The LCFS, which was enacted in 2009, requires California’s fuel producers to reduce the greenhouse gas emissions of their fuel by 10 percent by 2020 (compared to 2010 levels). It’s a major component, along with cap-and-trade, of California’s AB32, the Global Warming Solutions Act of 2006. That act requires the reduction of greenhouse gas emissions in the state to 1990 levels by 2020.

CARB officials called the LCFS a success story at their recent meeting, although greenhouse gas emissions from fuel have been reduced by only 1 percent so far. Lawsuit challenges and new research on alternative fuel carbon levels have prompted CARB to revise and reauthorize the regulations. A final vote to update them is planned for this summer, with implementation to begin in 2016.

A 2012 study by the Boston Consulting Group for the Western States Petroleum Association predicts California’s economy will take a hit when the full force of the regulations takes effect in 2020:

• “Due to forecasted refinery closures, California could lose 28,000-51,000 jobs, including many high-paying skilled manufacturing jobs, as well as indirect job losses due to multiplier effects.
• “California could lose up to $4.4 billion of tax revenue per year by 2020 resulting in further reduction in employment in certain areas (e.g., road maintenance, local businesses).
• “There will be a wealth transfer of at least $3.7 billion per year by 2020 from refineries and fuel suppliers to the California Air Resources Board as a result of purchasing allowances.
• “Other negative impacts include loss of manufacturing expertise and increased cost of living resulting from higher fuels cost, disproportionately impact[ing] low-income households.
• “California’s climate change regulations will discourage energy intensive industries from locating in the state, and existing industry will have an incentive to relocate outside of the state.”

‘Infeasible’

WSPA’s website page on climate change calls the LCFS “infeasible” because “[i]nadequate supplies of low carbon intensity (CI) biofuels and LCFS credits leave refiners no viable compliance options.”

CARB uses a compliance mechanism similar to the cap-and-trade program. Fuel providers receive credits when their fuel is below the carbon-intensity standard, and deficits when they exceed the CI. Credits can be stored to offset potential deficits in later years when the standard becomes stricter, or sold to other companies seeking to offset their current deficits.

Because companies have only been required to reduce their CI by 1 percent so far, most have accrued credits. But the CI standard will be tightened significantly in coming years: a 2 percent reduction in 2016, 3.5 percent in 2017, 5 percent in 2018, 7.5 percent in 2019 and 10 percent in 2020.

Many petroleum companies are concerned they will be hit hard with deficits by 2020 because there will not be an adequate supply of low-carbon alternative fuels to blend with their fossil fuels. The penalty could reach as high as $200 per metric ton of carbon dioxide equivalent they produce.

Credits

WSPA Vice President Gina Grey told the committee a BCG study “concluded that approximately 5.1 percent is the sustainable reduction that can be achieved by 2020 through the use of both [blending alternative] fuel and the credits.”

She was echoed by Miles Heller, representing Tesoro Petroleum Corporation. “In our opinion, this is an impossible task given availability and blending constraints in alternative fuels and the complexities of this proposed regulation,” he said.

“CARB’s own numbers indicate some infeasibility. By 2019 the credits that are generated from available fuels will not be adequate to offset the deficits generated in that year. By 2020 there’s a considerable gap – only 70 percent of what is needed will be generated. And the availability of credits for gasoline is only 36 percent of what’s needed.

“The only way that the obligation is met in these years and beyond is by utilizing banked credits. These will run out. This is not sustainable. And we do not think that designing a program that will rely on banked credits is wise. This is like telling a student that at the beginning of the semester they will fail the final exam, but they can still pass the class if they do extra credit projects throughout the semester. This does not bring certainty.”

CARB Chair Mary Nichols challenged Heller’s focus on credits. “I hope you don’t take [the credit system] as meaning that we don’t think you should be accelerating your efforts to develop and bring in lower carbon alternatives that would help you comply,” she said.

