Low Carbon Fuel Standard v Cap & Trade

There has been a tremendous amount of chatter in the last few weeks about meetings between Governor Brown’s office and representatives of the petroleum industry. What appears to be happening is a complex negotiation concerning the extension of the California Global Warming Solutions Act (SB-32) and the controversial Cap & Trade program that it seeks to extend. The petroleum industry sees Cap & Trade, not to mention other climate policies that target their products, as a tax. So they’ve been lobbying the legislature to treat it that way, which could have serious implications. It certainly has poured cold water on what had been a very hot Low Carbon Fuel Standard (LCFS) credit market.

The governor’s original budget for Cap & Trade credit auction revenues was just over $1 billion. But last year quarterly carbon credit auctions ended up raising over $3 billion, which seemed to be very unexpected. But first quarter of this year only netted about $10 million due to uncertainty about the program’s future support, most likely thanks to petroleum industry lobbying efforts. Revenues from the program have been earmarked for some of the governor’s programs such as high-speed rail and a variety of climate projects. That’s at least part of the controversy.

But the thing that has really stirred the hornet’s nest is the rumor that the governor has potentially offered up the LCFS program as a bargaining chip in order to get the petroleum industry to curtail their lobbying efforts and support the passage of SB-32 and the extension of Cap & Trade, which is set to expire in 2020.

That rumor, it would seem, has sent LCFS values plummeting by about 50% since the story broke (as of this writing), which exemplifies the concept of market volatility when it comes to government programs.

So what’s really going on? It’s open to speculation, but I suspect that there are a lot of closed-door negotiations going on. LCFS has been one of the more successful climate programs in California, however. Not one without its own controversy, but it’s generally working as designed and a model for Oregon and British Columbia, and it’s being strongly considered in many other places as well. There is disagreement as to whether the targets can be achieved on the proposed schedule, but the LCFS is doing what was intended – lowering the carbon content of transportation fuels.

It doesn’t make sense that the governor would really offer up one of the jewels in the California climate crown, unless he’s trying to motivate the environmental base because he may feel they have become too complacent in defending the program. But keep in mind there are a variety of tools the governor can access that would be far more effective in influencing the petroleum industry to support the extension of Cap & Trade.

It also doesn’t make sense that the state would need to rush into a vote since AB-32 is in place until 2020. But some of the push may be because SB-32 author, Senator Fran Pavley, terms out this year and the governor terms out in 2018. So both will be out of office well before the actual extension, so they might want to know that their climate legacies are secure before they leave office.

The LCFS was established in 2007 through an executive order issued by then-governor Arnold Schwarzenegger. Which means that some future governor (including Brown himself) could un-do the order. But Governor Brown’s administration has turned this groundbreaking program into something the whole world is talking about – and beginning to copy. In addition to its effectiveness in lowering carbon, it’s created lots of good paying green jobs in disadvantaged communities and generally spurred economic development in the clean fuels sector in California and around the world. It seems highly unlikely that Governor Brown would want to do anything to tinker with that kind of success. What would that do to his legacy?