California’s Low Carbon Fuel Standard (a provision of AB 32 requiring refiners and transportation fuel distributors to reduce the carbon intensity of fuels by 10% by 2020) faces legal challenges and its future is uncertain. Adding to the recent debate, on June 19 the Western States Petroleum Association (WSPA) hosted a forum centered on their release of a study from Boston Consulting Group (BCG) projecting severe, negative impacts on jobs and economic activity. The study’s pessimistic assumptions and limited scope mean it does not give a complete picture of the policy’s likely costs and benefits.
Ongoing legal challenges make the future share of domestic and imported fuels difficult to predict. BCG correctly points out that there is currently very little domestic infrastructure to produce the low carbon fuels required to meet California’s standard; several other forum participants noted that the legal uncertainty surrounding the LCFS is making it very difficult to finance new projects to produce these fuels. BCG assumes minimal change in local production of biofuels out to 2020, so the bulk of California’s demand is satisfied by imports from Brazil. This leads to negative economic and jobs impacts as local production of conventional fuels declines. Once the legal challenges are resolved, however, it is likely that domestic production of biofuels would increase, at least to some degree. Local production would generate economic and jobs benefits, reducing the projected costs.
The Low Carbon Fuel Standard aims to drive innovation. While biofuels are not the lowest cost greenhouse gas abatement option in the short term, the LCFS aims to stimulate the growth of new industries and technologies to reduce the costs of abatement in the transport sector in the longer term. This is an important task, given transport accounts for more than one third of California’s greenhouse gas emissions. The BCG analysis assumes little or no innovation actually occurs, resulting in limited take up of alternative fuel vehicles, and little innovation in biofuel production. This reinforces reliance on imported biofuels and therefore increases costs. In the past, other California policies, such as vehicle emissions and fuel economy standards, have led to technological innovation at a low cost, and in the long run been very cost effective. Given time, the LCFS may well do the same.
Policy tends to be less costly than projections suggest. Projections, including those in the BCG/WSPA study, are generally based on known abatement opportunities, current technology costs and/or assume modest levels of technological progress. However, experience from emissions trading schemes, such as the Northeast’s Regional Greenhouse Gas Initiative and the European Union’s Emissions Trading Scheme, show that firms find ways to reduce emissions at low cost once they have an incentive to do so. The costs of environmental policy are often much lower than initial projections suggest because the rate of technological progress is underestimated.
Costs should be viewed alongside benefits. The BCG analysis examines in detail a high-cost scenario for California. The analysis neglects to discuss direct and indirect benefits. In part, this is due to their assumption of very little domestic production, meaning no new industry, jobs or expertise in novel technologies. As noted above, this is a pessimistic assumption: BCG project pump prices will increase by up to 181 cents per gallon, which will in turn dramatically increase the value of biofuels in California. Further, the projected refinery closures, if they occur, would substantially reduce air pollution in certain regions of the state, resulting in significant human health (and consequent economic) benefits.
Forecasting potential policy impacts is a difficult exercise, just as forecasting any future outcome is difficult. In the case of California’s Low Carbon Fuel Standard, this challenge is compounded by the uncertainty stemming from the current legal challenges. Nevertheless, BCG’s analysis does not attempt to quantify the benefits of the policy, and magnifies the negative impacts by using pessimistic assumptions. For these reasons, its results should be seen as a worst case scenario rather than a reasonable best guess.