National Low Carbon Fuel Standard: Policy Design Recommendations

The abundance and low cost of petroleum over the past 150 years has enabled rapid economic growth and extraordinary mobility advancements. But dependence on petroleum fuels also has large downsides, including dependence on insecure supplies, volatile prices causing high economic costs, polluted and unhealthy air, climate change, and increasing threats to local environments as production moves into more fragile areas. The transition to low-carbon alternative transportation fuels is becoming more urgent. But their introduction is inhibited by a long list of market conditions and failures. These include sunk investments and technology lock-in by the automotive and energy industries, other forms of technological and market inertia impeding investments in deployment and R&D, cartel pricing, and the failure of markets to assign a price to greenhouse gas (GHG) emissions. Various policies might be adopted to overcome these market conditions and barriers, ranging from pure market instruments such as carbon taxes to prescriptive mandates and voluntary actions. Each has different advantages and disadvantages. Some are easier to implement administratively, some are more economically efficient, and some are more effective in accelerating investments. None is perfect. One of the most compelling, assuming some level of urgency, is a broad, performance-based policy that targets greenhouse gas reduction — what we refer to as a low carbon fuel standard (LCFS). In this report, we integrate scientific knowledge of alternative fuels — including an assessment of economic, administrative, institutional, equity, political, and technological considerations — to aid us in proposing a policy design for an LCFS for the United States. We have aimed for a policy design that would be effective, economically efficient, and broadly acceptable. An LCFS is a policy designed to accelerate the transition to low-carbon alternative transportation fuels by stimulating innovation and investment in new fuels and technologies. The goal is to provide a durable policy framework that will stimulate innovation and technological development. Since 2007, variations of an LCFS policy have been adopted by California, the European Union (Fuel Quality Directive, FQD), and British Columbia (Renewable and Low-Carbon Fuel Requirement Regulation, RLCFRR). Other states in the United States have been exploring the adoption of an LCFS policy, including states in the Midwest and the Northeast/Mid-Atlantic region, and the states of Oregon and Washington. The design of an LCFS is premised on the use of technology-neutral performance targets and credit trading, with the intent of harnessing market forces and providing industry with flexibility. It is also premised on the use of life-cycle measurements of GHG emissions, to assure that emissions are regulated effectively and scientifically. An LCFS is a hybrid of a regulatory and market policy instrument. It does not include mandates for any particular fuel or technology and as such does not attempt to pick winners or losers. Instead, it defines an average emissions intensity standard — measured in grams CO2 equivalent per mega-joule of fuel energy (gCO2e/MJ) — that all energy providers must achieve across all fuels they provide. Many options exist for meeting the standard. Regulated parties are free to employ any combination of strategies that suits their particular circumstances and perspectives — including the purchase of credits from other companies. The breadth and reach of an LCFS, and the challenge of implementing an innovative policy, means that adoption of a national LCFS will not be easy or straightforward and will require careful analysis and design. It is necessary to address the cost-effectiveness of the policy (compared with other similar GHG policies) and to analyze ease of administration, fairness, equity, market flexibility, and impacts on energy security and sustainability. We have done so in a companion report, National Low Carbon Fuel Standard: Technical Analysis Report (TAR). This Policy Design Recommendations (PDR) report builds on insights and findings from the TAR. Below we recommend key policy design principles that chart a path toward developing a national LCFS policy.