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The End of Liquid Motor Fuels?

Petroleum retailers in California are serving as the industry’s early warning system for a regulatory standard that possibly threatens the future of motor fuels: the low carbon fuel stan­dard (LCFS). Intended to reduce the carbon intensity of motor fuels —a measure of direct and indirect greenhouse gas emissions from production to consumption —these standards are spreading beyond California and gaining traction in other parts of the United States and possibly the U.S. Congress. 

A low carbon fuel standard seems to pursue a reasonable objec­tive —a cleaner environment. However, the standards could reduce the use of traditional gasoline and diesel and incentivize non-liquid motor fuels alternatives, such as electricity and compressed natural gas. And though this approach may not seem as ominous as cap-and-­trade or carbon tax proposals, an LCFS —whether federal, state or regional —is potentially more threatening to petroleum retailers and their customers.

Infeasible and Counterproductive
A major problem with an LCFS is that it assumes alternative fuels are affordable and commercially available to all Ameri­can consumers. But in fact, widespread production and use of advanced alterna­tive fuels is far from reality. First, by incor­porating indirect —or lifecycle —green­house gas emissions requirements, an LCFS would actually discourage the use of corn-based ethanol. The carbon emis­sions associated with its agricultural pro­duction and the energy needed to convert corn to ethanol fly in the face of an LCFS. This contradicts federal laws like the Re­newable Fuels Standard, which mandates that at least 36 billion gallons of renewable fuel (of which 15 billion gallons can be corn-derived ethanol) must be available to the U.S. marketplace by 2022, and trade policies that affix federal tariffs on im­ported, LCFS-compliant sugar-cane de­rived ethanol. Meanwhile, alternative fuels that would satisfy an LCFS, such as cellulosic ethanol and other advanced biofuels, face a number of technological and even environmental hurdles. In fact, a single gallon of commercially viable cellulosic ethanol has never been produced in the United States.

To top it off, the country lacks the wholesale and retail distribution infra­structure to support the mandatory, expanded use of biofuels or alternative fuels. A June 2007 Government Accountability Office (GAO) study reported that the De­partment of Energy "has not yet devel­oped a comprehensive strategic approach to coordinate the expansion of biofuel...and has not evaluated the effectiveness of biofuel tax credits."

Current federal and state policies, meanwhile, ignore the infrastructure compatibility requirements, which can result in federal law violations when selling any fuel containing more than 10 percent ethanol. Consequently, an LCFS could mean the end of liquid motor fuels and the beginning of a push toward alternative fuels that simply don’t work with the current petroleum retailing infrastructure.

But even beyond infrastructure concerns, these alternatives face significant hurdles, namely consumer demand. Most non-liquid motor fuels vehicles —compressed natural gas vehicles (CNGVs), plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs) —are considerably more expensive than conventional fuel vehicles and will likely be slow to gain marketshare. (Even the popular gas-electric hybrid vehicles currently represent less than 2 percent of the passenger vehicles in the United States.)

Although the GAO study focused on expanded use of liquid biofuels, it ignored the infrastructure investment requirements necessary to achieve widespread consumer use of alternatives such as compressed natural gas or electricity. The vast majority of our nation’s wholesale and retail motor fuels infrastructure is dedicated to moving and marketing liquid motor fuels. If an LCFS renders the current system obsolete or requires businesses to invest in a new infrastructure, it’s likely that pe­troleum retailers would be at the front of the line of financing these invest­ments. The government might also de­velop an implementation plan that would require that retailers make the necessary investments to bring these alternatives to market.

Energy Independence and National Security
Limited availability of alternatives and expensive vehicle choices are just two problems inherent with an LCFS —but it could also jeopardize our nation’s en­ergy and economic security.

As the economy continues to recover, demand for gasoline and diesel fuel, and naturally crude oil, will likely increase. Canada is the largest supplier of import­ed crude oil to the United States, but LCFS proponents would likely prohibit Canadian crude and "synthetic" oil sands products from entering the U.S. fuel mix because they require more en­ergy to produce and generate more car­bon emissions.

Turning off the tap to crude oil from Canada —a U.S. ally —would potentially increase our dependence on energy pro­duced overseas in unstable parts of the world. Discriminating against a re­source that can be safely, securely and reliably transported via pipeline 1,000 miles as opposed to tens of thousands of miles by sea makes little sense in terms of foreign policy, national security and global environmental quality.

Transporting oil overseas would also generate greenhouse gas emissions; thus, any alleged emissions savings from re­stricting Canadian crude would be negli­gible —if not entirely negated —when you consider the lifecycle emissions of crude originating from other regions.

And finally, if the United States is forbidden from purchasing Canadian crude, China will buy it, placing our na­tion at a strategic disadvantage. Indeed, China has already entered into several production agreements with Canadian firms.

Reasons to Fear
An LCFS threatens more than domes­tic oil and gas producers. For NACS members, an LCFS would mean the mandated sale of non-liquid alterna­tives incompatible with our nation’s existing retail motor fuels infrastruc­ture, as well as substantial investments in new infrastructure. And as noted, an LCFS would contradict current federal law —which mandates more use of corn-based ethanol —by restricting its use in the marketplace.

