I’ll Be Back—Will California’s Low-Carbon Rule Terminate Refineries There?

Arnold Schwarzenegger said “Hasta la vista, baby” to the governor’s office in Sacramento four years ago, but his 2007 executive order establishing a low-carbon standard for transportation fuels is only now starting to have a real effect on California refineries. Some refiners say the rule aimed at reducing “life-cycle” greenhouse gas emissions from the transportation fuel sector 10% by 2020 is unrealistic and could result in refinery closings and gasoline and diesel shortages. Others say California’s goal is achievable. Today, we consider the Golden State’s low-carbon fuel standard (LCFS) and what it may mean for refiners.

California refineries are in the news because of last week’s fire at the 155 Mb/d ExxonMobil Torrance refinery that has shut that plant down, as well as the ongoing refinery strike that has kept the 160 Mb/d Tesoro Martinez refinery shut following maintenance. Together these plants represent 17% of California’s refinery capacity and fuel prices in the State are spiking higher. California is something of an “island” state when it comes to refining with unique regulations mandated by the California Air Resource Board (CARB) that make gasoline and diesel more expensive to produce than in other states. As a result with no strategic reserves of fuel or pipeline access from other regions, California faces a continual risk of refined product shortage (see Save It For A Rainy Day). All the more reason for the State’s refiners to be concerned by the impact of LCFS regulations.

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California is often the first state to try something new. It was out front in making pot illegal (1913), and then (83 years later) in legalizing medical marijuana. It was first with a cap on property tax increases (Proposition 13, in 1978) and with a three-strikes-and-you’re-out law (1994). And it was the first and only state to elect not one, but two actors as its governor (Ronald Reagan in 1966, and the aforementioned “Governator” in 2003). But California’s real claim to fame is being first with environmental laws and rules. The state has frequently pre-empted the U.S. Environmental Protection Agency (EPA) with regulations on car and truck emissions, pesticides and, most recently, on climate change. As we discussed a while back in AARGH Matey—Cap’n Trade Sets Sail in California, the state’s effort to reduce carbon dioxide (CO2) and other greenhouse gases (GHGs) began in earnest in 2006 when Governor Schwarzenegger signed the Global Warming Solutions Act. The law directed CARB to adopt regulations to reduce the state's GHGs to their 1990 level by 2020, and told CARB to achieve the goal by adopting "market-based compliance mechanisms” for industry, transportation fuels and other GHG emissions. Put simply, these mechanisms involve a cap-and-trade market in which the state establishes a cap or limit for total GHG emissions, divvies up among market participants the allowances for emitting GHGs (based on recent history), then ratchets down the cap year by year until the goal is met. Participants who reduce their GHG emissions to levels less than what they are allowed each year gain credits they can either save or sell to others, while participants who fail to keep pace in reducing their GHG emissions must buy credits from others.

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