Assessing the Impact of Leakage on the Effectiveness of a Low Carbon Fuel Standard

Focus Area

Climate Change

Subcommittee

Air Quality, Environmental Process

Status

Archived

Cost

$500,000-$750,000

Timeframe

Unknown

Research Idea Scope

Problem Statement
A low carbon fuel standard (LCFS) sets a target to reduce the greenhouse gas (GHG) intensity of transportation fuels. Fuel providers must reduce the GHG intensity of their fuels, measured on a lifecycle basis. Concerns for the leakage problem raise doubts about the effectiveness of the LCFS. There are at least two types of the leakage problems that can occur: first, regulated parties will have incentives to export high-carbon fuels to non-LCFS countries or not import high-carbon fuels. Thus, a national LCFS could limit the flow of high-carbon fuel, such as oil sands, into the U.S. But instead of reducing the consumption of high-carbon fuels globally, the majority of the oil sands exports might be diverted to elsewhere, such as to the Asian market. Thus the marginal benefit would be close to zero. Similar problems can also exist for other fuels such as high carbon bunker fuel and aviation fuel. Not only fuel providers can deliver high-carbon bunker fuel and aviation fuel to other markets, ships or airplanes can plan their fueling routes and refuel at ports or airports where high-carbon fuels are sold at lower price. The second type of leakage is the indirect land use change issue associated with the large-scale production of low-GHG biofuels. Indirect emissions occur when biofuels production on agricultural land displaces agricultural production and causes additional land-use change elsewhere that leads to an increase in net greenhouse gas emissions. Few studies have examined the impacts of leakage on the effectiveness of the LCFS.
 
Objective
Studies are needed to examine the type of conditions under which leakage may occur and the extent of leakage that could affect the effectiveness of a national LCFS. More robust assumptions and alternative scenarios will be needed to give a better picture of the impacts of a national LCFS on global oil and commodity markets and vice versa. The cost of mitigation options, such as the ability of companies to switch to low-GHG fuels, the cost of reducing the carbon intensity of high-carbon fuels and the potential for second generation biofuels to mitigate the competition for land that will be used to produce biofuels and the type of land (marginal vs. cropland) likely to be used for energy crop production at a county-specific level for the U.S. This research should also consider the potential for interstate and interregional leakage from the California Low Carbon Fuel Standard and the proposed Northeastern States Low Carbon Fuel standard.
 
Related Work
Holland, Stephen. 2009. Taxes and trading versus intensity standards: second-best environmental policies with incomplete regulation (leakage) or market power. Berkeley, CA: Center for the Study of Energy Markets, University of California Energy Institute.
 
Difiglio, Carmen. 2009. Analysis of a Federal LCFS (Sec 121 of Waxman-Markey Discussion Draft). Paper read at Twelfth Biennial Asilomar Conference on Transportation and Energy Policy, at Pacific
 
Urgency/PriorityThe research will contribute to the understanding of the effectiveness of the LCFS and inform policies to develop strategies to reduce leakage and shuffling outside of the unregulated market (which is a common problem for any low-carbon policy, including the cap-and-trade).

Urgency and Payoff

Implementation
The desired project outcome is a final report(s) evaluating the potential impacts of leakage affecting the effectiveness of an LCFS and policy recommendations to effectively reduce the leakage from occurring.
 
EffectivenessThis research will have many broad implications to a broad set of carbon policies (or even more broadly policies that intend to achieve a set of sustainability goals) that will need to deal with leakage at the domestic and international level. Reducing the potential leakage will help to improve the efficiency of policies, minimize unintended consequence, and promote the production of low GHG fuels.

Suggested By

RNS. Sponsoring Committee: A0020T, Special Task Force on Climate Change and Energy Source Info: Special Task Force on Climate Change and Energy January 2010 Workshop

Submitted

08/06/2010