California will be the biodiesel market to watch in 2016 as the state implements a diverse portfolio of policies that will directly impact the industry. The state’s landmark greenhouse gas (GHG) reduction program, AB 32, is celebrating its 10-year anniversary and ramping up quickly. According to the 2015 State Agency GHG Report Card, California GHG policies reduced more than 37 million metric tons of GHG emissions in 2013, and the state intends to quadruple that rate of GHG reduction by 2020. California is outpacing the U.S. average on both job creation and economic growth and showing no political hesitancy in combatting climate change.

The low carbon fuel standard (LCFS) is California’s flagship GHG reduction program in the fuels sector and is delivering 10 percent of the state’s GHG reductions, despite being hindered by litigation. In 2015, California’s Air Resources Board readopted the LCFS program to satisfy procedural requirements while simultaneously enhancing the program and refusing to delay the GHG reduction timetable. Based on credit generation, California’s transportation sector reduced its carbon intensity 2 percent between 2010 and 2015, and will reduce it 8 percent more between 2016-’20. The market has responded accordingly with credit prices moving from $28 per ton in June to triple digits by December. Robust credit values have incentivized biodiesel production particularly from corn oil, tallow and used cooking oil, and also attracted 115 million gallons of renewable diesel into California’s market in 2014. In addition, highly effective participation in the readoption process by the National Biodiesel Board, California Biodiesel Association and individual producers convinced ARB to reduce by more than half the indirect land use change (ILUC) attributable to soy. This change will roughly triple the rate of LCFS credit generation from virgin soy biodiesel compared to the prior LCFS regulation.

California’s cap-and-trade program will generate approximately $2.5 billion in revenue for the state’s GHG Reduction Fund (GGRF) in fiscal year 2015-’16. As a GHG-reducing clean fuel technology, current and future California biodiesel producers are potentially eligible to receive a portion of the GGRF budget. In its Second Triennial Plan, ARB recommended that in-state production of low carbon fuels receive funding from the GGRF. The CBA and Low Carbon Fuels Coalition are actively engaged in the political process to secure long-term funding for the industry. The outcome of the GGRF budget process in California could set a precedent for other states that establish cap-and-trade programs pursuant to EPA’s Clean Power Plan.

With the support of the NBB, CBA and LCFC, Assemblymember Bill Quirk successfully guided AB 692 to passage this year. AB 692 establishes mandatory procurement of low carbon fuels for the overall state fleet with a 3 percent requirement applicable for 2017, ratcheting up 1 percent annually to 10 percent in 2024. Very low carbon diesel fuels must not exceed 40 percent of the carbon intensity of CARB diesel—a standard that can be met by biodiesel produced from low carbon feedstocks. While AB 692 only imposes reporting requirements in 2016, state fleets are already issuing solicitations for very low carbon fuels. Such an approach is consistent with a central pillar of Gov. Brown’s GHG reduction strategy: 50 percent reduction of petroleum use in vehicles by 2030.

While these programs appear likely to create opportunities for biodiesel, California’s Alternative Diesel Fuel regulation presents more of a challenge. The ADF regulation has been under development for many years and its implementation was made mandatory by the LCFS lawsuit. The ADF regulation establishes a fuel approval process in California. During the rulemaking, ARB analyzed the emissions performance of biodiesel blends and found a small increase in nitrogen oxide (NOx) emissions. As a result, ARB imposed limitations on biodiesel blends that vary from B5 to B10 depending on the season and cetane number. The NBB, CBA and individual biodiesel producers were highly engaged in the ADF rulemaking and convinced ARB to delay implementation of the blending limits until Jan. 1, 2018, and to include a sunset provision based on the market penetration of new technology diesel engines. In addition, ARB established provisions to authorize the use of the NOx-reducing additive DTBP, and to enable biodiesel producers to certify their fuels as NOx-neutral relative to CARB diesel. 

Finally, the biodiesel industry convinced the California Legislature to solve a bothersome tax problem with the passage of AB 1032. The provision authorizes a refund for tax paid on the biodiesel fuel portion of dyed blended biodiesel fuel removed at rack if the supplier can show that tax on this biodiesel has been paid by the same supplier.

Author: Graham Noyes
Attorney, Keyes, Fox & Wiedman LLP
916-668-4636
gnoyes@kfwlaw.com