As the California Low Carbon Fuel Standard heads toward a possible legal resolution later this year, one of the many changes from its earlier version is that crudes produced in the state won't have the same sort of special status under the new rules that they did in the regulation's formative years.
That is one of the key changes in amendments approved late last year, according to various state and industry officials in California interviewed recently by Platts. The implementation of the law was put on hold by a judicial stay late last year, but its legal status is expected to become clearer before the end of 2012.
The most significant change under consideration by the California Air Resources Board is a recommendation by CARB staff, made late last year and adopted by the full board, that would alter the status of the crudes in the California crude "baseline."
Under the old 2006 baseline, California crudes included in the baseline -- and that was most of the crudes produced in the state -- were to be the beneficiaries of a classic free-rider situation, with all of them given a carbon intensity (CI) rating equivalent to the CI of the entire baseline, regardless of their own individual CI.
The LCFS is part of the implementation of so-called AB 32, a far-reaching piece of legislation whose goal is to reduce the state's CO2 emissions to 1990 levels by 2020. The legislation is largely lacking in specifics, which has given CARB a great deal of leeway in implementing the law. In terms of the CI of fuels, the goal is to cut that CI by 10% off a 2010 baseline.
But the change in the baseline is not the only amendment to the original LCFS recommended by the staff and approved by the full board in December.
Legally, enforcement of the LCFS was stayed by a federal district court in late 2011, and the stay was upheld by the same court a few weeks later. The stay ultimately was based on the court's decision that parts of the LCFS discriminated against ethanol from the Midwest, and was therefore a violation of the Commerce Clause of the Constitution.
Next stop on the legal journey for the case is the 9th Circuit Court of Appeals.
According to a paper on the case produced by the law firm of Sutherland Asbill & Brennan, the 9th Circuit could lift the stay while it hears the case, which would allow enforcement of the LCFS. Some observers of the LCFS process told Platts they are anticipating that.
In an interview with Platts, Richard Corey, deputy executive officer at CARB, said that the baseline of crudes had been calculated back in 2006, and constituted all crudes that had made up of 2% or more of what was then California's refinery input.
The way the basket worked, the CI of the overall basket was calculated with a CI rating of 8 grams of CO2 equivalent per megajoule. A crude that was going to be dubbed a high carbon intensity crude oil (HCICO) would have carried a rating of 15. But in the redesigned program, there will no longer be an HCICO designation.
As Corey noted, all crudes in the baseline would have been be assigned a CI rating of 8, regardless of the individual carbon intensity of that crude. It was that fact that many traders simplified into describing California crudes as being "grandfathered" under the early days of the LCFS.
"The effect was that if you're trying to get to a reduction in carbon intensity, you washed out the benefits of the program" by giving some crudes an effective CI rating less than its actual CI rating, Corey said.
Many California crudes have features that presumably would rate them as high CI on their own, including that fact that anywhere between 40% and 50% of the crude produced in the state is aided by such carbon-intense processes as steamflooding.
So a new baseline will be produced, based on 2010 CI. The annual CI of the fuels used to make finished products will be calculated by CARB each year, with a goal that by 2020, the CI will be reduced 10% from the 2010 baseline.
Corey and Mike Waugh, chief of CARB's transportation fuels branch, repeatedly said in the interview that crudes will simply be given a rating, and no crude would have any sort of preferred designation.
That could pose a problem for some grades of California crudes, no longer protected by the baseline, and with their heavy dependence on steamflooding and other carbon-intensive processes for production. However, as both Corey and Waugh pointed out, not every California crude fits this description.
But those crudes won't be designated HCICO. In fact, none will, under the changes under review by CARB. The original plan called for crudes that topped a CI rating of 15 grams of CO2 to be designated HCICO, Waugh said.
"We are not designing the testing (of individual crudes' carbon intensity) with the idea of cutting anybody out or isolating any particular source," Waugh said. "We want to know on a level playing field what's coming in and in order to do that we need something more intricate than a bucket where you just toss things out."
With that in hand, CARB will be looking to create a 2010 baseline, Corey said. From that point on, the CI of the crudes being consumed by California refiners will be calculated every year out to 2020, "and if it does not exceed the 2010 average, then there is no incremental deficit to make up."