Heller responded, “I understand that, and we have been bringing in the fuels to meet our compliance obligation and exceed it in some cases. But the question becomes in the future when there’s not enough fuels even to do that, then you’re left with using whatever credits have been banked in the system.”

Nick Economides, representing Chevron, also argued the LCFS regulations are unrealistic. “The LCFS program, in our view, will likely fall short of its originally intended targets, and should be adjusted to more accurately reflect the real world rate of development and market penetration of advanced low-CI fuels,” he said.

“The board should look beyond targets that are met largely through accumulated credits, and weigh heavily whether the program can stand on its own two feet; i.e, in any one single year will there be enough CI credits generated to match what is needed for that year? Chevron’s view is that the proposed 2020 target of 10 percent is essentially aspirational. It depends on unrealistic credit buildup leading up to 2016.

“We advocate that this program should bring certainty to the regulated community. We know you share that objective. But this strategy of setting higher than achievable goals denies the regulated community the strategy it needs to go forward. And it continues the climate of uncertainty that has shrouded this program since its inception.”

Alternative fuel companies

But they were the only LCFS critics out of the 51 people who addressed the board over three hours. The meeting was dominated by representatives from alternative fuel companies who called the program a success.

Low-carbon fuels include biodiesel, renewable diesel, ethanol, electricity and natural gas. Thanks to LCFS and other governmental incentives, the alternative fuels industry has been booming. Tim Olson, representing the California Energy Commission, said his agency has awarded nearly $160 million in matching funds over the past five years for 43 biofuel and biomethane projects.

“Right now California imports 80 percent of its biofuels,” he said. “We think in-state development is an important aspect, and LCFS makes that work. We are seeing a shift from petroleum to alternative fuels.”

Alternative energy officials assured the board there will be enough low-carbon fuel available to meet the 2020 target.

“Ten years ago you were buying biodiesel by the jar,” said Shelby Neal, representing the National Biodiesel Board. “Now we are [producing] up to 1.5 billion gallons [annually in the U.S.]. It is not scarce. And California would only require a fraction of that.

“But the real story is not production, the real story is capacity. Capacity is over 3 billion gallons. California would require maybe one-eighth of that. We’re affordable. For the past three years biodiesel has been 22 cents cheaper than petroleum at the wholesale level.

“In the biodiesel industry our motto has always been: ‘Local feedstock, local production and local markets.’ California is a very positive story. Pre-LCFS, California was not on the national radar screen in production. Now California ranks 13th out of 46 states in biodiesel production. By 2018 and 2020 with these regulations we would expect California to possibly enter into the top five in production.”

Meeting the standard

The board members were unanimous in their praise for the Low Carbon Fuel Standard. Nichols called it essential for meeting both the AB32 reduction goal by 2020 and Gov. Jerry Brown’s proposal to cut petroleum consumption in the state in half by 2030.

“Obviously, we did not hear a lot of support from major oil companies today,” said Nichols. “Which is disappointing. I’m not going to try to debate the politics or economics at all. This board has for decades now been in the business of setting standards that were ahead of how the people regulated knew how they were going to comply but were based on a substantial knowledge and analysis of the potential for technology as well as increasingly more sophisticated economic analysis.

“I just want to say that I think we have a good track record of working with the regulated community and adjusting regulations when it turns out that our predictions were wrong. But that overall by pushing toward goals that we believe are achievable and occasionally adjusting [compliance] timelines that we have achieved just tremendous progress and we look forward to doing the same thing here.”

Sympathy

Board member Daniel Sperling, who was one of the architects of the LCFS, expressed sympathy for the oil industry in having to comply with the regulations.

“This really is hard,” he said. “The challenge we’ve laid out really is a huge challenge. We shouldn’t understate that. We should also appreciate that for the oil industry we are basically telling them we want you to change your business model and your main product. That’s pretty tough stuff. But at the same time this is the larger social goal, public goal that we’re aiming for.

“So I can sympathize with the oil industry. We are attacking their basic business model. But we’re providing a lot of flexibility. So we are going out of our way to try to make this transition as smooth and efficient as possible while still achieving the goals that we’re aiming for.”

