What Impact Do Low Carbon Fuel Standards Have on Fuel Prices?

by Jim Lane (Biofuels Digest) There are horse whisperers and there are fuel price whisperers. The latter, they beguile us with their charts and tables and reports and white papers and studies, generally aimed at making fuel prices seem awfully complex, when they’re actually not too tough to figure.

These days some fuel price whisperers I know have taken aim at Low Carbon Fuel Standards, not because they fear them, but because frightening people is easy and it pays well. The whisper is that the compliance costs for Low Carbon Fuel Standards drive up costs for refiners, which are passed on to the public via higher wholesale gasoline and diesel prices and cause Pain at the Pump for consumers.

Do low carbon fuel standards actually increase the prices that refiners charge for gasoline and diesel? There are two ways to find out — we can look from the top down, and from the bottom up. Let’s look both ways, and tease out the real story with the hard data.

View from the Top

The Low Carbon Fuel Standard as a climate-fighting ordinance was born in California, so we’re going to look to see if California gasoline and diesel prices have risen — compared to US prices — during the LCFS era. Gasoline and diesel prices rise and fall according to supply and demand — that’s why we need to look at the comparative prices. If California prices are rising, compared to US prices, the LCFS could be the cause.

Today, we’ll look at “wholesale refiner product prices”. That’s the right place to go, because we eliminate the retail margin by looking at wholesale prices. Also we eliminate taxes which are added into the retail price of gasoline. That’s important in California, because the state gasoline tax is different (and higher) than the rest of the US. Our data source is the US Energy Information Administration, which is the unsung hero of transport-related prices, supply and demand. You can access the underlying data here.

We can say this, based on the hard data of ten years of history of actual prices:

There is no difference between fuel prices for gasoline or diesel, that can be assigned from price data to the impact of a Low Carbon Fuel Standard.

Why is an LCFS more effective than a Zero Emission Vehicle?

A zero-emission vehicle reduces tailpipe emissions to zero, which is a marvelous thing but has nothing at all to do with decarbonizing transport.

A ZEV is like a rifle, you still need the bullets, and the bullets are the energy source, and ZEVs use high-emission electricity just as easily as low-emission electricity.

No tailpipe emission, but your ZEV didn’t produce a zero-emission sky or a zero-emission society, which is the actual goal.

ZEVs can use very low-carbon electrons, too, but what they really do, their amazing magic, is to transfer the emissions from energy production so far upstream in the production cycle that most people forget that they are emitting anything. Since you’re not starting at tailpipe exhaust, you think the emissions are gone.

Not long ago, the US Navy purchased more than 50 million gallons of zero-sulphur renewable marine diesel for $1.90 a gallon, and if you’ve tried to find $1.90 gasoline lately at your local fuel pump, you’ll know the Navy is onto something from a cost point of view. That the raw materials were collected above ground by recyclers instead of below ground by frackers might delight those interested in keeping oil in the ground.

That it was manufactured by Americans at a refinery in the Los Angeles metro area, instead of overseas by someone else, might delight those interested in “making America great again.” That those fuels have close to zero net emissions and that the refinery in question was switched over from petroleum to renewables in its entirety might delight those interested in containing global warming.

That those fuels could be safely and affordable provided without traversing any of those naval hot-spots: that’s what delighted those manning the conning towers back at the Pentagon.

“We announced in 2009 that we would demonstrate the Great Green Fleet in 2012 and sail in 2016. And when we demonstrated the new fuels in 2012, we bought small quantities of experimental fuels. And we paid $26 per gallon, and some people said “you’ll never make this affordable.”

“In 2016, sailing the Great Green Fleet we paid $2.05 per gallon for the largest renewable fuel contract ever made. Let me repeat that. $2.05 per gallon. That’s the story. 13 times less expensive than just four years before.” (former Navy Secretary Ray Mabus)

By 2019, renewable diesel is cost competitive or even cost-better with fossil diesel. As I heard it from World Energy, and so we saw in the statistics of fuel price buys from the Navy.

The Fruits of Carbon Victory

Lately, renewable diesel can win any fuel auction it enters into. Today, the profits from sales of renewable diesel are being plowed into building more refining capacity. Despite the impact of fracking, there is more renewable diesel refining capacity being built in the United States today than fossil diesel.

And it is not just small renewable energy companies that are building that capacity. Quietly, Marathon is in the business, Valero is in the business, Darling is in the business. Offshore, there’s Neste, ENI and Total, to name a few. Renewable Energy Group and World Energy have that first-mover advantage and, now that they have sorted out their tax credit situations, expect these two emerging lions to roar.

The Bottom Line

We are paying more or less what they’ve always paid — only now, we get a performance attribute and we get the low-carbon attribute, all in one. Lucky us!

Prices are in check, as they should be in the Land of the Free, and part of the reason is that innovation is moving faster than the Low Carbon Fuel Standard required it to, and that means prices are stable, and consumers are not subsidizing renewable diesel. We all want to keep those prices down, so we want projects to be green-lit and more renewable fuels made. That’s good for jobs, good for national security and good for the earth. READ MORE