A Few (Six Actually) Problems With the State's New Cost Estimates of the Low-Carbon Fuel Standard

March 4, 2014

Yesterday, the Governor's office released an analysis of the potential cost of a low-carbon fuel standard (LCFS), arguing the cost is as low as four cents per gallon. The purpose was to respond to analyses, like ours, showing the potential cost was much higher.

The analysis, however, suffers from a number of shortcomings.

First, the Governor has not released his strategy for an LCFS. The price associated with the LEIDOS base case may or may not be what the Governor chooses. The Governor himself sent a letter in January saying the Senate couldn't critique "a proposal that doesn’t exist." Complaining that people are exaggerating the cost of a plan he won’t share seems disingenuous.

Second, according to the consultant hired by the state's climate workgroup, LEIDOS, the base case would only reduce 1 metric ton (MT) of CO2 by 2020. To meet the emissions reduction targets, Washington state needs to reduce 9.5 MT by 2020. There are no other strategies that reduce transportation carbon emissions in any meaningful way. Since transportation is nearly half of our total carbon emissions, an LCFS would only achieve one-fifth of the proportionate share of transportation emission reduction. If the Governor wants to use the LCFS to meet the reductions targets, he would have to increase the cost five fold. Even using the LEIDOS numbers, this would increase costs to between 20 cents to 40 cents per gallon.

Of course, the Governor could keep the price low to reduce opposition. That, however, would dramatically reduce the effectiveness of the policy. He can’t claim the policy is environmentally effective and cost effective.

Third, LEIDOS has chosen a strange approach to estimating costs. To calculate the cost per gallon, LEIDOS uses “(NPV change in fuel expenditures from 2016 to 2035) / (Total gallons consumed from 2016 to 2035).” That is an extremely obtuse approach and assumes they can accurately predict the change in fuel expenditures twenty years from now. It is unlikely they can provide an accurate estimate with so many other factors to account for.

A more straightforward approach is to divide the cost, $103 - $131 per metric ton of CO2, by the emissions per gallon – 19.4 lbs. This yields a range of 9 – 11.5 cents for every 10% increase in the LCFS, not the 4 – 8 cents LEIDOS claims. Using this methodology, to meet the transportation reduction targets would require a cost of 45 – 57.5 cents per gallon.

Other estimates, like ours, noting that the cost could go over $1 per gallon make the assumption, as LEIDOS notes, that the LCFS impacts 100% of the fuel. It is true that this is the high water mark, but there is no reason this can't be part of the discussion, especially in the absence of a tangible proposal.

Fourth, this isn’t the only price analysis. There are many other analyses indicating the price is much higher. For example, this piece from 2009 (a bit old) says the cost ranges from $307-$2,272. That would put the cost in the range of 27 cents – 2 dollars per 10% increment of biofuel to reach the LCFS.

Other analyses, including one from the author of the 2009 report, indicate the price may actually be lower than the LEIDOS study. These studies, however, rely on the emergence of cellulosic ethanol, which is much lower cost than current biofuels. This may happen. Or it may not. The state of California waited twenty years for electric cars to emerge in response to its zero-emission vehicle mandate. We've been waiting more than a decade for cellulosic ethanol, despite having some of the most knowledgeable companies, like Chevron and Weyerhaeuser, working on the issue. Expecting biofuel prices to decline significantly is the triumph of hope over experience.

Fifth, the Democrats on the climate workgroup have proposed using a cap-and-trade system on top of the LCFS to achieve the additional transportation emission reductions. Combining cap-and-trade and an LCFS, however, makes no sense. The benefit of cap-and-trade is that it allows people to meet the carbon reduction goals in the least expensive way. Adding an LCFS to cap-and-trade would not increase the total CO2 reduction, it would just mandate a particular approach to achieve that goal – an approach that is more expensive than alternatives.

Finally, it is worth noting the LCFS is a relatively high-cost approach to cutting carbon emissions. There are many alternatives that are less expensive. Thus, advocates of an LCFS are in a box. Either they scale it up to significantly reduce carbon emissions and the cost rises dramatically, or they scale it down to keep prices reasonable and the policy becomes ineffective.

Ultimately, this is why climate policy experts argue that a simple price on carbon is far more effective and lower-cost than the reuglatory approaches, like an LCFS, the Governor and other activists seem to prefer.