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Reports & Research

Post‐2020 Carbon Constraints

Modeling LCFS and Cap‐and‐Trade

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Feb 16, 2017

Transportation accounts for 37 percent of California’s greenhouse gas (GHG) emissions and for 50 percent when refinery emissions are added;1 and its share of emissions is expected to grow in the future because other sectors (e.g., electricity generation) are reducing GHG emissions at a much faster rate. Recent legislation (SB 32, Pavley) requires California to reduce emissions by 40 percent below 1990 levels. In this report, ICF has assumed that this goal would be achieved through some combination of policies and programs similar to those in place today, i.e., cap‐and‐trade and the Low Carbon Fuel Standard (LCFS) programs. The objective of this report is to quantify the cost and emission impacts of the LCFS as a complementary mechanism to a cap‐and‐trade program, both of which are assumed to be extended to 2030.

ICF’s approach to the analysis was rooted in a fundamental understanding of the costs of abating GHG emissions, and the amount of GHG emissions that can be reduced at a given cost. The relationship between cost and abatement is referred to as the marginal abatement cost curve. In principle, the marginal abatement cost curve helps us understand the allowance price in the cap‐and‐trade market, and is a proxy for compliance costs in the market. As the cap reduces over time, which changes depending on the reductions expected from complementary measures like the LCFS program, the allowance price will change (presumably increasing) to reflect the shape of the marginal abatement cost curve. When the curve is steep, allowance prices will increase more rapidly and are subject to volatility. When the curve is flatter, allowance prices are subject to more modest increases and tend to be more stable. Our analysis, then, focused on a) the amount of GHG reductions delivered via the LCFS program as a complementary measure, which takes pressure off the cap in the cap‐and‐trade program and b) the associated impact on allowance pricing and compliance costs.

ICF used a combination of internal LCFS compliance modeling (using an optimization framework, whereby a lowest‐cost, lowest‐emissions solution is determined based on supply‐demand curves in the transportation sector) and the IPM Plus® model. ICF developed compliance pathways to lower GHG emissions 40 percent below 1990 levels by 2030 under a range of emissions scenarios. The base model, IPM® provides a detailed representation of the US electric power sector, and is widely used by a range of private and public sector clients, in addition to being the platform used by EPA to support their analysis of the Clean Power Plan as well as other major air regulations under the Clean Air Act. 2

ICF considered four scenarios for LCFS program compliance with different carbon intensity targets in 2030: 10%, 15%, 20%, and 25%. ICF notes that the stakeholder group requested that ICF model a 25% carbon intensity target for the LCFS program; this should not be viewed as a feasibility analysis of the target. For each scenario, ICF considered a mix of alternative fuels and advanced vehicle technologies that would be required to achieve compliance by 2030. This compliance scenario was linked to the IPM Plus® model to estimate the corresponding allowance price impacts of different transportation emission trajectories.

ICF modeling results indicate the following key conclusions:

  • ICF’s analytical findings support the argument that the LCFS program reduces the emissions required under the GHG allowance cap, thereby lowering the allowance price and flattening the marginal abatement cost curve. ICF finds that the marginal abatement cost curve, which is used to estimate the market clearing price for allowances, is quite steep in 2030. As a result, we find that a reduction of 3 14 MMT in transportation emissions in 2030 yields a reduced allowance price spread of $5— 29/ton by 2030.
  • The LCFS does not substantially raise overall GHG compliance costs in the transportation sector, especially in the short‐ to medium‐term future. The moderately stringent LCFS programs considered in this report (i.e., a 15‐20% carbon intensity target) deliver ongoing long‐term abatement that we do not observe in a scenario with cap‐and‐trade on its own. Consequently there are long‐term benefits once the initial (and potentially high cost) barriers are overcome in the transportation sector.
  • Because refiners are the regulated entity that will face the burden of compliance costs, ICF finds it useful to also frame the compliance costs on a per barrel basis. In this case, the more stringent LCFS programs yield a slightly higher (about 10%) overall cost; however, these scenarios also yield considerably higher petroleum reduction via fuel diversification, which has its own benefits (although not quantified in this report).
  • ICF estimates that the scenarios with more stringent LCFS targets (i.e., 15%, 20%, and 25% carbon intensity targets) will reduce petroleum consumption by 18—26% when compared to the current 10% target. This is an important finding when coupled with the finding that there are substantially similar compliance costs, especially with a 15—20% carbon intensity target. This means that the LCFS program can help ease compliance in the cap‐and‐trade program, while also making significant contributions to petroleum reduction.
  • ICF also finds that the design of the LCFS program post‐2020 is especially critical: If the stringency of the LCFS program is increased too rapidly in the first 2‐3 years after 2020, then we find that this could lead to the program having insufficient credits to offset deficits.

1.California GHG Emissions Inventory, 2016 Edition, California Air Resources Board. Available online at https://www.arb.ca.gov/cc/inventory/data/data.htm.

2. EPA Power Sector Modeling, available online at www.epa.gov/airmarkets/power‐sector‐modeling.

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Download the full Post‐2020 Carbon Constraints report to learn more.