit price to incentivize the reduction of carbon emissions from stationary sources like power plants, cement plants and refineries. They are paying to purchase cap and trade credits and are passing that price through to consumers.

There have been efforts for the state of Washington to adopt an LCFS. They have so far failed including an attempt just in recent weeks.

The post Oregon's path to lower carbon fuels is clear; what does that mean for the price at the pump? appeared first on FreightWaves.

Image sourced from Pixabay