Come Clean - Low Carbon Fuel Policies and How They're Changing the Transportation Sector

As part of the Paris Agreement and other regional sustainability goals, countries across the globe are formulating strategies to reduce greenhouse gas emissions. The resultant policies target numerous different areas such as stationary emissions, electricity production, and transportation fuel sourcing. Within the transportation sector, one aspect that has spurred quite a bit of investment relates to reducing the carbon intensity of transportation fuels. The “low carbon fuel” policies that are in place today, coupled with those that are being evaluated for the future, have the potential to displace a sizeable portion of the petroleum-based fuels in the regions where they are adopted. In today’s blog, we begin a series on low carbon fuel policies, the mechanisms being evaluated to meet increasingly stringent regulations, and the impact these regulations could have on refined-products markets.

Given the global focus on reducing emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs), it’s only natural that folks in the business of producing, transporting, processing, and refining hydrocarbons need to stay abreast of what’s going on. We’ve been helping out in that regard by writing a number of blogs on GHG-related topics, including series on ESG and hydrogen. There’s so much more to discuss, though, especially on the increasing number of laws and regulations being implemented in the U.S., Canada, and elsewhere that are aimed at decarbonizing the transportation sector. With that in mind, we thought it would make sense to undertake a blog series that delves into these efforts in detail — after all, they already are changing how refiners do business and will have only greater effects going forward.

Today, we’ll start with an overview of different regulatory mechanisms that have been adopted and are being discussed to reduce GHG emissions from on-road transportation fuel use. As we noted in the introduction, GHG emission-reduction policies can cover a broad list of targets – everything from electricity production; home heating; stationary emissions from industrial facilities, buildings, and landfills; and fuel usage in the transportation sector. In this series, our focus is on-road transportation fuels — i.e., the gasoline and diesel you put in your cars and trucks — and especially on one aspect of these fuels: their Carbon Intensity (CI) value. (More on CI in a moment.)

From a regulatory perspective, the goal of reducing GHG emissions from the consumption of on-road transportation fuels can be addressed in a number of different ways. Here are some of the more popular approaches — note that this is not an exhaustive list nor are the methods mutually exclusive:

• Fuel Economy Standards: With tighter fuel standards, manufacturers are required to increase the efficiency of their vehicles, which results in lower fuel usage per distance traveled. In the U.S., for example, Corporate Average Fuel Economy (CAFE) regulations mandate certain levels of fleetwide fuel economy based on the category of vehicle (i.e. light-duty vehicles, heavy-duty vehicles, etc.). These rules may not have been initially implemented with GHG emissions as the primary target, depending on the regional policy, but ultimately they lower demand for transportation fuels, which has the effect of lowering GHG emissions too.
• Renewable Blending Requirements: Some governments require that certain proportions of transportation fuels come from renewable sources, such as ethanol and biodiesel. Key to the efficacy of these policies in reducing the sector’s overall emissions is that the renewable fuels are produced from sources with lower lifecycle GHG emissions. Similar to fuel economy standards, renewable blending policies in place today in various regions around the world may not have been initially instituted with the main aim of reduced GHG emissions. However, if the petroleum-based fuel is being displaced with a lower lifecycle GHG alternative fuel, then the result would be reduced GHG emissions per gallon of fuel consumed. In the U.S., for example, the Renewable Fuel Standard, which was authorized under the U.S.’s Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007, mandates a certain volume of alternative fuels be consumed in the U.S. transportation sector each year.
• Zero Emission Vehicle Mandates: These types of efforts, which typically require that a certain proportion of the vehicles sold be fully or partly powered by electricity, are becoming increasingly popular across the globe, including in the U.S., the European Union (EU), and China. The primary goal of these policies is to reduce air pollutant and GHG emissions in that they call for gradually replacing fossil-fuel-fired transportation with batteries or fuel cells. Due to infrastructure requirements for increased power production and vehicle charging, coupled with the long amount of time it takes for the vehicle fleet to turn over, these types of policies are very long-term in nature.
• Low Carbon Fuel Standards or Clean Fuels Policies: These policies, which will be the focus of a lot of the discussion in this blog series, are relatively new but their use is spreading. GHG emission reduction is the core goal of low carbon programs — in fact, they generally are based on the carbon intensity (CI) of various fuels, and on shifting to lower-carbon fuels over time. We should note that these policies have many names. One of the earliest and best-known is California’s Low Carbon Fuel Standard (LCFS); some others are called Clean Fuels Programs or Clean Fuels Standards. These programs often incorporate some sort of credit program with a carbon price policy.

For ease of discussion, we’ll refer to all low carbon fuel standards policies as LCFS policies through the rest of this series. So how do these types of policies work? Well, there is not a common framework across all the different policies so far, but there is generally a common goal of a specified percentage reduction in GHG emissions from on-road transportation fuel use over a period of time. For example, in the states of California and Oregon and the Canadian province of British Columbia, the LCFS policies establish downward-sloping CI benchmarks for the jurisdiction’s total fuel pool, and incentivize the provision of fuels with CIs lower than the benchmarks. Other jurisdictions may just stipulate that renewable fuels blended into the traditional pool must demonstrate that the new source meets a certain percentage reduction in GHG emissions versus their petroleum-based alternative.

A real-life example would help, so we’ll discuss California’s LCFS and that program’s strategy for a gradual reduction in the CI intensity of the state’s diesel fuel pool. First, we should briefly explain what a CI value is and how it is calculated. CI is a measure of the GHG emissions associated with producing, distributing, and consuming a fuel, which is measured in grams of carbon dioxide equivalent per megajoule (gCO2e/MJ). The CI of fuels varies by feedstock type, origin, processing efficiencies, and transportation to market and can even include land-use charges, depending on the calculation method utilized. This means that each individual producer of alternative fuels can have a unique CI value associated with its fuel. On top of that, the CI value can vary depending on where the fuel is being consumed (such as California vs. Oregon) for the same fuel from the same producer, due to transportation differences or differences in the CI model structure. This stuff can get complicated quickly.

As we noted earlier, California’s program and some others incentivize reductions in the carbon intensity of transportation fuels over time. They do this by establishing gradually declining allowable CIs for diesel (sloping black line in Figure 1) and other transportation fuels, and by giving credits for the production and use of alternative fuels such as renewable diesel (RD) and biodiesel with CIs lower than that (colored lines below sloping black line) and deficits to petroleum-based ultra-low sulfur diesel (ULSD), which according to the state has a CI value of 100.45 gCO2e/MJ (red line at top of Figure 1). An interesting aspect of this program is that it focuses on the CI value of an individual unit of fuel, which ignores the volume of the fuel consumed. Therefore, the GHG emission-reduction goal can’t be met through demand declines and the region is not forced to blend a certain volume of particular types of alternative fuels.  According to the LCFS policy requirements, diesel consumed in California in 2021 must meet a maximum CI value of 91.66 gCO2e/MJ. Therefore, the CI value must be lowered by almost 9% from petroleum-based diesel, which can be achieved through blending in alternative fuels into diesel (or alternative technologies such as electric) or through credits, which can be generated and banked in other years or generated through blending other alternative fuels into other transportation fuels, such as gasoline or jet fuel.