San Ardo Oil Field, Monterey County, CA. Photo: Loco Steve CC-BY-SA 2.0 (Flickr).

California’s Cap-and-Trade Program and Low Carbon Fuel Standard Go Together Like Peanut Butter and Jelly

, Western states policy manager | May 22, 2017, 2:59 pm EST
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This year is shaping up to be another action-packed year on climate change in the California Legislature. Last year, legislators passed a sweeping commitment to cut California’s global warming emissions 40 percent between 2020 and 2030, and this year policy makers are considering how California should achieve these big goals. At the center of that conversation is a debate about whether to extend the state’s cap-and-trade program beyond 2020.(For a quick primer on cap-and-trade, check out our Carbon Pricing 101 webpage.)

Lawmakers should extend and refine California’s cap-and-trade program

California’s cap-and-trade program is an important tool for addressing climate change. This is because it sets a price on global warming emissions and that price helps incorporate the costs of climate change and the value of low carbon technologies into the decisions businesses and consumers make.

In addition, the program’s revenues have proven to be a critical source of funds for investments in clean vehicle, fuel, and energy technologies, particularly in communities that are most impacted by fossil fuel pollution.

In short, California’s cap-and-trade program, while not perfect, is helping to address climate change. As the state sets a course to make big cuts in pollution over the next decade, the program’s price signal and investments in clean technologies will become even more important.

However, given that the cap-and-trade program is now in its fifth year and needs updating for the post-2020 period, it also makes sense to consider refinements to the program. The Air Resources Board has proposed some changes, but we support lawmakers taking a closer look at further improvements.

In particular, UCS supports AB 378 (C. Garcia, Holden, E. Garcia), which seeks to better align the cap-and-trade program with air quality goals. This legislation aims to promote strategies that deliver equitable reductions in criteria emissions, toxic contaminants, and global warming pollution that also benefit low income communities and communities of color. Additionally, we advise the legislature to consider:

  • Raising the cap-and-trade program’s price floor (or “auction reserve price”)—This will ensure the price signal from the program is adequately driving investments in clean technologies.
  • Requiring auctioning of allowances except for proven leakage risks—This will ensure that the value of allowances is being used for the benefit of the public.
  • Taking a cautious approach to offsets—It is difficult to make sure some offset projects represent additional and permanent emission reductions. An abundant use of offsets would also outsource the co-benefits that come with emission reductions from covered sectors.
  • Pursuing opportunities to link with other jurisdictions—In addition to Quebec and Ontario, Canada, several U.S. states, including neighboring Oregon, may seek to link future economy-wide cap-and-trade programs with California’s large and proven market. The opportunity for linkage is one important way for California’s leadership to spread to other jurisdictions.

The oil industry supports cap-and-trade too?

The politics of extending the cap-and-trade program are starting to get interesting.

For example, the program has picked up new and unlikely supporters. First on that list is the Western States Petroleum Association (WSPA), the oil industry’s trade group. (A few Republicans have also started to voice support for the concept.) Just last year WSPA opposed setting limits on climate pollution in California and previously it fought vehemently against including gasoline and diesel fuel in the cap-and-trade program. Nonetheless, WSPA now supports extending cap-and-trade to 2030.

What’s going on here? Well, the oil industry’s idea of how to best design California’s cap-and-trade program looks quite different from UCS’s vision for the program. WSPA wants to see a limit on the price of allowances, more free allowances to refineries and other industrial sources, and greater use of offsets to maximize flexibility, among other changes. If they succeed, we will see fewer emission reductions from the oil industry, the largest sector of emissions in California.

But the biggest prize on WSPA’s wish list in cap-and-trade negotiations is to roll back California’s Low Carbon Fuel Standard (LCFS), a program that focuses directly on the transportation fuel industry. Earlier this month, WSPA launched a website devoted to ending the LCFS. And just last week, at an informational hearing about cap-and-trade, the oil industry’s lobbyist spent half of his testimony talking about the need to eliminate “redundant” programs such as the LCFS.

LCFS guarantees a market for cleaner fuels

In order to understand the importance of the LCFS—and why the oil industry has consistently sought to undermine the program—one must understand the basics of the program.

The LCFS requires petroleum refiners and fuel importers to reduce global warming pollution associated with the fuels they sell. The program regulates the “carbon intensity” of fuels, which is a measurement of global warming emissions per unit of fuel. Moreover, the program looks at emissions over the fuel’s entire life cycle, which means the emissions that come from both producing and using the fuel.

The LCFS requires a gradual reduction in carbon intensity, reaching a 10 percent reduction in 2020, relative to 2010. (ARB plans to extend the program to 2030.) Refineries and fuel importers can meet the requirement by selling fuels that, on average, meet the carbon intensity standard, or by selling fuels over the standard while also purchasing credits generated by sellers of lower-carbon fuels, such as biodiesel or electricity.

Since gasoline and diesel are above the standard, the LCFS creates a dependable market for cleaner fuels, which drives steady investment into non-petroleum fuel sources. The program’s performance speaks for itself. Between 2011 and 2016, use of alternative fuels grew by 50 percent in California, while the average carbon intensity of these fuels declined by 30 percent. All told, the program reported 25 million tons of reduced carbon emissions.

California’s LCFS has helped grow the state’s clean fuels market by 50 percent.

Like peanut butter and jelly

The oil industry argues the cap-and-trade program and LCFS just don’t mix—like oil and water, you might say. However, I see the two policies more like peanut butter and jelly—they are good on their own but so much better together.

The two programs fulfill different niches in California’s climate-fighting repertoire. The LCFS is fostering research, development, and deployment of new and better clean fuel options. That’s why more than 150 clean fuel producers, vehicle manufacturers, and fleet operators recently voiced their support for the program.

Meanwhile, the cap-and-trade program is helping to integrate the costs of climate change into business decisions throughout the economy while also supporting investments in deployment of clean technologies through the program’s revenues.

The two programs also complement one another because compliance with the LCFS eases compliance with cap-and-trade. For example, recent research showed that extending the LCFS to 2030 would cut cap-and-trade allowance prices, reducing compliance costs for all sources covered by the cap-and-trade program.

While the oil industry would love to rely only on cap-and-trade to cut carbon pollution from cars and trucks, the reality is that a carbon price alone is not enough to decarbonize our transportation system. The cap-and-trade program and LCFS are two key components of the state’s multifaceted approach reduce the carbon content of fuels, improve the fuel efficiency of vehicles, and reduce vehicle use.  It’s critical that both policies are designed wisely and extended to 2030, even if that means overcoming the oil industry’s opposition.

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