Said board member John Gioia, noting that oil companies like Shell are exploring alternative fuels, “So while it may be a challenge to their business model, it will help develop a new business model. Or help move toward a new business model.”

Nichols concluded the discussion by taking a phrase from former Gov. Arnold Schwarzenegger, who spearheaded AB32. “We’ll be back,” she said with a laugh. “We’ll be back in the summer.”

California’s oil industry is celebrating the defeat of a bill that would have placed a moratorium on hydraulic fracturing — but warned that the fracking war is far from over.

Senate Bill 1132 by Sen. Holly Mitchell, D-Los Angeles, failed 18-16 on the Senate floor May 28. Four Democrats joined Republicans in voting against it, while three Democrats sat out the vote. The bill was reconsidered the next day, resulting in a loss of two more Democratic votes.

Catherine Reheis-Boyd, president of the Western States Petroleum Association, sent out a congratulatory email to supporters last week:

“The legislation would have banned hydraulic fracturing and other well stimulation technologies, putting existing petroleum industry jobs at risk and preventing the creation of potentially tens of thousands of others – not to mention depriving Californians of much-needed state and local tax revenues and enhanced energy security.

“Not surprisingly, anti-oil special interests who fed the public, the state Legislature, and media egregious misinformation about hydraulic fracturing and other oil extraction techniques have vowed to continue their efforts in Sacramento and throughout California’s local communities. WSPA will continue to push for common sense legislation that balances environmental protection with domestic energy security, job creation, and economic development.”

Mitchell: Big Oil ‘polluting for profit’

Mitchell did indeed vow to keep up the fight against an oil-and-gas drilling process that she believes pollutes the environment.

“[She] is proud of the bill’s successful journey in raising awareness around public safety, fossil fuels and environmental justice,” Mitchell said in a press release.  “Although the bill fell short of passage, she is confident that the movement to re-assess fracking, acidization and other well stimulation methods will continue to grow until the public’s concerns are thoroughly addressed.

“We have the momentum, this issue’s gone viral nationally, and it’s just a matter of time before the dangers of fracking prompt people to put it on pause until its safety can be established. When the impacts on the public of a for-profit endeavor are unknown, we try it out first in minority neighborhoods – assuming low vigilance and the need to bring in jobs makes safety irrelevant.

“But we’ve put big industry on notice: That ploy won’t fly forever. People’s neighborhoods aren’t fodder for fracking, environmental justice must come, and one day soon the vote to refrain from polluting for profit will prevail!”

State, feds: Fracking not a danger

But the California agency charged with oversight of fracking assures that more than a half-century of hydraulic fracturing in the country have shown it to not be an environmental danger.

“Hydraulic fracturing was first used in 1947 in a well in Kansas,” states the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources. “Since then, hydraulic fracturing has become a regular practice to tap into previously unrecoverable reserves, or to stimulate increased production from existing oil or gas wells in the United States.

“In California, hydraulic fracturing has been used as a production stimulation method for more than 30 years with no reported damage to the environment.”

The Obama administration also has long depicted fracking as safe. In May 2013, at a news conference on draft rules for fracking on 700 million acres of federal land, Interior Secretary Sally Jewell defended the drilling process: “I know there are those who say fracking is dangerous and should be curtailed, full stop. That ignores the reality that it has been done for decades and has the potential for developing significant domestic resources and strengthening our economy and will be done for decades to come.”

SB1132 came hard on the heels of another fracking crackdown bill, SB4, which was approved by the Legislature last year and signed by Gov. Jerry Brown. It increases regulations on fracking, including disclosure of the composition and disposition of fracking fluids to state regulators.

It also requires a study be completed by the end of this year on “the hazards and risks that fracking poses to natural resources and public, occupational, and environmental health and safety,” according to the bill’s legislative analysis. “No permits for fracking would be allowed to be issued after Jan. 1, 2015, unless the study is completed and peer reviewed.”

