Energy Policy ] (]]]]) ]]]–]]]

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Energy Policy

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Preface

Low carbon fuel policy and analysis

1. Introduction

The transition to non-petroleum fuels is proceeding slowly.Petroleum continues to dominate the transportation fuels market,accounting for over 95% of total supply. It has many advantages: Itis very energy dense, easily transportable, and relatively abun-dant. But it also has large downsides: High carbon and toxicemissions when combusted and most of the lowest-cost sourcesare concentrated in a politically unstable region, the Middle East.Only Brazil has successfully shifted a large share of its transporta-tion energy away from petroleum.

There are many reasons for policy intervention. These include theclassic market failures of ignoring climate change and local airpollution, and under-investing in R&D (Jaffe et al., 2005; Nemet andKammen, 2007). But equally important are the many market failuresand market conditions that riddle the energy system, many of themunique to transportation, that result in consumer and businessdecisions not in the best interest of society. These market conditionsinclude the network effects of additional coordination among fuelproducers, vehicle manufacturers, and fuel distributors (Leiby andRubin, 2004; Sperling and Gordon, 2009; Struben and Sterman,2008); energy security externalities related to petroleum imports(Greene and Leiby, 2006; Greene et al., 2007; Leiby, 2008; U.S. EPA,2011b); long time horizons needed for return on investments in fuelinfrastructure (NRC, 2008); the lack of fuel-on-fuel competition; thediffuse nature of the biofuel industries; and the market power of oilcompanies and OPEC countries. Energy markets are particularlyinefficient and ineffective at addressing end-use technology effi-ciency and demand reduction (Greene et al., 2011; Greene, 2011).

Transportation needs to contribute a sizable share of green-house gas (GHG) emission reductions if climate stabilization goalsare to be achieved. Significant penetration by advanced vehicletechnologies and alternative fuels would be needed by the 2015–2020 timeframe given the long lag time of technology uptake(IEA, 2012; Kyle et al., 2011; IPCC, 2007; Greene et al., 2011;Greene, 2011; Pacala and Socolow, 2004; Schafer et al., 2009;Vimmerstedt et al., 2012). Market-based policies are, in theory,the most economically efficient means of achieving GHG reduc-tions. Pure market instruments, such as carbon taxes and carboncap-and-trade, are likely to provide the long-term policy frame-work for continuing reductions in GHG emissions and are key toinserting a price signal for GHG emissions in energy markets—butby themselves are inadequate to achieve large reductions in GHGemissions in the near- and medium-term, especially with respectto transportation.

Policy analyses suggest that very stringent caps (Yeh et al.,2008) or taxes (Schafer et al., 2009), well beyond what is likely tobe politically acceptable, will be needed to incentivize significant

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x.doi.org/10.1016/j.enpol.2013.01.008

penetration by low-carbon vehicle/fuel technologies. In an ana-lysis of the carbon cap-and-trade program adopted by the USHouse of Representatives in 2007 (but later rejected by the USSenate), the U.S. Environmental Protection Agency (EPA) foundthat the policy would raise gasoline prices by $0.16 and $0.81 pergallon in 2015 and 2050, respectively, which would not besufficient to induce consumers to reduce fuel use significantlyor purchase alternative fuels or vehicles (U.S. EPA, 2010). Hollandet al. (2009) suggest an efficient carbon pricing policy (equivalentto carbon trading) would need to raise fuel prices by $1.15 to$31.16 per gallon gasoline to reduce transportation fuel use andGHG emissions by 20 to 24 percent.

