California’s LCFS Raises Prices at the Pump

The United States Supreme Court announced on June 30 it would not review California’s Low Carbon Fuel Standard (LCFS). This decision allows California to go forward with its LCFS. As a result we will likely see even higher gasoline prices in California.

A Low Carbon Fuel Standard limits the amount of greenhouse gases vehicle fuel can emit in its production and usage. Transportation fuel (ie. gasoline and diesel) producers are encouraged to reduce the amount of greenhouse gas emissions used in the manufacturing of fuel or to purchase credits to offset their impact.[1] According to California, certain biofuels decrease the “carbon intensity” of the fuel, which means that one way to comply with an LCFS is to blend biofuel with gasoline. Because of the need to buy credits or use more expensive feedstocks an LCFS program increases the cost of gasoline at the pump.[2]

California’s LCFS Law Upheld

The first state to adopt a LCFS was California in 2007. It has served as a model for other proposed LCFS regulations throughout the world.[3] California hopes the regulation will reduce all greenhouse gas emissions by 10 percent by 2020. California’s regulation assigned each fuel a “carbon intensity rating” a calculation based on projected emissions. The rating takes into account the conversion of forests and diverse ecosystems into farmlands to grow biofuels (land use factor), transportation of the raw resources to the refineries, the refining process, transportation to the consumers, and the usage of the fuel.[4] As a result, fuel from states and countries outside California has a higher carbon intensity rating than the same fuel produced within California.

Biofuel producers outside of California and conventional fuel producers filed a lawsuit against the California Air Resource Board alleging the regulation violated the Commerce Clause because it favored in-state biofuel producers to out-of-state producers. At trial, federal district court Judge Lawrence O’Neill found that California’s LCFS violated the Commerce Clause by giving an economic advantage to Californian fuel producers by assigning a mandatory economic disadvantage to out-of-state and foreign fuel producers.[5] Accordingly, the Court ordered an injunction that prevented implementation of the law. On appeal, the Court of Appeals for the Ninth Circuit reversed the district court’s decision, holding that the regulation did not violate the Commerce Clause because it served a legitimate local purpose.[6] The decision lifted the injunction, allowing California to implement its LCFS.

In response to the Ninth Circuit, fuel producers petitioned the Supreme Court for writ of certiorari. The Court decided not to hear the case.[7] The Supreme Court’s decision is not an endorsement of the California policy, but it means that the Ninth Circuit’s decision will stand. Because the Supreme Court did not rule on the case, it means that courts outside of the Ninth circuit are not bound by the Ninth Circuits opinion and can rule with the Ninth Circuit and allow LCFS or agree with the Judge O’Neill and not allow LCFS.

LCFS Standards in the Ninth Circuit

The Court’s decision affects two other states that have discussed implementing LCFSs—Washington and Oregon. Washington State Governor Jay Inslee issued an executive order that authorizes the Legislation and Policy Office to draft a LCFS proposal for the state. The Office’s commission is creating a legislative proposal to establish the total reduction goals and target year, and Governor Inslee hopes to make the proposal in 2015.[8]

Oregon’s legislature began implementing a LCFS in 2009 by collecting data to aid lawmakers in developing their standard. The legislature hopes to reduce CO₂ emissions by 10 percent by 2020.[9] Using this data, the legislature can determine the availability of advanced biofuel and the potential economic and societal effects of implementing a LCFS. If the legislature cannot agree that there are enough advanced biofuels available in Oregon to implement the standard by 2015, the data collection process will end without implementing a LCFS.

State Senators have attempted to implement a LCFS several times, but past attempts have failed because of concerns of fuel price volatility.[10] The current proposal to implement the LCFS in Oregon addresses this concerns by allowing for a suspension of the standard if the price of gasoline and diesel increase 4 percent above the “anticipated cost” because of the standard. The Senate Committee on Environment and Natural Resources has not yet reviewed this bill.[11] Critics of the bill are skeptical of the LCFS in Oregon because of its potential impact on poorer households.[12] The lack of large-scale production of advanced biofuels coupled with growing global food demand could contribute to high grocery and food prices, which would disproportionately affect low-income families.[13] Data from the EPA and U.S. Energy Information Administration provides evidence for this skepticism; national production of advanced biofuels has not kept up with the increase in national demand.[14] Despite this data, Governor Kitzhaber is calling for implementation of the LCFS.[15]

Conclusion

In the short run, the Supreme Court’s failure take up this LCFS case only means that California will go forward with their LCFS and Oregon and Washington will continue to consider implementing an LCFS. By not granting cert, the Court has given the LCFS a second chance, meaning that California and continue to implement its LCFS. .

But the main problem with the LCFS remains—it increases the price at the pump. As the Oregonian explains:

It will raise fuel prices for many Oregonians and create a costly compliance burden. And for what? The program will harm Oregon’s competitiveness far more than it will help the environment. And that assumes it works as intended. You’d think lawmakers would have learned by now how badly off-track attempts to shovel subsidies to chosen industries can go.

California’s LCFS is just one more reason why California has some of the highest gas prices in the county. So far, it’s good to see that no other states have followed California’s lead in implementing a program that is all cost and no benefit.

IER Summer Associate David Greenberg authored this post.