SB1132 would have extended that study an additional six months, and imposed additional governmental reviews before fracking could resume in the state.

Sharp disagreements in Senate floor debate

Democrats and Republicans debated the bill May 28 on the Senate floor.

“SB1132 puts a temporary moratorium on hydraulic fracturing and acidization until they are proven safe by an exhaustive study that looks at many of the concerns and complaints commonly made by the citizens who live and work near the oil fields,” said Mitchell.

She dismissed concerns about potential job loss, saying the oil industry claims that only a small minority of wells are fracked. And she cited media reports that the oil recovery potential of California’s Monterey Shale formation has been cut by 96 percent, according to the U.S. Energy Information Administration.

“SB1132 simply calls for a ‘time out,’ if you will, a temporary moratorium pending verification that fracking and acidization methods are safe,” said Mitchell. “Along with many of you, I have no desire to increase our over-reliance on foreign oil. However, the safety of oil drilling is fundamentally an environmental justice issue that I believe we must view with great scrutiny.”

Jackson: No need to ‘frack, frack, frack’

She was backed by Sen. Hannah-Beth Jackson, D-Santa Barbara, who said that fracking has caused earthquakes in Ohio and degraded water quality in Texas.

“There would be no harm in hitting the pause button and evaluating specifically and more independently what the impacts are of this process on our water quality, air quality, the public health of people in surrounding communities,” said Jackson. “There is no urgency to frack, frack, frack. Let us be cautious. Let us be circumspect. And let us have the information that we need in order to determine whether we should continue a procedure that has demonstrated negative results in other parts of the country.”

Sen. Mark Leno, D-San Francisco, said that 70 percent of Californians support a fracking moratorium. And he noted that other states have adopted moratoriums.

Two Republican senators representing inland valley areas pointed out that their districts are still suffering double-digit unemployment, which will worsen with this year’s drought.

GOP response cites economic potential, need for fuel

Sen. Tom Berryhill, R-Stanislaus, discussed a trip to North Dakota last year where the economic contrast could not have been more stark due to that state’s oil and gas drilling boom.

“It was mind-boggling,” he said. “There was ‘help wanted’ on every corner and every small business. It was a tremendous opportunity to get people back to work. This technology has the potential to create thousands of jobs and a second gold rush to the local economy in the state of California that we haven’t seen in years.”

Sen. Jean Fuller, R-Bakersfield, challenged Mitchell.

“Californians require 44 million gallons of gasoline a day,” said Fuller. “Our state refineries provide all of that gasoline, and they must be supplied with oil from somewhere. My question for the author is: What other methods or new technology does this bill propose to use to backfill the lost oil production in California? Tankers, rail, rationing or something that I don’t know?

Mitchell responded, “This bill does not propose to offer an alternative.” The time for that is if the study determines that fracking is unsafe, she added.

That did not satisfy Fuller, who said, “My area produces about 80 percent of the oil and gas. Most of those wells that are being fracked have been fracked for many, many years. Most of them are in an oil well footprint where there’s no groundwater underneath, there’s no residential houses nearby. And they haven’t had safety violations.

“I think that we’ll get [safe fracking] without having to suffer loss of jobs and tremendous economic upheaval in my area. Some of the small cities in my area have 30 percent unemployment now. We’re about to head into a drought in August, and that will probably double [unemployment], because the last time we had a drought there was 30 percent unemployment just from the drought. To have even a day’s loss of this work, which are very good wages and very good health benefits, is absolutely crushing for us.”

Sen. Jim Nielsen, R-Tehama, argued that Mitchell’s bill puts up so many obstacles to completion and certification of the study, that it would amount to a de facto ban on fracking.

“Would it affect the citizens of California?” he asked. “Absolutely. We cannot conserve our way to the future in either water or energy.”

Mitchell: You’re crying fire

Mitchell accused her bill’s opponents of being alarmists on the threat of lost jobs.