Because pure market-based policies have limited effects, abroader mix of policies is needed if transportation GHG emissionsare to be reduced significantly in the next few decades (Sperlingand Nichols, 2012). Vehicle efficiency (and tailpipe GHG emission)standards are being adopted around the world (see, for example,U.S. EPA (2011a, 2011c), the European Commission (EC, 2009),and the recent global fuel economy initiative led by the UnitedNation Environment Programme (http://www.unep.org/transport/programmes/gfei/index.asp). The recent history of vehicleefficiency standards in several markets and the aggressiveness ofnew standards suggest that they will be a highly effective policytool in reducing vehicle GHG emissions (Karplus and Paltsev,2012). Policies addressing vehicle use and decarbonization offuels have been less successful, in the latter case due in part tothe ‘‘fuel du jour’’ pattern of past policies and the lack of a robust,long-term policy framework (Sperling and Gordon, 2009; NRC,2011).

Here we take up the challenge of policy to decarbonizetransportation fuels. Below we provide an overview of theprincipal existing policy initiatives to decarbonize transportationfuels, focusing on those that incorporate performance-basedelements.

2. U.S. Renewable Fuel Standard

The U.S. Energy Independence and Security Act (EISA) of 2007requires transportation energy suppliers to sell 36 billion gallons(bgal) of biofuels annually by 2022. At least 21 bgal must beadvanced biofuels, including 16 bgal cellulosic biofuel and 1bgalbiomass-based diesel. No more than 15 bgal can come fromstarch-derived ethanol such as corn ethanol (Table 1). These fuelrequirements, codified as the Renewable Fuel Standard (RFS2),have GHG emission reduction thresholds for each category ofbiofuels, including explicit consideration of emissions from globalland use conversions (often known as indirect land use change, or

Table 1RFS2 biofuel requirements (in billion gallons), as set initially by EISA (2007) and later revised by EPA.

Advanced biofuelb (minimum volume) Corn-based ethanol(maximum volume)

Total renewablefuels

Cellulosic Biomass-based dieselc Other Total

EISA 2011 0.25 0.80 0.30 1.35 12.6 13.95

2012 0.50 1.00 0.50 2.00 13.2 15.20

2013 1.00 0.75 2.75 13.8 16.55

2022a 16.00 4.00 21.00 15.0 36.00

EPA 2011 0.0066 0.8 1.35 13.95

2012 0.00865 1.0 2.0 15.20

2013d 1.28

a EISA 2014 to 2021 requirements are not shown here.b In 2011 and 2012, most of the advanced biofuel requirement was met by biomass-based diesel and sugarcane ethanol (categorized under ‘‘other’’).c Biomass-based diesel requirements after 2012 are to be determined by EPA through a future rulemaking, but must be no less than 1.0 billion gallons.d As this article goes to press, EPA has not yet published 2013 volumetric requirements except for biomass-based diesel.

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iLUC, emissions). These GHG thresholds are based on life-cycleemission accounting. The policy allows banking and trading ofcredits using renewable identification numbers (RIN).

Each year, EPA is required to adjust the RFS2 cellulosic biofuelrequirement for that year based on the volume projected to beavailable during the following year, using U.S. Energy Informa-tion Administration projections and industry assessments ofproduction capability. In 2011 and 2012, EPA greatly loweredthe required volume of annual cellulosic biofuel, well belowlevels established by EISA, but kept the requirements foradvanced biofuel and total renewable biofuel the same as thoseestablished by EISA 2007 (Table 1). In response to delayedinvestments, EPA adjusted the 500 million gallon 2012 require-ment downward to 8.65 million gallons, as indicated in Table 1,with companies required to pay penalties for shortfalls. Only20,069 gallons of cellulosic ethanol and 1024 gallons of cellulosicdiesel were commercially delivered in the first 11 months of2012, falling far short of the 8.65 million gallons required by U.S.EPA (2012).

3. California’s LCFS

A low carbon fuel standard (LCFS), adopted by California in2009 and implemented in 2010, requires a 10 percent reductionby 2020 in the carbon intensity of transportation fuels sold in thestate (CARB, 2009). Like the RFS2, the LCFS relies on lifecycleassessment of GHGs, expressed as CO2 equivalents per unit of fuelenergy (gCO2/MJ). Lifecycle emissions are defined to include allGHGs emitted during extraction, cultivation, land use conversion,processing, transport and distribution, and fuel use.

