California’s Low Carbon Fuel Standard

1. California Environmental Protection Agency Air Resources Board California’sLow Carbon Fuel Standard Overview of the Proposed Regulation March 16, 2009 James Goldstene Executive Officer

2. Why Do We Need To Act? • Climate change is real • The Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment (2007) was definitive but understates impacts • Temperature rise and climate impacts occurring faster than expected • Recent scientific findings show sea level rise by 2100 is underestimated

3. 169 MMT CO2e Reduction 1990 Emission Baseline 80% Reduction 341 MMT CO2e Magnitude of the Challenge AB 32 requires a return to 1990 greenhouse gas (GHG) emission levels by 2020

4. GHG Emission Sources Emissions By Sector

5. Transportation GHG Reductions Regional Strategies 9% Vehicle Efficiency Measures 11% LCFS 27% AB 1493 Vehicles 53%

6. Origin of LCFS • First fuel carbon standard in the world • Established by Executive Order S-01-07 in January 2007 • Identified as an early action measure under AB 32 in June 2007 • ARB legal authority for vehicle fuel standards has existed since 1975

7. Goals of LCFS • Achieve at least a 10% reduction in average fuel carbon intensity by 2020 • Contribute about 16 MMT CO2e to meet California’s GHG reduction goals by 2020 • Reduce petroleum dependency • Create pathway to much higher long-term GHG reductions

8. What is a Low Carbon Fuel? • Transparent to motorists: works in today’s vehicles and fueling facilities • Typical fuels include: • Gasoline blended with low-carbon ethanol • Diesel blended with biodiesel or renewable diesel • Natural gas or biogas • Electricity used in an electric or plug-in electric vehicle • Hydrogen used in a fuel cell vehicle

9. LCFS: The Essential Facts • Gradual reduction in the carbon content of conventional gasoline and diesel • Cost of fuel production is closely linked to cost of petroleum, but is projected to belower over time • Expands the market for renewable fuels like ethanol and biodiesel

10. LCFS Key Attributes • Establishes stable investment environment for low carbon conventional and emerging fuels • Requires lifecycle analysis of fuels’ GHG emissions, including indirect land use changes (ILUC) • Performance standard – does not mandate any specific fuel, formulation or blend for compliance

11. LCFS Benefits • Creates durable framework for near and long term transition to low carbon fuels • Encourages technology innovation in both fuel and vehicle development • Establishes a model that can be used for regional or national standards

12. California Environmental Protection Agency Air Resources Board California’sLow Carbon Fuel Standard Program Details March 16, 2009 Bob Fletcher, Chief Stationary Source Division

13. LCFS Mechanics • Baseline fuel carbon “intensity” is that of 2010 gasoline and diesel fuel • Carbon intensity (CI) represents the GHG emissions per unit of energy • Fuel producers required to achieve a 10 percent reduction in the carbon intensity for both gasoline and diesel fuel by 2020 • Reduction is gradual and weighted toward later compliance years

14. Implementation Schedule

15. How is Compliance Determined? • Compliance based on system of determining annual credits and deficits • Fuels with lower carbon intensity than the standard generate credits • Fuels with higher carbon intensity that the standard generate deficits • Annually, credits must equal or exceed deficits

16. What are the Compliance Options? Regulation is market-based and allows the following compliance options to lower cost and provide flexibility: • Provide low carbon fuel(s) • Use banked credits • Use purchased credits • Use any combination of the above

17. Who Must Comply? • Providers of most transportation fuels are ‘regulated parties’ under the LCFS • Providers of fuels that already meet 2020 levels are not regulated but may ‘opt in’ to earn credits: • Electricity • Hydrogen & hydrogen blends • Some fossil CNG • Biogas CNG and LNG

18. How is CI Determined? • Table of default carbon intensity values provided based on ‘fuel pathway’ emissions: • Origin of feedstock • Production/processing emissions • Transportation/distribution emissions • Vehicle emissions • Indirect effects • Regulated parties may propose alternative pathways for ARB’s approval

19. What are Indirect Effects? • Indirect effects result in additional GHG emissions that are not addressed in the “direct pathways” • Analysis of indirect land use change (ILUC) from biofuel production identified as significant • No other indirect effect identified that would substantially affect the LCFS framework

20. “Indirect” Land Use Effects • Indirect Land Use Effect: • Increased corn produced to meet demand for ethanol, thus displacing soybeans; • non-ag land (native grasslands/forests) converted to soybean production to meet demand • Impact: • GHG emissions increase because native grasslands/forests sequester more carbon than agricultural land

21. No ILUC Effect Alternative fuel will likely have little or no ILUC impact when it: • Is not derived from crops • Is derived from crops grown on marginal ag lands or otherwise fallow farm land • Is derived from waste

22. Compliance Scenarios Standards can be achieved by: • Increasing volumes of liquid biofuels: California ethanol, cellulosic ethanol, sugarcane ethanol, biodiesel, renewable diesel • Increasing number of flexible-fueled vehicles using E-85 • Increasing number of plug-in hybrid, battery electric, and fuel cell vehicles • Increasing number of CNG heavy-duty vehicles

23. LCFS Compliance & Enforcement • ARB will provide software tools for fuel carbon reporting and credit tracking by early 2010 • Regulated parties will electronically report specified information quarterly and credit balances annually • Enforcement includes electronic reconciliation, records review, field inspections, audits and penalties, if necessary

24. Environmental Analysis • Total of 16 MMTCO2e reduction in 2020, based on tank-to-wheel carbon intensities • Represents about 10% of reductions necessary to meet AB 32 Scoping Plan goals • No significant environmental impact identified from the use of alternative fuels • Overall reductions in criteria pollutant emissions may occur with transition to non combustion-powered vehicle technologies such as electric, hybrid-electric, and hydrogen fuel cell vehicles

25. Biofuel Production Facilities • Environmental analysis considers possible impacts from 24 new biofuel facilities • Number of facilities based on assessment of potentially available biomass feedstocks • Mitigation required due to local permitting and CEQA requirements • ARB staff committed to develop best practices guidance for local use

26. Economic Analysis • Net cost of producing vehicle fuels is expected to be slightly lower over 10 years • Capital cost effect is gradual, incremental and tracks federal renewable fuel requirements • Impact on producers will vary depending on carbon reduction investment strategy • Market will seek most cost-efficient fuel over time

27. Relationship to Clean Vehicle Program • Low and very-low carbon fuel providers may opt-in to generate credits • Credits may be sold and revenue used to expand clean fuel facilities or provide vehicle incentives • Double credits may be provided to LCFS and ZEV program to incent both lower carbon fuels and cleaner vehicles

28. LCFS Public Outreach • ARB has held 15 public workshops and 200 stakeholder meetings in developing the regulation • Received over 200 public comment letters • Next public workshop is on March 27th • Proposed regulation and all supporting documentation available online at: http://www.arb.ca.gov/fuels/lcfs/lcfs.htm#new

29. LCFS Complements Federal RFS2 • Federal RFS2: • Mandates large volumes of biofuels, including low-carbon biofuels • Promotes technology innovation and advanced biofuels • Achieves only 30% reduction in CI by 2020 • ARB supports regional/federal LCFS to promote greater GHG reductions • LCFS designed to complement federal RFS2

30. Summary • LCFS needed to reach California’s GHG reduction goals for transportation • LCFS provides framework for transition to sustainable alternative fuels • Innovation is the key to low-carbon advanced biofuels • Low-carbon renewable fuels play important role