In addition, an LCFS could increase reliance on electric vehicles that con­sumers would power at home —primar­ily by coal-fired electricity, which is harmful to the environment.

Unfortunately, the dogmatic drive to promote low-carbon alternatives is compelling many regulators to move forward with an LCFS at state and re­gional levels. The momentum is growing and there’s mounting concern that an LCFS will be considered by Congress in the near future.

 It is critical for petroleum retailers to understand the implications of these initiatives, and to address these issues with their elected officials to block the implementation of new LCFS programs before it’s too late.

The article was written by NACS Vice President of Government Relations John Eichberger, with contributions from the National Petrochemical and Refiners Association

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State and Regional Initiatives
While Washington considers the pros and cons of a federal, nationwide LCFS, a number of states and regions are considering their own policies with the expectation that Congress will one day approve a national standard. While California is the farthest along in implementing a state-level LCFS program, other states are in the early stages of following its lead:

California
The California Air Resources Board (CARB) has developed a performance-based LCFS that must reduce greenhouse gas emissions measured on a lifecycle basis. The reductions must begin in 2011, with 2010 as a reporting period. California’s Office of Administrative Law approved and enacted LCFS regulations with the California Secretary of State on January 12, 2010.

The National Petrochemical and Refiners Association, joined by the American Trucking Association and the Consumer Energy Alliance, filed a legal challenge in federal court against California’s LCFS on February 2, 2010. The plaintiffs argue that California’s LCFS violates the U.S. Constitution’s Commerce Clause because it directly regulates interstate and foreign commerce and extraterritorial conduct, including the extraction, production and transport of motor fuels and fuel feedstocks outside of California.

In addition, the California Jobs Initiative is seeking a ballot initiative to suspend implementation of the LCFS until the economy returns to the healthier conditions that prevailed when the law was initially enacted. The ballot prohibits implementation until the state attains a sustained unemployment rate of 5.5 percent for four consecutive quarters. More than 800,000 Californians have signed a petition in support of the ballot initiative. To learn more, visit jobs2010ca.com.

The Pacific Northwest
Pending litigation against California’s LCFS has caused Oregon and Washington to slow the development and implementation of their own regulations.

Section 6 of HB 2186-C, signed by Oregon’s governor on July 22, 2009, permits the state’s Environmental Quality Commission to adopt an LCFS for gasoline and diesel that reduces the lifecycle greenhouse gas emissions per unit of fuel 10 percent below 2010 levels by 2020 (excluding farm vehicles, tractors and trucks used to transport timber).

The Commission would provide exemptions and deferrals to alleviate the costs of the LCFS if the average price of gasoline and diesel in Oregon is not competitive with the average price of gasoline and diesel in its Petroleum Administration for Defense District (PADD 5).

The state’s Department of Environmental Quality has created an LCFS Advisory Committee, which plans to develop a proposed LCFS rule this summer, seek public comment in a formal rule-making process, and have a final rule ready for consideration by December 2010.

Meanwhile, Washington’s proposal revolves around Executive Order 09-05, released May 21, 2009, which directs state agencies to develop an LCFS or alternative requirements intended to reduce carbon emissions from the transportation sector. Washington’s Department of Ecology, in consultation with the state’s Departments of Commerce and Transportation, is currently conducting workshops to evaluate the feasibility and potential construct of a statewide LCFS.

The Northeast and Mid-Atlantic
Eleven Northeast and Mid-Atlantic states have announced that they are following California’s lead in adopting their own LCFS.

The governors of Connecticut, Delaware, Massachusetts, Maine, Maryland, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont signed a Memorandum of Understanding on December 30, 2009, to develop a framework and rule intended to reduce the average carbon intensity of motor fuels, which could include heating oil. The Northeast States for Coordinated Air Use Management (NESCAUM) is coordinating these efforts, and six working groups —open only to these 11 states —have been created to address sustainability, legal authority, communications, economic impacts and implementation.

The Midwest
The governors of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Ohio, South Dakota and Wisconsin, joined by the premier of the Canadian province of Manitoba, endorsed the Midwestern Governors Association’s (MGA) Energy Security and Climate Stewardship Platform for the Midwest 2007, which includes a commitment to "create a uniform, regional low-carbon fuels policy —implemented at the state or provincial level as a standard, objective or incentive." MGA is considering at least a 10 percent reduction in the greenhouse gas intensity of motor fuels within 10 years, and the Great Plains Institute, the Pew Center on Global Climate Change and the North Central Bioeconomy Consortium are coordinating this effort.

An advisory group (including some energy industry representatives) has developed draft recommendations, and a draft model rule and analyses could be completed this summer. Minnesota and Wisconsin are also pursuing their own initiatives to require motor fuels refiners, blenders and importers to reduce carbon intensity and implement an LCFS, respectively.