California Continues to Lead Efforts to Control Climate Change by Adopting the First “Low Carbon Fuel Standard” in the United States

On April 23, 2009, the California Air Resources Board ("ARB") adopted the Low Carbon Fuel Standard ("LCFS"), the first standard in the nation aimed at reducing the amount of greenhouse gas emissions ("GHG") generated by transportation fuels.  The LCFS seeks to reduce GHG emissions by reducing the "carbon intensity" of transportation fuels used in California by an average of 10 percent by the year 2020.  The ARB identified adoption of an LCFS as one of the early action GHG measures it would take under the California Global Warming Solutions Act of 2006 (known as "AB 32").  The LCFS is one tool ARB will use to achieve AB 32's goal of reducing GHG emissions in the state to 1990 levels by the year 2020. 

Carbon intensity is a measure of the direct and indirect GHG emissions associated with the production of a transportation fuel over its life cycle.  Direct GHG emissions include all emissions associated with producing, transporting and using the fuel.  Indirect GHG emissions include other effects, such as land use changes associated growing crops for use as feed stock (e.g., corn-based ethanol).    

In general, the LCFS requirements apply to the upstream entities in the transportation fuel supply chain, rather than downstream distributors and filling stations.  Transportation fuels regulated under the LCFS include gasoline, diesel, compressed or liquid natural gas (CNG and LNG), electricity, hydrogen, bio-diesel and any fuel blend containing hydrogen.  Regulated parties may contract away duties under the LCFS.  In addition, persons that generate or sell certain fuels that inherently meet the LCFS carbon intensity standards, such as electricity or bio-gas based CNG, may "opt-in" to the LCFS.

Using 2010 as a baseline, producers and suppliers must incrementally reduce the average carbon intensity of the suite of fuels sold for use in California each year starting in 2011, with an overall 10 percent reduction by 2020.  The overall carbon intensity of a regulated party's suite of transportation fuels sold or distributed in a year must meet the specified carbon intensity in the LCFS for that year.  This will require that regulated entities increase the percentage of low-carbon intensity fuels sold in a given year as compared to the prior year.  Fuels that have carbon intensity levels below the requirement generate credits; fuels that exceed the carbon intensity requirement generate deficits.  To comply with the LCFS for a given year, a regulated party must demonstrate that the total amount of credits equals or exceeds the deficits incurred.  If a regulated party has excess credits at the end of the year, the credits may be retained for use in subsequent years or sold to another regulated party. 

Regulated parties are subject to substantial recordkeeping and reporting requirements.  Progress reports must be submitted quarterly and contain such information as fuel volumes sold or dispensed, fuel transfer information, and carbon intensities.  An annual account-balance report must also be prepared and must contain information from the quarterly reports as well as information relating to total credits and deficits generated during the year and carried over from the previous year, credits bought and sold during the year, and credits or deficits carried into the following year.  Regulated parties that have a deficit greater than 10 percent or that have had deficits for two consecutive years will be in violation of the LCFS and subject to a notice of violation and potential penalties.

Before taking effect, the Office of Administrative Law must approve the LCFS.  Approval is expected, and potentially regulated parties would therefore be well-advised to start developing programs now to comply with the LCFS.  In addition, parties that are or are interested in producing alternative transportation fuels should evaluate the LCFS to determine if it makes sense to "opt in" to sell credits.

Farella Braun + Martel advises clients on carbon management strategies, reporting obligations and the treatment of GHG emissions in CEQA documents and is closely monitoring the development of climate change-related statutes and regulations. For more information, please contact Mathew Swain or Buzz Hines at 415.954.4400