Oregon’s Clean Fuels Program Off to a Great Start

April 28, 2017 | 10:37 am
Photo: Oregon Department of Agriculture. CC BY-NC-ND 2.0 (Flickr)
Jeremy Martin
Senior Scientist and Director of Fuels Policy

Oregon’s Clean Fuels Program (CFP) was initially authorized by the legislature in 2009, with subsequent legislation in 2015 allowing the Oregon Department of Environmental Quality (DEQ) to fully implement the program in 2016.  The program’s goals are to foster the development of an in-state market for cleaner fuel by requiring that transportation fuels used in Oregon get steadily less-polluting over the next decade. The program requires average life cycle global warming emissions per unit of energy in transportation fuels to decline by 10% by 2025 compared to 2015.

Oregon’s CFP completed a very successful first year, but it remains under attack, so it’s a great time to review how the policy works, the results of its first year, and its prospects for the future.

The Clean Fuels Program creates a steadily growing market for clean fuels

Transportation is the largest source of global warming pollution in Oregon, and the overwhelming majority of transportation emissions come from petroleum-based fuels like gasoline and diesel.

Making a transition to a low carbon transportation system will take several decades, and will require a systemic transformation of transportation systems, vehicles and the fuels used to power them.  The Clean Fuels Program focuses on the fuels, ensuring that the market for clean fuels grows steadily year after year.  This assurance is critical to support investment in new fuels.

Getting clean fuels production and distribution up to commercial scale in the next decade is critical to accelerating the transition to clean transportation, and this early market signal to invest and innovate is even more powerful over the long term than the significant reduction in pollution the policy will deliver over the next few years.

The Clean Fuels Program protects clean fuels producers and all fuel consumers from volatile oil prices

Markets for transportation fuels are highly unstable, with retail gasoline prices in Oregon swinging back and forth in the last decade, from less than $2/gallon to more than $4/gallon.  The instability is a problem for drivers, but it also makes it very difficult for new cleaner fuels to get a foothold, since a clean fuel that is very attractive competing against $4/gallon gasoline may struggle at low prices.

The Clean Fuels Program assures fuel producers that the market for the clean fuels will grow steadily, protected from changes in global oil prices beyond their control, so clean fuel producers can focus on competing against other clean fuel producers.

How does the Clean Fuels Program work?

The Clean Fuel Program requires that large companies importing and distributing transportation fuel in Oregon, mostly gasoline and diesel, act to reduce the emissions from the fuels they sell by 10% per unit of energy.

Unlike Federal biofuels policy, the CFP does not set specific targets for ethanol, biodiesel, natural gas, or any other alternative fuel.  Instead the CFP requires that the average carbon intensity of fuels meets a gradually declining target.  Fuels that are cleaner than the target generates credits, while more polluting fuels generate deficits.

At the end of the year, fuel providers need to settle with the Department of Environmental Quality (DEQ), turning in enough credits to cover their deficits.  The CFP also has several flexibility mechanisms built in, including allowing credit trading between parties selling clean fuels and parties selling more polluting fuels, and allowing fuel sellers to generate extra credits early and save them for later (called banking).

What is Carbon Intensity?

The CFP regulates the “carbon intensity” of fuels, which is a measurement of global warming emissions per unit of energy in the fuel. This allows all fuels—whether gasoline, diesel, ethanol, biodiesel, natural gas, or electricity—to be compared accurately.

In measuring the carbon intensity of fuels, the CFP measures each fuel’s life cycle emissions, which accounts for not only the emissions generated by a vehicle when using a given fuel, but also the emissions that come from producing and transporting the fuel. For example, about a quarter of global warming emissions associated with using gasoline come from extracting and refining the oil to make the gasoline.

Emissions associated with biofuels depend greatly on whether they are made from corn, soybean oil, used cooking oil or biomethane collected at landfills, as well as how the fuel is produced. Electric vehicles produce no tailpipe emissions, so the life cycle emissions of electricity depend primarily on how the electricity is generated (whether from fossil fuels or renewable sources such as wind and solar). See my recent report, Fueling a Clean Transportation Future, for much more information about the future of fuels, especially gasoline, ethanol, and electricity.

The Clean Fuels Program is off to a good start

2016 was the first year of the CFP, and so far, the program is off to a good start. Fuel producers have been registering, and establishing the Carbon Intensity of their fuels, and for the first three quarters, credit generation (from selling fuels cleaner than the target) significantly exceeded deficit generation.  This means that regulated parties are entering the next year with a buffer of banked credits they can use later if necessary.

In the first few quarters, most of the credits were generated from ethanol and biodiesel.  These fuels are already part of the Oregon Fuels mix, blended into gasoline and diesel to satisfy state and federal requirements, but the CFP provides an incentive for fuel blenders to use more of these cleaner fuels and to seek out the least polluting sources of these biofuels, which provide more credits per gallon.

In subsequent years, other fuels, including biomethane and electricity, will play a growing role, but the procedures to credit some of these fuels are still being finalized and it will also take time for fuel buyers to react to the market signals from the CFP.

Clean Fuels Program credit data from Oregon DEQ

Lessons learned from California’s Low Carbon Fuel Standard

California got started with clean fuels policy a little earlier than Oregon, with a closely related policy called the Low Carbon Fuel Standard (LCFS) which went into effect in 2010 and requires a 10% reduction in average carbon intensity by 2020.