The LCFS differs from the RFS in that it allows all transport fuelalternatives, including biofuels, compressed natural gas, electri-city, and hydrogen, to be used to meet compliance targets. It isalso different in calculating a continuum of GHG emissions inaccordance with actual lifecycle emissions of a particular energypath, unlike the RFS2 which assigns biofuels to only three fuelcategories—with 20, 50, and 60 percent GHG reductions relativeto gasoline and diesel fuel for renewable, advanced, and cellulosicbiofuels, respectively.

The use of lifecycle measurements is important when con-sidering alternative fuels because emissions upstream of vehiclesrepresent almost the total lifecycle emissions of biofuels, elec-tricity, and hydrogen, compared to conventional gasoline anddiesel fuel, where upstream emissions account for only about 20percent (Delucchi, 2003; GREET (2010)). Upstream emissions ofvery heavy oils and oil sands can also be much greater than those

for conventional gasoline and diesel fuel, because much moreenergy is expended in extraction, production, and refining(Brandt, 2011; Brandt and Farrell, 2007; Charpentier et al., 2009).

The LCFS utilizes lifecycle measurements to stimulate innova-tion. By targeting GHG reductions throughout the entire supplychain – including those with emissions higher than conventionalgasoline and diesel (such as electricity from coal) – the lifecycle-based LCFS encourages continuous innovation in every step of thesupply chain. For instance, the LCFS encourages reductions intheir mining and processing, including capturing and sequester-ing carbon emissions.

Regulated parties have considerable flexibility under the LCFS.They can comply by (1) increasing the supply of low-carbon fuels;(2) reducing the carbon intensity of fuels they supply; or (3) pur-chasing credits from other regulated parties that exceed thecompliance (Sperling and Yeh, 2009). Thus, California’s LCFS is ahybrid policy instrument in the sense that it includes not onlyregulatory features, but also market features, allowing companiesto trade and bank carbon reduction credits. The RFS2 also has amarket feature, allowing companies to trade compliance volumes,but in a more limited fashion because only biofuels can complyand emission categories are more lumpy.

A review of California’s LCFS by Yeh and Witcover (2012)found that fuel sold in California during the first 1.5 years of theLCFS program exceeded the initially modest requirements (0.25percent carbon intensity reduction in 2011 and 0.5 percent in2012), with 86 percent of credits generated from ethanol, pri-marily corn based, and the remaining 14 percent coming fromnatural gas and biodiesel. That report also found the average LCFScredit prices in August 2012 to be $13/MT CO2e, adding about0.1cents per gallon to the production cost of gasoline.

4. European Union Fuel Quality Directive, FQD

In April 2009, the European Commission revised its FuelQuality Directive to focus on GHG emissions from transport fuels,and incorporated LCFS-like features into the Directive. It estab-lished a 6 percent reduction target for the carbon intensity oftransportation fuel supplied to the European Union. This carbonintensity reduction can be achieved by supplying any low carbonfuel, such as hydrogen or electricity, but it is widely expected thatthe bulk of the target will be met through the use of biofuels. Therevised FQD was designed to be consistent with their RenewableEnergy Directive (RED), which sets a mandatory 20 percentrenewables target for the EU energy mix by 2020, includinga specific requirement for 10 percent renewable energy in

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transportation energy. There are no limits on eligible feedstocksunder the Directive, although only energy options surpassing aminimum GHG threshold on a lifecycle basis can qualify.

Unlike the US, where most biofuels are domestically suppliedcorn-based ethanol, the majority of EU biofuel requirements havebeen met to date with biodiesel (80 percent of the total biofuelsmarket on an energy basis). Around 80 percent of the biodiesel isproduced domestically primarily from Germany, France, Spain,and Benelux, with about 2/3 of the domestic biodiesel made fromrapeseed. The remaining 20 percent is soybean-based biodieselimported from the US and Brazil and palm oil based biodieselimported from Malaysia and Indonesia.

