Pushmi-Pullyu: How Do Carbon Prices and Fuel Mandates Work Together in Breaking through a Fossil Fuel Monopoly? Or, Do They?

by Jim Lane (Biofuels Digest) Sometimes, the set-up of the transition from fossil fuels is as pretty and impractical as Dr. Doolittle’s Pushmi-Pullyu. The Digest investigates. -- ... For example, a renewable fuel does not qualify under the Renewable Fuel Standard if it is to be used in an ocean-going vessel, but it can qualify under the California Low Carbon Fuel Standard if it is loaded on ships in California. And, it qualifies for the federal renewable diesel tax credit even though it does not qualify for RINs.

Conversely, jet fuel from the same biorefinery can qualify for the Renewable Fuel Standard, but does not qualify under the California Low Carbon Fuel Standard. It does not qualify for the renewable diesel tax credit though it does qualify for RINs.

To make matters more complicated, consider the problem of feedstocks. A jet fuel made from eucalyptus oils by the same California biorefinery would not yet qualify for anything — not the RFS, not the LCFS and not the renewable diesel tax credit.

Yet, were you to take old branches from eucalyptus trees, grown in Burundi, ship them back to California and convert them into ethanol, you would qualify the fuel under the Renewable Fuel Standard and the California LCFS.

As originally conceived, a mandate, and a tax on the incumbent (or a tax credit for the new entrant) should work well together.

First, the mandate should ensure that there is a market available, taking into account that incumbents directly or indirectly control fuel supply (through direct ownership of fueling outlets, or franchising agreements, or the inability of dispensers to handle a new product.

The mandating regime can assist the transition away from that old system of ownership and control via incentives or regulations (e.g. the installation of blender pumps, the manufacture of flex-fuel vehicles, or banning agreements that limit fuel selection at any location), or not.

We generally attack the resulting production cost problem with tax credits, of which there are three kinds, production credits, investment credits and carbon credits.

Production credits are the easiest to understand. You produce a qualifying fuel, you receive a tax credit. The taxing regime gets to decide if it will award the credit to the producer of the fuel, or the marketer that blends and distributes the fuel (known as the Producer’s Credit or the Blender’s Credit) — this past year, the US considered switching from a blender’s credit to a producer’s credit when it comes to biodiesel or renewable diesel. A blender’s credit can benefit, for example, an off-shore producer, while a producer’s credit might narrow the benefit to domestic producers.

Then, there are investment tax credits, These always incentive local producers, who are paid out when they install new production capacity.

Carbon credits are the most murky. A federal credit under the Renewable Fuel Standard comes in two flavors. One is a RIN and one is a cellulosic waiver credit.

You see, the real performance differentiations between renewable fuels and fossil fuels lie in emissions, energy security and economic development that renewables achieve when they are deployed, by reducing imports and reducing CO2. These are social benefits enjoyed by society as a whole, they do not accrue to the investor in the project, because investment and return in measured in dollars instead of social benefit.

The carbon credits localize the benefits inside the project, monetizing a social benefit such as cleaner air or less dependence on fuels made by unfriendly regimes.

One final improvement. The EPA decided that RINs would be calculated on energy content and no other factor. Yet, molecules have downstream pathways just as they do upstream pathways. It would be generally acknowledged that higher-ethanol blends incentivize more use of renewable fuels and do more towards achieving aggressive Congressional targets, yet E15 blends (based on a $0.70 RIN) provide a 3.5 cent incentive to the blender compared to E10 blends. That’s not the kind of incentive that breaks through the E10 saturation problem. If higher blends received higher RIN values based on their value in incentivizing a distribution system that could achieve Congressional targets, they would be serving the Congressional purpose. READ MORE