California’s plan to overhaul a key climate program — raising the cost of gas — ignites debate

California plans to overhaul one of its cornerstone climate programs — a decision that could push gasoline prices higher in a state where residents already pay the most at the pump.

On Nov. 8, just three days after an election marked by concerns over rising costs, the California Air Resources Board will hold a public hearing and vote on its plan to amend the Low Carbon Fuel Standard.

The program, which has existed since 2011, is a $2-billion credit trading system that requires fuels sold in California to become progressively cleaner, while giving companies financial incentives to produce less-polluting fuels, such as biofuels made from soybeans or cow manure. The standard has helped the state phase out fossil fuels to clean up air pollution and cut climate-warming gases.

The concern over gas prices has been part of the debate since last December, when the plan was released. Much of the agency’s overhaul, however, has focused on highly technical disputes between oil companies, dairy farms, biofuel and other lower-carbon fuel companies, and environmental justice advocates who say the program maintains polluting industries.

But as the election has approached — with costs and affordability of top concern for voters — Republicans in California’s state Legislature have urged a delay in the fuel standard changes, saying they could further drive up gasoline prices. They also have criticized Gov. Gavin Newsom, who recently declared victory over Big Oil during a special legislative session, for not doing enough to cut gas prices. On Thursday, California Republicans in the U.S. House of Representatives also urged a delay in the air board plan.

The proposal to strengthen the fuel standard has fueled a recent outcry from the public: More than 100 commenters earlier this month wrote to the air board, protesting the amendments due to the potential impact on gas and diesel prices.

“Are you kidding?” Rich Marotti of Ventura County wrote, adding a profane adjective. “Gas is already more expensive in CA than HI. That’s absurd…Any action taken to increase gas prices is an attack on California citizens.”

The gas price revolt over the fuel standard underscores how the state’s ambitious agenda for addressing climate change can come under fire if it threatens to make fossil fuels more expensive as the state tries to phase them out by 2045. Californians paid an average of $4.61 a gallon on Thursday.

Energy experts and air board staff say the fuel standard raises the cost of producing high-polluting gasoline and diesel for the California market. Those costs can drive up prices at the pump when companies pass them on to their customers, although it’s difficult to predict exactly by how much.

The air board said earlier this month that fuel producers typically pass on 8 to 10 cents per gallon of costs to consumers because of the program. Estimates for how the air board’s proposed changes in the program would affect gasoline prices vary.

In an initial assessment released last year, the air board projected that the proposed new standard could potentially raise the per-gallon price of diesel by 59 cents and for gasoline, 47 cents, in 2025 — numbers that have turned the policy debate into a political flashpoint.

Air board officials have since disavowed that estimate, writing earlier this month that the analysis “should not be misconstrued as a prediction of the future credit price nor as a direct impact on prices at the pump.”

A separate report, released earlier this month by the University of Pennsylvania’s Kleinman Center for Energy Policy, predicted that the program’s changes could increase the cost of gas by 85 cents a gallon through 2030.

Air Resources Board Chair Liane Randolph told CalMatters in an exclusive interview that the heated debate prompted her to speak out ahead of the board’s vote, something she typically doesn’t do.

In the interview, Randolph emphasized that the fuel standard is critical for meeting the state’s targets to slash greenhouse gases and use of fossil fuels. She said the proposed changes are designed to prevent California from falling behind on its ambitious climate goals, which are already at risk, according to experts.

At the heart of the debate, Randolph said, is a fundamental question about California’s climate future: How quickly can we shift from fossil fuels to a zero-emission future?

The air board’s changes could reduce carbon dioxide-equivalent gases by 558 million metric tons through 2046, according to its initial economic assessment. That’s equal to what more than 120 million cars emit on average in a year. (Experts say that may be an overstatement because the carbon footprint from some renewable diesel such as soybeans might be more than reported.)

“The Low Carbon Fuel Standard is one of California’s most significant and most effective climate programs,” Randolph told CalMatters. “It’s a market program that comes with a mandate to fuel producers to reduce their carbon intensity over time. So the reason we undertook the update of this program is because we wanted to make sure that the ambition of the program was aligned with our goals.”

Randolph said the fuel standard has been a crucial driver in reducing pollution from cars and trucks, and can help drive a wider array of transportation choices for Californians. The program, she added, “helps clean the air in the most impacted areas.”

“For the everyday Californian…this helps fund your opportunity to buy a plug-in hybrid car, a battery electric car, a hydrogen fuel cell car,” Randolph said. And for diesel trucks and delivery vans, it “is helping make those vehicles cleaner and quieter.”

The program has been particularly successful in shifting the fuel market for medium and heavy-duty trucks, and over the course of 13 years, the program has displaced 25 billion gallons of petroleum fuels, according to the board’s economic assessment.

