FocusUS fuel prices would soar with low-carbon standard - study

22 June 2010 17:50  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS news)--Prices for US motor gasoline could reach $7.50/gal (€6.08/gal) by 2025 if a nationwide low-carbon fuel standard (LCFS) programme were implemented, the author of a LCFS study said on Tuesday.

“The Low-Carbon Fuel Standard says that we must reduce the carbon content of transportation fuels,” said David Montgomery, vice president of Boston-based global research firm Charles River Associates. “And the problem is there are not enough of the low-carbon fuels to get to the standard, or they will be very, very expensive.”

The study focussed on expenses of the LCFS, which is soon to be implemented in California and had been discussed on the federal level. Moreover, several north-eastern states were planning to work together to mandate low-carbon fuels beginning in 2011.

In 2007, California Governor Arnold Schwarzenegger said the initial California LCFS would reduce the carbon intensity of transportation fuels by 10% by 2020. The regulation would take full effect in 2015.

But the study estimated there would be drastic increases in the prices of retail gasoline and diesel there, because carbon intensity could not be reduced that much if the consumption of transportation fuels remained at baseline levels.

Montgomery said there was no available low-carbon fuel that could be mixed with motor gasoline at a 10% level to push carbon intensity down by 10%. A larger percentage of a low-carbon fuel would have to be blended with gasoline, and most engines could not handle more than a 10% blend.

In that case, to meet the 10% reduction in carbon intensity, consumption of gasoline and diesel would need to be reduced. One way to do that, Montgomery said, would be to ramp up prices of motor fuel.

A federal low-carbon fuel standard was included in the Lieberman-Warner climate change bill in 2008 and proposed as part of the Waxman-Markey bill in 2009, but it was removed before the House passed the bill.

Despite removal from federal legislation, more than 20 states had the California-version of the low-carbon fuel standard as an active issue in their state legislatures, according to Chris Tucker, spokesman for Consumer Energy Alliance (CEA), which contracted the study.

“Basically they couldn’t go through the front door so they’re going to the back door,” said Tucker. “So the back door is pushing the issue to national regulators in (Washington) DC that it’s imperative for this to be a national mandate.”

The California mandate passed by unanimous vote from the state's Air Resources Board, an 11-member governor-appointed board. During 2010, fuel suppliers in the state are required to indicate which fuels they would supply, including any low-carbon fuels.

Requirements for using lower-carbon fuels would ramp up over the next five years to be fully implemented in 2015.

The results of the study showed that a nationwide LCFS would boost US gasoline and diesel prices by up to 80% within five years of the programme being fully implemented and up to 170% after 10 years.

Proponents of the LCFS agreed that prices of conventional fuels would increase, but argued it would create an open market for alternative fuels and create jobs.

“We believe this will drive competition, and consequently keep alternative fuel prices down," said Stanley Young, director of communications at the California Air Resources Board.

Young said facilities in California could produce ethanol from municipal waste at about $2-$3/gal. In addition, Young said the LCFS would help create ethanol refineries and other sources of alternative fuels.

Job creation would be particularly strong in rural areas where cellulosic ethanol could be produced from thinning forest operations, he said.

“We are already seeing significant investment in research facilities with commensurate new jobs in the research field being created,” Young said. “This must be seen against the rollercoaster volatility of oil prices, of course."

But conventional ethanol facilities were not viable replacements for gasoline or diesel under California's LCFS, Tucker said. Corn-based ethanol, the foremost renewable fuel, scored ethanol worse than gasoline over five years due to indirect land use, he noted. 

Tucker said the mandate was deceiving to the US midwest and agricultural community, where some thought the LCFS would increase demand for ethanol.

“With the low-carbon fuels, we’re talking electric vehicles, cellulosic ethanol and natural gas vehicles. There’s only one problem: those don’t exist in commercial quantities,” said Tucker.

The National Petrochemicals and Refiners Association (NPRA) earlier this year took legal action against the LCFS, arguing the standard was unlawful because it violated both the US Commerce and Supremacy Clauses.

In mid-June, a US district court denied the state’s motion to dismiss the lawsuit.

“It will harm our nation’s energy security by discouraging the use of Canadian crude oil – our nation’s largest source of imported petroleum – and ethanol produced in the American midwest,” NPRA president Charles Drevna said.

In addition, several US ethanol groups filed a lawsuit alleging the LCFS would violate the Commerce Clause by impacting out-of-state production.

US refiners Valero and Tesoro were also funding a California ballot initiative to stop the state’s climate programmes, on grounds that they would raise fuel prices.

($1 = 0.81)

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By: Sheena Martin
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