A Low Carbon Fuel Standard Could Be Ugly

E&E News reports this morning that senators are considering including a low-carbon fuel standard (LCFS) in the impending energy bill. The (laudable) idea would be to force more low-carbon biofuels and electricity into the transportation system. They should proceed with great caution, though, since most standard variations on the theme could be dangerous. There are, however, some simple potential fixes that would probably take the rough edges off.

Each gallon of transportation fuel consumed in the United States has “lifecycle” or “well-to-wheels” (WTW) emissions associated with it. With oil, for example, this includes the emissions entailed in producing, transporting, and refining the oil, as well as the emissions generated when the final product (gasoline, diesel, or jet fuel) is ultimately burned. With electric cars, this includes the emissions generated in producing the electricity used to charge the car. With biofuels, it includes the emissions created in making the fuel and burning it in a car, minus a credit for the carbon captured while growing the original feedstock (like corn or sugarcane).

An LCFS would require the average WTW emissions associated with transportation fuels used in the United States to drop to some set (declining) target each year. This would increase the proportion of low-carbon biofuels and electrified transportation in the U.S. system while decreasing the proportion of carbon-intensive fossil fuels.

It would, in the typical conception, do this by requiring refiners, blenders, and importers to hold special permits for their fuels. Those permits would be tradable – if I produced gasoline, I could buy permits from a biofuels producer to cover my extra emissions. This is basically cap-and-trade restricted to a small slice of the emissions picture. The impact on markets works similarly to cap-and-trade too: high-carbon fuels would get more expensive, leading people to reduce their relative consumption of them.

This may sound elegant, but it is an extraordinarily inefficient way to cut emissions, and could get very ugly in practice. Let me highlight two big problems.

There are three ways to hit any target for cutting the average WTW emissions of U.S. transportation fuel. First, we increase the proportion of low-carbon biofuels and electric cars. Second, we cut the use of higher-carbon fossil fuels (like fuels from California, Canada, Mexico, and Nigeria; more on this below). The mechanics of these two make obvious sense. Third, we cut the use of all fossil fuels. This helps meet the target because it ensures that low-carbon biofuels electricity make up a larger fraction of all fuels combined. (Basically, we’re cutting the denominator rather than increasing the numerator.)

Depending on how the target is set, it’s eminently possible that the combination of more low-carbon biofuels / electricity and less high-carbon fossil fuels won’t be enough to meet the target, simply because not enough low-carbon fuels will be available, and because there won’t be enough high-carbon fuels to cut. In that case, we’ll need to drop overall fuel consumption to hit our goals. That’s fine (actually, desirable) in principle, but the way this happens gets messy. Basically, the LCFS becomes a potentially huge gasoline and diesel tax. (That’s how you get people to consume far less fuel.) One simulation of a superficially attractive LCFS predicts gasoline price increases of $3-$20/gallon over a decade (above business as usual). That curbs fuel demand and allows the LCFS targets to be met. I have some problems with this specific analysis, and am very skeptical of the high end of the spectrum, but it’s the only decent one out there, and gives some indication of how things could turn out unexpectedly, even near the low end. (If what we want is a gasoline tax, we should just do that, an eliminate the risk that it will end up being $10/gallon because of some quirks in the system.)

The other problem with the LCFS is the mess that it could create for different sources of imported oil. Oil and fuels from the Canadian oil/tar sands and from Nigeria have unusually high WTW emissions (10-20% higher than the typical barrel consumed in the United States). Mexico is almost as bad. Algeria is much better than average. Middle Eastern countries are all over the map. A simple LCFS could create large financial incentives to totally reorder the patterns oil imports, with little if any environmental impact (since, unless we reduced our overall fuel consumption at the same time, they’d just send their fuel somewhere else). We’d cut imports from Canada and Mexico and switch them to Algeria and the Middle East. The international political consequences would be a mess.

The upside to an LCFS, of course, is that it would encourage the use of low-carbon biofuels and electricity for transportation. There are other ways to do this, but if senators are dead-set on using an LCFS, there are a couple tweaks they could use to keep things under control.

In order to avoid the danger of the LCFS becoming a ridiculously large gas tax (as opposed to a modest and sensible one), they could impose a price ceiling on the permits that refiners, blenders, and importers would be required to hold. To avoid creating an international political mess, they could declare that the system would treat all petroleum-derived fuels as having the same WTW emissions. That would mean that all oil, whether from Mexico, Algeria, Canada, or the United States, would be treated the same – it would be penalized, but not differentially.

Bottom lines: An LCFS could get ugly. There are some simple fixes, though these could make it harder for the LCFS to achieve its goals. Senators would be wise to think about better ways to achieve their ends. But if they go with an LCFS, they should do that with care.