Regarding the cost at the gas pump, Randolph said it’s challenging to put a specific number on gas prices because fuel producers have different strategies for complying. Some might produce cleaner fuels themselves, potentially profiting from the incentives, while others may buy credits on the market, which could lead to varying costs.

It’s hard to predict whether oil companies will pass those costs onto customers or absorb them, making it difficult to determine the exact impact on prices, Randolph said. She pointed to the data indicating that fuel producers typically pass on 8 to 10 cents per gallon costs to consumers because of the program.

The current standard’s target is reducing the climate impact of transportation fuels by 20% between 2010 and 2030. The air board proposal would impose tougher “carbon intensity” targets, tightening reductions in the greenhouse gases those fuels produce by about 30% by 2030 and 90% by 2045. (Carbon intensity is the measure of carbon dioxide emissions produced per unit of energy or activity.)The board is also considering accelerating those reductions when certain conditions are met.

This tightening of the standard will affect the entire fuel market, from companies such as Chevron and Shell that dominate fuel production in California to smaller operators who import fuel.

The Western States Petroleum Association, an oil industry group, has supported the low-carbon fuels program, with many of its members producing some of the new fuels the program has spurred. However, they have argued against many of the proposed changes because they might increase costs or disadvantage some companies.

Chevron has warned against what the changes might do to costs in the state.

“At a time when fuel prices are under significant scrutiny and demand in California frequently outstrips supply, regulators should be careful about adding new measures that restrict supply,” Don Gilstrap, the company’s manager of fuels regulations wrote earlier this month.

Laura Renger, executive director of the California Electric Transportation Coalition, said the fuel standard is essential for getting more electric cars on the road and building the charging infrastructure they need.

The program has funneled billions into electric vehicles and chargers, pushing the state away from petroleum and toward cleaner electricity. With the new rules under consideration, she says, the state’s utilities will have funds to invest even more.

Through the fuel standard, California has become a proving ground for cleaner fuels.

The tighter the fuel standard, the more intense the scramble to produce lower-carbon alternatives and obtain credits. The program considers not just tailpipe emissions but also carbon emitted during fuel production and distribution.

So many companies have produced cleaner fuels that the price of credits has nosedived, dropping to an average of $62.17 in mid-October compared to $180.86 the same week three years ago. The credits have built up to the point where some companies can simply buy their way out of producing cleaner fuels.

To avoid that, regulators have proposed the changes to be voted on next month — essentially tightening the standard so that companies are incentivized to burn through the excess credits.

Biofuels: Are they better?

Most notably, the fuel standard has spurred a boom in biofuels, which are produced from plants or animal waste. Two Bay Area companies are converting their refineries to focus on biofuels: a Marathon joint venture with the company Neste at the Marathon Martinez refinery and a conversion by Phillips 66 of one of its refineries in Rodeo to a biofuels project.

But experts have increasingly questioned that approach, particularly if the state is trying to shift transportation from fuels that are burned to zero-emission vehicles. The University of Pennsylvania report, authored by Danny Cullenward, a climate economist, estimates that about 80% of the credits issued to date — worth more than $17.7 billion, have gone to biofuels.

While biofuels reduce emissions relative to traditional fossil fuels, he says that their production, particularly renewable diesel fuels, like soybean, has unintended environmental consequences, including deforestation and food system disruptions​. The board has proposed caps on diesel produced from soybean oil, canola oil and sunflower oil, but some groups say that the proposed measures don’t go far enough.

A debate over fuel from cow manure

Throughout the debate, tensions have arisen over how the new fuels have impacted California’s polluted, low-income communities of color. One of the most heated disputes has been over the proposed phaseout of climate credits for cow poop — biofuel made from dairy farm manure.

California’s strategy for cutting its methane footprint has so far hinged on providing incentives, mostly to the dairy industry, through grants for construction of digesters — recovery systems that trap the methane from manure — and valuable climate credits from the fuel standard program for the natural gas that methane produces.

About half of the state’s methane emissions come from dairy and livestock, so collecting the gases wafting off of manure keeps them out of the atmosphere and offers a renewable source of fuel.

But the board has proposed a phase out of those credits, beginning in 30 years for projects that already exist and 20 years for those built before 2030. The proposal has angered environmental groups who want a more aggressive discontinuation because they say the credits support industrial dairy farms that pollute rural, low-income communities in the Central Valley.

The state’s dairy industry, meanwhile, says the credits are one of the program’s success stories.

“As a result of this important program, dairy farmers are able to reduce emissions and enhance the environment and economic stability of their farms,” wrote Michael Boccadoro, head of Dairy Cares, which promotes digesters for methane reduction.

And finally, a major debate has been waged about what the program isn’t regulating. The air board considered ending an exemption for jet fuel under the program, but under pressure from the aviation industry, declined to pursue it in its final proposal.

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This story was originally published by CalMatters and distributed through a partnership with The Associated Press.

By ALEJANDRO LAZO/CalMatters
CalMatters