“I don’t think it’s appropriate for us to cry fire in a crowded theater when we are unable to quantify the actual statistical job loss based on the narrow parameters of this bill,” she said. “We as policy makers have to make a very, very difficult, delicate decision: employment versus public health and safety. I appreciate the challenges many of the districts are experiencing. I hope you appreciate the challenges my constituents are facing who live in very, very dangerous close proximity to wells that are being fracked and where acidization is being used.”

Reheis-Boyd discussed in her blog her organization’s next steps, now that there has been a temporary truce in California’s fracking war:

“[The] defeat of Senate Bill 1132, legislation that would have imposed a moratorium on hydraulic fracturing and other well stimulation technologies, clears a path for a concerted and collaborative effort to fully implement new statewide regulations embodied in Senate Bill 4.

“The SB 4 regulations put into place a robust set of monitoring, disclosure, testing, land use and research requirements that ensure hydraulic fracturing in California is conducted safely and without harm to the environment. But there is still much to be done to finalize these new regulations, and the petroleum industry is going to be a constructive partner in getting them accomplished.

“For example, we are working with the State Water Resources Control Board and regional water boards to develop groundwater monitoring criteria and planning required by SB 4. Once finalized, these new requirements will give us the data necessary to demonstrate hydraulic fracturing and other well stimulation technologies are not adversely impacting California’s precious water supplies.

“We are working with the California Air Resources Board and regional air boards to ensure air quality concerns are addressed as required by SB 4. We are working with the Division of Oil, Gas & Geothermal Resources to develop the in-depth CEQA analysis of well stimulation operations also required by SB 4. And we look forward to the findings of the science-based study of hydraulic fracturing – yet another requirement of SB 4. …

“As Governor Brown has noted, close to a third of the new wells drilled in California are hydraulically fractured as a way to improve their productivity. These wells are an important part of California’s ongoing, conventional oil production that supplies 37 per cent of our daily petroleum needs. 

“The more than 100,000 men and women directly employed in oil production and transportation in California appreciate the Legislature’s support for the work they do and welcome the opportunity to move forward under the guidance of SB 4 regulations.”

By Dave Roberts

Two new studies are predicting economic devastation in California as the myriad regulations and costs resulting from AB 32, the Global Warming Solutions Act of 2006, take effect in the next eight years. The hit to state residents will total $35 billion in 2020 —  exceeding California’s combined revenue from sales taxes, corporation taxes, insurance taxes, estate taxes, liquor taxes, tobacco taxes and vehicle fees, according to a study by Andrew Chang & Company for the California Manufacturers & Technology Association. The average family will pay an extra $2,500 by 2020 due to increased energy prices.

The total cumulative cost to consumers will be $136 billion by 2020, according to the report. California’s gross state product will be reduced by $153 billion, representing a 5.6 percent decrease. That is roughly equivalent to California’s GSP loss in the Great Recession from December 2007 to June 2009. In addition, the state will have 262,000 fewer jobs in 2020 than if AB 32 had not been enacted. Total state and local tax revenues will be reduced by more than $7.4 billion annually in 2020.

These figures are based on an “optimistic” scenario, assuming a lower range for fuel price hikes and a higher range for energy efficiency the reduction in vehicle miles traveled. The actual costs could be much higher: California families could be paying an extra $4,500 annually, while state and local tax revenue could drop $39 billion by 2020.

“These policies will create a large but hidden tax on families and will add new burdens to a fragile state economy,” said CMTA President Jack Stewart. “This new tax is not what we need while Californians struggle to find jobs, meet mortgage payments and maintain a reasonable quality of life. This poses great risks to manufacturers and other firms competing in regional and global markets. Current data shows that California already is lagging the nation in new manufacturing investment because of other cost pressures and uncertainties. The Legislature must use this critical data to get control of AB 32 costs.”

Hardest hit may be the state’s businesses, particularly those in energy-intensive areas like manufacturing, transportation and petroleum refinement. But all will feel the pain, according to National Federation of Independent Business/California Executive Director John Kabateck.

