What starts in California—the biggest state by population—often finds its way to the rest of the union, making two big regulatory moves about to hit its fuel marketers of interest to the entire industry. California Assembly Bill 32, or the Global Warming Solutions Act of 2006, seeks to cut the state’s greenhouse-gas emissions to 1990 levels by the year 2020, marking a more than 16% decline. To hit this target, the act directs the state’s clean-air agency, California Air Resources Board (CARB), to implement regulations that will result in the reduction of several greenhouse gases, including carbon dioxide, methane and nitrous oxide.
One of these levers is a cap-and-trade program that sets a limit, or cap, on hundreds of industries responsible for most of the state’s greenhouse-gas emissions. This cap is set at 2% below forecast 2012 levels for 2013, declined another 2% for 2014 and is set to decline 3% annually from 2015 to 2020.
Companies must possess enough emission allowances to cover their emissions but then must buy more allowances in the open market. Each year, the state holds greenhouse- gas allowance auctions where the price of the allowances is set. (Washington and Oregon are watching California as they fi nalize their own cap-and-trade regs.)
Utilities and large industry were first subject to the cap in 2013. And on Jan. 1, 2015, fuel distributors such as Robinson Oil became part of it. “The impact to the retailer is that they will soon have an increase in the price of fuel, which gets passed along to the consumer,” says Tom Robinson, president of Robinson Oil Corp., Santa Clara, Calif., a retailer and distributor with more than 30 Rotten Robbie c-stores.
“Although the state and CARB don’t like to call this a tax, it tends to look, smell and feel like a 15-cent tax,” says Robinson.
Any marketers who ship product on a pipeline, such as Robinson Oil, are an obligated party under the cap-and-trade program, and required to buy allowances. This situation is almost the opposite of renewable identification numbers (RIN), which many marketers across the country are able to sell to refiners for a tidy sum.
“Marketers who ship product in the state have to be pretty knowledgeable about their obligations, and pretty careful that they don’t fi nd out they have a signifi cant obligation,” says Robinson. “In our business, a couple of pennies are a big deal. If you’re not paying attention, you may have to take 15 CPG out of a gallon.”
Marketers who decide to keep shipping on a pipeline need to fi gure out how to acquire enough allowances to cover the related emissions. After a lot of thought, Robinson Oil execs decided they would ship on the pipeline in first-quarter 2015, and buy credits at auction just to “dip our toes in the water.”
“We have to give them all of the money for everything we will bid for, which takes a chunk of change,” Robinson says. “This makes it a lot more diffi cult for folks, especially if you are moving a lot of product.”
One silver lining of sorts for fuel retailers is that California’s borders are underpopulated compared to the rest of the state, so retailers in border towns will likely not be at a big competitive disadvantage to retailers in other states without similar regulatory initiatives, says Robinson. “Truckers have the ability, if they are going east or west, to make a decision [on where they buy fuel],” he says. “If you’re in the state, consumers are going to pay the bulk of this.”
As fuel marketers grapple with life under cap and trade, another element of AB32 will also hit them within the next few years. The Low-Carbon Fuel Standard (LCFS), signed into law by former Gov. Arnold Schwarzenegger in 2007, calls for a 10% reduction in the carbon intensity of the state’s transportation fuels by 2020. To get there, it assigns a carbon intensity score to every transportation fuel. Fuel producers and importers must make sure their fuel pool hits the carbon intensity target for each year—for example, by blending in lower-carbon fuel to their overall mix. Those who exceed the target must buy LCFS credits (which are traded separately from cap-and-trade credits).
While most fuel marketers and retailers won’t be obligated parties in this scenario, they will be subject to whatever cost increases refiners and suppliers plan to pass on as they try to comply with the LCFS.
One possible problem is that without a sufficient supply of low-carbon fuels, the price of available fuel would rise and drive up demand for LCFS credits, says Jay McKeeman, vice president of government relations and communications for CIOMA, the state’s fuel marketer association. The state right now has sufficient low-carbon fuel supply to cover its needs; however, fuel marketer groups believe by 2016 or 2017, supply will become constrained.
McKeeman cites a study sponsored by the oil industry that in the next decade anticipates an inadequate supply of low-carbon substitutes, particularly for gasoline for California’s massive market, which consumes 15 billion gallons of gasoline a year. “When you start talking about the California market, it can easily absorb the most aggressive small plant productions, and that’s assuming no one else wants the material,” he says. (At the same time, California is growing its storage capacity in anticipation of importing more Bakken crude, which has a lower carbon intensity compared to other crudes and could provide supply wiggle room.)
Furthermore, the LCFS is missing an “off-ramp,” McKeeman says, or a way to pause the ramping up of regulatory provisions if there is not enough low-carbon fuel available: “It’s just on-ramps, saying we have to supply the fuel, and everyone crosses their fingers and hopes the fuel will get supplied.”
McKeeman worries that some fuel manufacturers might even decide to export more of their fuel—which is not subject to LCFS requirements—or stop making fuel altogether, further restricting supply.
There is a big range of estimates and disagreement on what effect cap-and-trade and the LCFS will eventually have on retail fuel prices in California. A review of studies by the state’s nonpartisan Legislative Analyst’s Office found a likely increase of 13 to 20 CPG by 2020 from the cap-and-trade program, although it could possibly hit more than 50 CPG. Meanwhile, estimates on LCFS suggest everything from an actual savings for consumers to a $1- or even $2-per-gallon hit.
That’s because of a big set of variables that can influence the financial implications. In the case of the LCFS, refiners have multiple paths from which to comply with the requirements. And technological advancements could always upend the most optimistic and pessimistic of estimates.
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