The market has certainly taken some unexpected turns—we’re seeing very interesting, if nascent developments from alternative fuel providers that are both encouraging and reflective of the market-based approach of the Low Carbon Fuel Standard.

—Philip Sheehy, analyst for ICF International

The second phase of the work will focus on the economic and environmental impacts of these compliance scenarios, including parameters such as gross domestic product, jobs, and avoided damage costs.

ICF developed two scenarios—Scenario 1 and Scenario 2—to capture the potential market responses to achieve compliance with the LCFS. ICF emphasized probabilistic outcomes for each alternative fuel type based on market constraints and opportunities. Where appropriate, ICF defaulted to more conservative estimates of fuel and vehicle penetrations.

A stakeholder panel developed a third compliance scenario—the LCFS Enhanced Scenario—which ICF will also be modeling as part of the second phase of the work. This scenario has even greater advanced vehicle penetrations than Scenario 1, and includes additional credits generated from off-road electrification and innovative crude extraction processes.

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Broadly, compliance is achieved through biofuel blending (with both gasoline and diesel) and through the deployment of advanced vehicle technologies that use natural gas, electricity, and hydrogen. Compliance in Scenario 1 depends on more aggressive forecasts for advanced vehicle technologies than Scenario 2, thereby putting less pressure on the demand for biofuels.

Other highlights of the LCFS compliance scenarios include:

• The alternative fuels market is evolving rapidly and in unforeseen ways, and the LCFS is driving investment in low carbon ethanol, biodiesel, renewable diesel, and biogas. Although cellulosic biofuels have been produced at a slower-than-expected rate, these lower carbon biofuels are available to California today and supply is forecasted to increase significantly over the next several years.

  Each of these fuels has a carbon intensity less than 35 gCO₂e/MJ, representing a more than 60% reduction in carbon intensity compared to the LCFS compliance schedule.

  Apart from biofuels, increasing natural gas supplies and lower fuel pricing than diesel have renewed interest in natural gas in the transportation sector.

  Although plug-in electric vehicles are being purchased by California drivers at modest rates, electricity consumption is unexpectedly making contributions towards LCFS compliance in these early years of the program.

• Over-compliance in early years of the regulation (through 2016, at least) is critical, and a significant number of excess credits have already been generated.

  LCFS credits can be banked and traded, and do not lose value. The LCFS market generated nearly 1.3 million excess credits by the end of 2012. Because of the way the LCFS compliance schedule is designed, over-compliance in early years is critical towards meeting compliance in later years (e.g., 2019 and 2020). In Scenario 1 and Scenario 2, credits are banked through 2017 and 2016, respectively. In subsequent years, the banked credits are drawn down to achieve compliance.

• The diesel sector will likely generate more than its fair share of credits. ICF developed scenarios that reflect the flexibility of the LCFS guidelines—i.e., credits are fungible. It does not matter if credits are generated using fuels that substitute for gasoline or fuels that substitute for diesel. Forecasted diesel consumption in California indicates that diesel will generate about 20% of deficits in the LCFS program. However, fuels that substitute for diesel, including biodiesel, renewable diesel, and natural gas, have the potential to generate 40-55% of LCFS credits.

• Biodiesel can make a significant contribution towards LCFS compliance. Although biodiesel consumption in California has been modest in recent years, there is significant potential to blend biodiesel at lower levels (e.g., 5% to 20% by volume) with conventional diesel and generate a substantial number of LCFS credits.

  Infrastructure providers are already responding to this potential, and based on ICF research and stakeholder consultation, the industry is rapidly increasing the ability to store and blend biodiesel at petroleum terminals and at refineries.

• Renewable diesel will make a modest contribution towards LCFS compliance, even at low volumes. With no additional distribution infrastructure or refueling infrastructure costs, and no limitations on consumption in vehicles, renewable diesel is an attractive option for LCFS compliance. Furthermore, it is available in significant quantities today.

  Even at conservative forecasts of 150 million gallons renewable diesel delivered to California by 2020, renewable diesel could generate about 8% of the LCFS credits required to achieve compliance.

• Natural gas consumption will increase rapidly in California and play a significant role in LCFS compliance. When the LCFS was first developed in 2008, natural gas was expected to play a niche role in compliance. However, the increase in domestic natural gas supply has helped maintain a persistent price differential between natural gas and diesel.

  Combined with increased engine offerings in medium- and heavy-duty applications, particularly in the goods movement sector, natural gas consumption in the transportation sector is poised to increase significantly and rapidly. The expansion of natural gas consumption in the transportation sector will also facilitate a transition to biogas from landfills, for instance. With a carbon intensity less than 30 gCO₂e/MJ, even modest penetrations of biogas (e.g., 10% of California’s natural gas consumption) are feasible.

• Small modifications to the LCFS can have a substantive impact on compliance. ICF also included estimated credits that can be generated through potential modifications to the LCFS, namely electricity used in fixed guideway applications (e.g., light rail in transit) or forklifts. Even though these credits are modest, they decrease the necessity of blending potentially more costly low carbon biofuels or accelerating the adoption of advanced vehicle technologies.