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Report Shows LCFS, Cap-and-Trade Programs Are Better Together

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LCFS compliance curves implemented using four different carbon intensity targets for 2030.

February 27, 2017

The Low Carbon Fuel Standard (LCFS) and cap-and-trade programs do a better job of reducing demand for carbon allowances, lowering allowance prices, and cutting the use of petroleum together than they would as individual policies, a new report from transportation consulting firm ICF finds.

ICF, which has expertise in transportation industries as well as U.S. policy and regulatory development, analyzed the cost and emissions impacts of California’s LCFS as a complementary mechanism to the cap-and-trade program. The report, Post-2020 Carbon Constraints: Modeling LCFS and Cap-and-Trade, assumes that both programs will be extended to 2030. The Coalition and several other alternative fuel groups, including the California Electric Transportation Coalition, Ceres, the Coalition for Renewable Natural Gas, Environmental Entrepreneurs, and the National Biodiesel Board, commissioned the analysis.

“The alt-fuel industries wanted to test the theory that the LCFS and cap-and-trade programs depend on each other for genuine success—and ICF found that they truly complement each other,” said Coalition President Thomas Lawson.

The report focuses on the technical challenges and opportunities associated with achieving a 40 percent reduction in emissions below 1990 levels by 2030, as mandated by SB 32. ICF assumed that California would pursue this goal through a combination of policies similar to the state’s current mix, including the LCFS, the cap-and-trade program, tailpipe greenhouse gas (GHG) standards, and sustainable community strategies.

According to the report, “The trend is clear: The addition of a more stringent LCFS lowers the emissions baseline for the transportation sector, which in turn reduces the pressure on the mass cap [in the cap-and-trade program]. All else [being] equal, this results in lower compliance costs.”

The analysis also shows that the LCFS doesn’t substantially raise overall compliance costs in the transportation sector, especially in the short to medium term. Additionally, the moderately increased LCFS goals that ICF analyzed would deliver ongoing, long-term pollution reductions that cap and trade won’t achieve on its own.

ICF modeled results from the current target of 10 percent lower carbon intensity in 2030 compared with results from targets of 15, 20, and 25 percent lower carbon intensity (illustrated in the chart). The more stringent carbon intensity reductions yield greater fuel diversification, with the benefits increasing substantially between 15 and 20 percent carbon intensity targets. ICF also found that LCFS carbon intensity targets higher than the current 10 percent target reduce petroleum consumption by 18 to 26 percent more.

The report says the design of the LCFS program after 2020 is “especially critical.” Despite the benefits of increasing the carbon intensity targets from 15 percent to as high as 25 percent, if the targets rise too quickly, the program could end up with insufficient credits to offset deficits.

Importantly, the report notes that cap and trade on its own is unlikely to boost demand for the lower-carbon alternative fuels needed for long-term GHG emission reductions. The costs of reducing GHGs are too high to give refiners much motivation to reduce emissions on their own, so they’re likely to continue buying allowances. However, the LCFS program compels refiners to take action to reduce the carbon intensity of transportation fuels, and sends clear policy signals to investors that low-carbon, cost-effective alternative fuels will have a long-term market, according to the report.

“The LCFS directly encourages innovation and investment in the supply and delivery of cost-competitive lower carbon fuels (e.g., biofuels, electricity, natural gas, and hydrogen). This complements the price signal placed on carbon emissions imposed by a cap‐and‐trade system,” the report concludes.

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