The Wall Street Journal‘s editorial page checked in recently with its view on the California Low Carbon Fuel Standard. Not surprisingly, it’s against it.
But in making its case, it also committed a significant error.
When the LCFS was created, there was a baseline basket of crudes that constituted all crudes that had accounted for at least 2% of California consumption over a previous several-year period. A carbon intensity rating of the crudes was calculated, and all crudes in the baseline basket were assigned the basket’s overall CI.
So a high CI crude in the basket would carry the same CI rating as a low CI crude. This obviously sort of defeated the whole point. If the economics were better to buy a high-carbon crude rather than a low-carbon crude, there would be no carbon penalty if the two were considered to be equal in carbon intensity under the LCFS.
This was particularly significant for California, where many crudes are produced by steamflooding or other higher carbon-intensity processes. They would not carry any sort of penalty for that fact.
This, apparently, is what the Journal was referring to when it wrote the following: What this means is that California’s crude oil now rates the same as Alaskan light — even though California’s actual carbon intensity is four times as high. Yet another convolution puts oil recovered from Canada’s Alberta tar sands at a ratings disadvantage in California.
But that changed last year, as we spelled out in this entry on The Barrel. Every crude now has its own CI rating, and they more accurately reflect the CIs of the individual crudes. And far from the WSJ’s “ratings disadvantage” for crude from the oil sands — or inversely, an advantage for California crudes — this list of carbon intensities from earlier this year shows some California crudes with CIs of more than 20 (grams of carbon per megajoule), while others are in the low single digits.
So there is a baseline of crudes, to determine the level from which the 10% cut in carbon intensity is to be made by 2020. But unlike the earlier plans, just because a crude is in that baseline, it doesn’t get special dispensation.
The California Air Resources Board released its second quarter report on the status of the LCFS. It doesn’t give precise data on LCFS credits and deficits generated. But it gives a graphic, and a rough estimate: approximately 802,000 mt of credits generated, compared to deficits of about 617,000 mt. That was a significant switch from the first quarter, when the two were practically equal.
Prices took awhile to react to that. Even as the imbalance favored supply over demand, the price of a credit, according to CARB, had risen to $65/mt in August. That was more than the $57 it reported for July, and far more than the $29 recorded in the first quarter. But by September, the price had slipped back to $54/mt.
It’s a thin market; there’s not a lot of transparency and it’s for the implementation of a sweeping regulation that may not even work. Volatility is almost certainly going to be a mainstay of this market.
Blog entry continues below…
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Overall, CARB reported that at the end of the second quarter, about 4.34 million mt of credits had been generated versus 2.7 million mt in deficits.
Is that enough? Earlier this year, a report done by ICF International but paid for by entities that would benefit from the LCFS — including the California Natural Gas Vehicle Coalition, the National Biodiesel Board and the Advanced Biofuels Association–said overcompliance would be expected through 2016-2017, to pile up enough credits to get through to the 2020 “finish line.”
That first quarter report, of credits and deficits about equal, had to be a little troubling in that regard; near-parity was being reached long before the report said it should. But the second quarter surge in supply over demand puts LCFS credit generation back in line with what the trend is supposed to be.
If somebody can show you whether 1.6 million mt of excess credits on July 1, 2013 is an adequate rate of surplus, let’s see the argument. That’s not to say that such an argument would be wrong. But because the LCFS is so unprecedented, there’s no history.
Few people — except maybe CARB itself — are proclaiming they know for sure whether the current pace of building credits is what is going to be necessary for this program to work.