“For the past five years, small business owners have been concerned about their ability to operate under the potential costs of a complicated AB 32 regulatory scheme,” said Kabateck. “This comprehensive report tells us that small business will get hit from all sides. Consumers will have less money to buy our products, employers will be forced to purchase more affordable products outside of California and our own energy costs will make it nearly impossible to stay in business.”

‘Optimistic’ scenario

Under the “optimistic” scenario, California’s local governments will lose $1.9 billion in revenue by 2020 and face an additional annual cost increase of $2.3 billion in 2020, according to the report. The Los Angeles Unified School District will face cumulative costs of $27.3 million, with an annual impact of $5.5 million in 2020.

“Municipalities are struggling everywhere in California,” said Diamond Bar Mayor Ling-Ling Chang. “This is a double hit in both lost revenues and substantial new costs. I’m in favor of greenhouse gas reductions, but there must be a cheaper way to do this.”

On the plus side, the state is expected to meet its goal of reducing greenhouse gas emissions to 1990 levels by 2020. On the down side, one-quarter of those reductions “will be due to the economic slowdown resulting from AB 32 and the decrease in transportation fuel consumption due to increased costs and decreased earnings,” the report states.

The state’s outlook is not much better in the other report, which was prepared by The Boston Consulting Group for the Western States Petroleum Association. It’s key findings include:

* Gas prices could increase by $2.70 per gallon in California, depending on the cost of carbon.
* Due to refinery closures, California could lose 28,000-51,000 jobs, including many high-paying skilled manufacturing jobs, as well as indirect job losses due to multiplier effects.
* California could lose up to $ 4.4 billion of tax revenue per year by 2020.
* There will be a wealth transfer of at least $3.7 billion per year by 2020 from refineries and fuel suppliers to the California Air Resources Board as a result of purchasing allowances.
* California’s climate-change regulations will discourage energy intensive industries from locating in the state, and existing industry will have an incentive to leave the state.

“The findings of this research are sobering,” wrote WSPA President Catherine Reheis-Boyd in a June 18 letter to Gov. Jerry Brown. “Californians know all too well that, no matter how well intended, innovative energy policies may result in unintended consequences. CARB’s climate change regulations for fuel providers and fuels are exactly these innovative, first-of-their-kind policies that may result in serious and unintended consequences.

“From possible fuel shortages to an increase in global emissions to market disruptions reminiscent of the California energy crisis, the BCG study has highlighted some warning signs that require immediate attention by California policymakers. In order to safeguard Californians and fuel providers from the unintended but almost certain disruption of our state’s fuel supplies, it is essential that we begin a serious and constructive discussion on California’s fuels policies.”

Fuel supplies disrupted

Brad VanTassel, the lead researcher for the BCG study, said, “California’s current climate change policies pose some really impossible challenges for refiners in California that have the potential to disrupt fuel markets and fuel supplies in very serious ways. In addition to forcing the closure of a significant number of California’s petroleum refineries, those disruptions are likely to manifest themselves economy-wide in terms of lost jobs, higher costs for fuel, food and other necessities, and loss of tax revenues to state and local governments.”

With the AB 32 horse having left the barn — an anti-AB 32 proposition, Proposition 23, was defeated easily two years ago — state officials have largely ignored the studies in the belief that all will be well. They argue that additional energy costs will be offset by savings from increased energy efficiency, and that “green” jobs will be created to offset other job losses. CARB spokesman David Clegern estimates the state will save about $4.3 billion in health care costs from cleaner air by 2020, according to Green Supply Chain News. A CARB study in March 2010 concluded that AB 32 will reduce GSP (Gross State Product) by just 0.2 percent.

If the new studies are accurate, the economic pain from AB 32 will begin to be felt next year, and then will slowly ratchet up for the rest of the decade. In effect, Californians are the frog that’s been placed in a pot of warm water and the burner has just been turned on. In eight years the water will be at full boil. But by then it may be much too late to jump out of the pot.