The FQD goes beyond LCFS-like policies in establishing sus-tainability criteria for biofuels. It states that biofuels produced onhigh biodiversity and high-carbon land cannot count towards theGHG intensity reduction obligation. The FQD requires EuropeanMember States to enforce both the overall targets and thesustainability conditions.

5. British Columbia (Renewable and Low-Carbon FuelRequirement Regulation, RLCFRR)

In January 2010, British Columbia implemented the Renewableand Low Carbon Fuel Requirements Regulation (RLCFRR). TheRLCFRR will reduce the carbon intensity of transportation fuelsthrough two sets of rules: the Renewable Fuel Requirement,requiring 5 percent renewable content in gasoline in 2010onward and 4 percent renewable content in diesel in 2012onward; and the Low Carbon Fuel Requirement, which requires10 percent reduction in carbon intensity of transportation fuels by2020.

6. Design and analysis challenges for LCFS-like policies

Implementation of the LCFS in California, the FQD in Europe,and future LCFS-like programs elsewhere, confront a variety ofchallenges (Sperling and Yeh 2009, 2010; Yeh and Sperling, 2010).Some of these challenges are general to biofuel and GHG policies,while some are related specifically to the design of LCFS policies.These challenges include the economic impacts of an LCFScompared with other GHG policies (Holland et al., 2009, 2011);impacts of low-carbon fuel policies on energy security due todiscouraging high-carbon fuels such as Canadian oil sands (Canesand Murphy, 2009; Keuter, 2009); market mediated effects on thenet GHG performance of the LCFS policy due to leakage andrebound effects (Chen and Khanna, 2012; Rajagopal et al., 2011)and indirect land use change (Hertel et al., 2010); uncertainties offuel carbon intensities (Kaufman et al., 2010; Mullins et al., 2010;Venkatesh et al., 2010); and the impacts on environmental andsocial sustainability (Yeh et al., 2009; Rosegrant et al., 2008)particularly on food prices (Tokgoz et al., 2012; FAO et al., 2011).While the papers cited above provide valuable contributions, theyare not focused on policy design.

The papers contained in this special issue analyze variousaspects of an LCFS-like policy. These papers compare an LCFS withother policy instruments that have the potential to significantlyreduce transportation GHG emissions from fuel use, and proposepolicy structures for an LCFS that would be most effective andimplementable. The topics addressed by these papers includeeconomic impacts (Huang et al., 2012), effects of credit tradingand banking on credit prices (Rubin and Leiby, 2012), energysecurity impacts (Leiby and Rubin, 2012), impacts on total GHGemission reductions (Rajagopal and Plevin; Huang et al., 2012),role of uncertainty (Griffin et al., 2012), impacts and issues with

electricity for vehicles (Yang, 2012), and policy designs to addressland use changes associated with biofuels (Witcover et al.).

The scholarly literature, as well as real-world experience,suggests that no single policy, including an LCFS, is likely by itselfto be effective at decarbonizing transportation fuels, at least notin the foreseeable future. While the LCFS provides a durablepolicy framework, it does not, for instance, address the chicken-and-egg challenge of simultaneously bringing to market – in atemporal and spatial sense – new forms of energy and newvehicles that would use that energy. For a timely transition tolow-carbon, sustainable fuels, other complementary policies areneeded, coupled with innovative business models and coordi-nated investment actions. Overcoming the many start-up barriers,market failures, and market conditions inhibiting innovations andinvestments is one of the grand challenges facing our generation.

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Sonia Yeh n, Daniel SperlingInstitute of Transportation Studies, University of California, Davis, CA

95616, USA

E-mail addresses: slyeh@ucdavis.edu (S. Yeh),dsperling@ucdavis.edu (D. Sperling)

n Corresponding author. Tel.: þ1 530 830 2544; fax: þ1 530 752 6572.