Cross-posted at Cal-Watchdog.

Buoyed by the repudiation of Prop. 23, the California Air Resources Board (CARB) is moving forward with cap-and-trade regulations designed to reduce the carbon level in fuel, but which will also drive up gas prices, further damaging California’s weak economy.

Beginning in January the $183 billion fuel industry in California will need to begin adhering to CARB’s Low Carbon Fuel Standard (LCFS), which has a goal of reducing the carbon level in transportation fuel by 10 percent by 2020. Fuel producers can do so by blending in bio-fuels such as ethanol or by purchasing emission credits, perhaps from electric or natural gas utilities, to offset their high-carbon fuel supply.

Several studies on the impact of a nation-wide LCFS, as proposed in the cap-and-trade legislation passed by the House (but stalled in the Senate), predict that just about everyone will suffer as a result.

“Adoption of a nationwide LCFS will result in a price shock that will dramatically increase the cost of transportation to consumers and have long-term effects on the economy by increasing transportation costs for all goods,” concludes a study released in June by Charles River Associates. “The price shock – about a 30 to 80 percent increase in the cost of transportation fuels within five years of the time the LCFS is implemented – is caused by the large increase in production of low-carbon fuels required to achieve the reductions in emissions required by the standard. It is highly unlikely that it will be possible to produce sufficient quantities of fuel with sufficiently low emissions to meet the standard without drastically reducing the total amount of fuel consumed.”

The potential cost per household ranges from $570 to $6,500 annually, and the price of gasoline would increase 61 cents per gallon, according to two  studies on the nationwide LCFS impacts conducted last year by the George C. Marshall Institute.

“The principal winners under an LCFS are those who are subsidized – namely suppliers of the low carbon fuel, and raw material suppliers and processors of that fuel,” states one Marshall study. “Among the principal losers are consumers who will have to pay higher costs for transportation fuels while realizing little environmental or other benefits.”

The other Marshall study also looked at the impact on California, noting that “California produces relatively little ethanol, and it is costly to ship large quantities from one area of the country to another. For that reason, fuel sellers in the California market might utilize relatively high-priced electricity, hydrogen or other alternatives. [T]he cost to California consumers could be very high.”

But there were few discouraging words at Thursday’s CARB meeting, which kicked off with Chairman Mary Nichols happily discussing the trouncing of Prop. 23, which would have put on hold California’s Global Warming Solutions Act of 2006 (also known as AB32). Implementation of the LCFS is one of the first major regulatory initiatives under AB32, contributing 10 percent of the target of reducing greenhouse gas emissions to the 1990 level by 2020.

“The results of the November election and the very large victory for the ‘No on 23? force has generated a lot of excitement,” said Nichols. “Some people are immediately spinning it as signs that California is about to fall into the ocean and we have really taken leave of our senses. But I think that the greater majority who have commented on this have recognized that what happened here was not necessarily a vote of endorsement for any particular policy but a rejection of a campaign that was designed to reverse or completely repudiate efforts that California has been making for many years to make our energy system more efficient and more clean, and I think a recognition on the part of the people of California that our future lies in the direction of clean technology and greening our economy.”

The only cautionary note was a request from the fuel industry to hold off on implementation of the LCFS for a year.

“We have to get this right, because there is too much at stake not to,” Catherine Reheis-Boyd, president of the Western States Petroleum Association (WSPA), told the board. “I still don’t think we are ready for 2011 as a compliance year. 2011 should be a reporting-only year just like this year. We are not ready. We have to make sure we get the implementation right with things very complicated like designing a cap-and-trade program. There’s lots of issues. We have to make sure we close some gaps to implement this regulation. The consumers are going to be the ultimate judge of the success of this program. Adequate, reliable, affordable fuels are very important as we develop the program in 2011.”

Nichols thanked Reheis-Boyd for her comments, adding, “I know this is life and death matter to your members.” But CARB decided to go ahead with implementation of the LCFS in January, noting that only a .25 percent reduction will be required in 2011 (increasing annually to 10 percent reduction by 2020) and that enforcement would only take place initially against companies not making a good-faith effort to comply. Enforcement “would focus on those areas that are materially egregious,” said a staff member. “If they don’t do anything, then we don’t think they should be off the hook. There is discretion involved in that. We want to work with the fuel providers. We want this to roll out effectively.”

Ironically, WSPA, whose 28 members include BP, Chevron, ExxonMobil and Shell Oil, is supportive of the LCFS, having bought into the effort to reduce greenhouse gas emissions in the hope it would slow global warming. “The petroleum industry stands ready to use its expertise to work with the state to achieve the goals of AB 32 and the LCFS,” states WSPA’s Web site. “But the challenges should not be underestimated.”

Those challenges include a lack of technology for removing carbon from petroleum-based fuel and the limited supply of alternative bio-fuels, some of which don’t qualify. For example, corn-based ethanol grown in the Midwest is considered even more carbon intensive than gasoline, according to the CARB Carbon-Intensity Lookup Table. Corn ethanol grown in California is less carbon-intensive, but even better is sugarcane-based ethanol from Brazil.

“First, these alternatives are not yet capable of being produced in sufficient quantities,” states the WSPA website. “Next, no one knows if they can be produced in a manner that makes them affordable and sufficiently reliable for consumers. And, finally, the infrastructure to get these alternatives to consumers does not yet exist.”

Tupper Hull, WSPA vice president for strategic communications, declined in an interview to speculate on how much gas prices will increase in California to comply with LCFS. “We never predict things about prices. That’s an anti-trust thing,” he said. “It’s fair to say that others that have looked at this have projected pretty significant impacts on fuel cost. The other problem with trying to talk about prices is it’s very hard – you can only do it by picking scenarios where you can attempt to comply with the LCFS.

“I think it’s fair to say that at least initially the challenges we think this rule creates is the blending of increasing amounts of low-carbon bio-fuels is the most likely and practical way to comply in the early years. Which means a specific type of bio-fuel, which are not in abundant supply. A lot of people are vying to purchase a limited supply of that fuel. Brazilian ethanol from sugarcane has a low-carbon intensity – they are making a lot of it and using a lot of it themselves. How able it will be to supply California is a question a lot of people are looking at. Other states, Washington and Oregon, are seriously considering low-carbon fuel standards of their own.”

And so the price at the pump in California in the coming years may well hinge on things like the Brazilian weather. And investing in Brazilian sugarcane may be a better bet than snapping up California bonds, given the hit that will be coming to the state economy.

“I think it’s fair to say the state of California has a policy that would like to see a substantial reduction in the amount of petroleum that’s consumed here,” said Hull. “A lot of regulations are designed to or have the result of making it more difficult and likely more costly for people to use petroleum products. It’s no secret, the (California) Energy Commission has said for years that its highly unlikely anyone is going to invest in expanding the refinery capacity in the state. Yet we have projected increases for population and vehicle miles traveled.”