Data from the first five years of the LCFS provides a hint of what Oregon can expect as the Clean Fuel Program progresses.  Like Oregon, early years relied mostly on alternative fuels that were already well established in the marketplace, ethanol and natural gas.  But the growth in alternative fuel use encouraged by the LCFS came from other fuels, especially biodiesel, renewable diesel and biomethane.

The LCFS also provided more credits for cleaner fuels, especially those made from wastes such as biodiesel and renewable diesel made from used cooking oil and animal fat, and biomethane captured at landfills.  The larger benefits of these fuels is reflected in the fact that their share of credit generation is larger than their share of alternative fuel volume.


Electricity and the Clean Fuels Program

The truly clean transportation system we need will have fewer internal combustion engines running on petroleum, and more electric vehicles running on non-polluting renewable sources of electricity.  The CFP can accelerate this transition by ensuring that the low carbon benefits of  electricity lowers the cost of operating electric vehicles.

When California’s LCFS got started in 2010 there were almost no electric vehicles, but by 2016 EVs were generating 9% of the credits.  Transit agencies running electric buses generated some of these credits, which they sold to oil companies and others who needed them to offset pollution for gasoline and diesel.

The value of these credits makes it easier for transit agencies to go electric, which also has important health benefits for communities in which these buses operate.  Households with electric cars also benefit as utilities have set up rebate programs funded by LCFS credits – PG&E is has a $500 clean fuel rebate program – which makes owning an EV even more attractive.

Managing the Clean Fuels Program

In 2017, DEQ is undertaking rulemaking  to implement a few important policy improvements. These include establishing procedures for crediting for the use of electricity as a transportation fuel, and implementing a cost containment mechanism to clarify what steps will be taken in the unlikely event of a shortage of clean fuels.  To assist them in this process, DEQ convened an advisory committee of stakeholders representing oil companies, clean fuel producers, environmental groups, the AAA, truckers, and others who are meeting seven times between November 2016 and June 2017.

I have been representing the Union of Concerned Scientists on this committee.  This process gives all parties the opportunities to share their concerns, and weigh in on proposed solutions so that DEQ can put together a well-considered set of program enhancements to take to the Environmental Quality Commission later this year.

The transportation system has many moving parts, and will require a suite of policies

Transportation is not just the largest source of Oregon’s climate emissions, it is also deeply integrated into people’s lives and commerce.

Ensuring the system serves Oregon well will require ongoing investment in roads, bridges, transit, facilities for bikes and pedestrians.  Finding sustainable, equitable means to fund these many priorities is critically important, and should not be considered as an alternative to supporting a transition to cleaner fuels.

Over time clean fuels, especially renewable electricity, will get steadily less expensive, and moving to these in-state sources of transportation fuel will protect drivers from the unpredictable price volatility of gasoline and diesel, which are influenced primarily by global oil prices over which Oregon has very little control. Getting started on this transition away from oil will have some costs, but with appropriate measures to manage these costs, this is a very smart investment in Oregon’s future.

Changing the law is not necessary or helpful at this time

Despite the ample evidence that the Clean Fuels Program is off to a great start, some critics of the policy in the Oregon legislature have been proposing legislation that would dramatically change the rules of the program, and if history is a guide, they may try to undermine the policy in negotiations over funding much needed transportation infrastructure investments.  This is not a smart way to move forward on either clean fuels or transportation funding.  Oregon needs to cut emissions, and it needs to make smart investments in physical infrastructure; bills pitting these goals against each other are short-sighted and counterproductive.

Clean Fuels Policies and Carbon Pricing work together

The Clean Fuels Program is focused on cleaning up transportation fuels, but while transportation fuels are important, other climate policies are also necessary to meet climate goals.  Putting an economy-wide price on global warming emissions, either through a cap-and-trade program or a carbon tax, helps integrate the costs of climate change into the cost of doing business.

In the transportation sector, carbon pricing helps ensure that the costs of pollution from fossil fuels—and the value of low carbon technologies—are better reflected in decisions fuel providers make about what fuels to produce, as well as the decisions consumers make about what cars to buy.  However, a carbon price alone is not enough to decarbonize our transportation system over the next few decades.

Typical carbon prices —which translate to pennies per gallon in increased fuel cost—cannot adequately motivate investments in innovative cleaner fuels. That’s why it is important to have policies in place to limit heat-trapping emissions from fuels directly. The Clean Fuels Program facilitates research, development, and deployment of transformational low-carbon technologies.  For more information, see our fact sheet on how California’s carbon pricing and LCFS complement one another.

State leadership on climate is more important than ever

States have always been important laboratories for democracy, but with the current administration in Washington D.C. actively undermining climate progress, states are an essential bulwark against backsliding.  Policies like the Clean Fuels Program ensure that the market for innovative clean fuels needed to address climate change continue to grow, even in the absence of reliable federal support.

By working together with neighboring states and provinces in the Pacific Coast Collaborative, Oregon can maintain momentum on emerging clean technologies for transportation and other climate goals.  Moreover, by investing in the future, Oregon can keep its transportation system moving forward, even if Washington D.C. is trying to slam the brakes on clean energy and go back to the fossil fuels of the last century.

UPDATE [May 2, 2017, 4:01pm]: The author updated the “Alternative Fuel Volumes and Credit Generation” graph to reflect the most recent data on California’s LCFS.