Aldyen Donnelly: A closer look at California’s Low Carbon Fuel Standard and what it means for Canada: Part I

What’s behind the delays to California’s Low Carbon Fuel Standard?

California Air Resources Board (CARB) staff recently prepared "Draft Resolution 09-31 regarding the new Low Carbon Fuel Standard: Draft Modifications to the Original Proposed Low Carbon Fuel Standard", which has been posted here,  along with the officially required 45 days notice of rule making. This is the beginning of a good news story for Canadian fuel exporters. CA’s legal advisors confirmed the opinions 2 peer reviewers of the LCFS that US courts would strike down the LCFS if it was challenged on the basis of poor science. So the drafters are now considering amendments to try to address some of the issues the peer reviewers raised.

In my view, the proposed modifications begin to address some of the more important issues raised by the regulation’s reviewers (including me). But the modified rule is still unlikely to survive a US court challenge. The reason this is good news for Canada is that it is, at least, a small indication that the CA regulators are becoming aware they have some problems. The reason it is not very good news is that their attempts to address the problems are insufficient.

I have written before that a US standard the defines "performance" in "percentage reduction from a base year emission measurement" can be highly biased standard. When US regulators structure regulations that require the regulated entities to show that their suppliers are meeting an obligation to cut supply chain GHGs from an historical level, it creates a potential opportunity for the US regulators to discriminate against imported feedstocks and refined products that: (1) are less GHG intensive than the US or CA domestic production and/or (2) originate in foreign plants that are unwilling or unable to provide commercially sensitive plant operating data to the US regulators to comply with US emission reporting rules.

Before I complete my response to your question about the LCFS, I want to walk you through an important regulatory/WTO precedent. This precedent is the basis for  much of the strategy of US climate change negotiators and should be front of mind for the Canadian negotiators.

An Important Case Study for Canadian Negotiators

In the US Reformulated Gasoline (RFG) standard, the US successfully implemented  a discriminatory definition of "performance". The RFG standard obliges a number of states to ensure that only reformulated gasoline is sold in US airsheds classed as "in non-attainment" with federal air quality regulations.

RFG is conventional gasoline that is blended with oxygenates (usually ethanol) so that it will generate far lower tailpipe NOx emissions when combusted. The RFG regulation establishes an RFG quality standard, but also creates a new national standard for US conventional gasoline. The 2nd product standard was deemed important to ensure that fuel suppliers did not simply high grade their output into the RFG market and deliver higher NOx-emitting conventional gasoline into the not-RFG restricted US airsheds. Any such high grading would accelerate the degradation of air quality in the airsheds still deemed to be in attainment.

So while the RFG regulation—made law in 1993—does not oblige fuel suppliers to reduce the NOx factor for their conventional gasoline sales, it obliges them to demonstrate that there has been no degradation of the NOx factor from the 1990 baseline levels for their conventional gasoline sales. But in 1993, hardly any of the foreign gasoline suppliers to the United States were able to retrospectively produce data to verify what their 1990 baseline NOx factors were. (The NOx factor is established by entering the fuel formulation–from a lab test of a batch sample–into something called the "Complex Model". The model produces a NOx emissions per mile factor for the tested fuel.).
Where the EPA deemed the foreign supplier unable or unwilling to present verifiable 1990 baseline data, it then adopted the practice of requiring importers to separately test all imported gasoline and, as long as the NOx factor for the tested gasoline was LESS than that for the US refineries, on average, the EPA assigned the US AVERAGE NOx factor to the imported fuels.

In the very first tests of foreign gasoline and ever since, the foreign conventional gasoline supply has tested in at around 1,412 grams NOx/mile, compared to the US refinery average of 1,465 grams/mile.  That means that low cost and less oxygenate would be required to make RFG from a foreign conventional gasoline basic input. But because the EPA is assigning a 1,465 grams/mile factor to all imported gasoline, US blenders are required, by law, to add ethanol to the imported conventional gasoline as if its actual NOx rating is 1,465. This procedure wipes out, entirely, what should be a significant competitive advantage for the cleaner foreign fuel suppliers in the US market.

The US’s RFG was subjected to a WTO challenge and the WTO ruled in 1997. But in the original rule, the EPA had elected to assign a NOx factor to imported conventional gasoline that was HIGHER, than the US refinery average—even though the tested fuel was clearly less polluting. Although the WTO struck  down the EPA’s practice of penalizing the imported fuels with a higher-than-US average NOx factor in the 1997 decision; the WTO did allow the EPA to assign the still biased US refinery average NOx factor to all imports, even though fuel testing clearly demonstrates the foreign RFG is less polluting and, therefore, a more competitive feedstock for RFG. Canada was among a number of nations that appealed this ruling, but our appeal was not upheld.

That’s  because the WTO is willing to honour the US practice of defining "performance" relative to an historical base year.

What the RFG Precedent Means in the GHG Law-Making Context

With the RFG precedent in hand, a majority of US environmental rule drafters—at both federal and state levels—are focusing their attention on the opportunity to draft all new US environmental regulations to measure "performance" as a reduction relative to an historical baseline. This creates new opportunities to discriminate against imports that compete with domestic output on two grounds:

First the foreign supplier is unable to produce verifiable base year data, at least not data that is as comprehensive or verifiable as the data the US EPA has collected from US refiners under normal US Clean Air Act Title V reporting requirements.

Both the RFG and subsequent US Renewable Fuel Regulations, which became law on September 1 2007, http://www.epa.gov/OMS/renewablefuels/), allow foreign suppliers to apply for "individual baselines" if they are willing and able to present the same plant-level data to the US EPA that was required of the US refineries in the base and all subsequent years.But both regulations oblige any foreign entity that applies for an individual baseline to: (1) remit plant operating and emission data—including commercially sensitive process design information—on a continuing basis, directly to the US EPA, (2) agree that the EPA has jurisdictional authority and can enforce US law at the plant on foreign soil,, as if the plant was located in the US and (3) waive sovereign immunity against US prosecution in the event the plant operator breaches US laws at the foreign site.

This procedure utterly circumvents and eventually supplants Canadian provincial and Environment Canada legal authorities over time.

Second, the foreign supplier is unwilling to remit commercially sensitive information to the EPA or unwilling to waive sovereign immunity from US law.

The EPA promises to keep commercially sensitive plant information confidential. Unfortunately,  the EPA will not be permitted keep that promise under existing US national security laws, as Congress could always expropriate of intellectual property form foreign fuel suppliers as a matter of national security.

With these two substantial potential sources of competitive advantage in mind, US regulations will continue to press to measure "performance" in all new US technical and environmental standards as a rate of change/improvement relative to an historical baseline.

It will prove essential that Canadian negotiators NEVER agree to any standard that is defined in percentage reduction terms. Any and all Canadian agreements must be based on discrete emission intensity standards, where performance is measured as emissions/unit of product sold, averaged over total sales in the regulated market.

Canada must never, ever, agree to any standard that refers to a base year. The US may elect to accept Canadian national targets because the it’s satisfied that the absolute national or product=specific GHG intensity standards that Canada may bind to are, essentially, equivalent to a given reduction objective. But Canadian negotiators must NOT enter into any dialogue that can reasonably be presented to the WTO, at a later date, as an agreement to bind to a standard that measures performance in percentage-reduction-from-a-base-year-terms.

 

Read Part II 

Read Part III

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11 Responses to Aldyen Donnelly: A closer look at California’s Low Carbon Fuel Standard and what it means for Canada: Part I

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