California Dreaming – Taking the Low Carbon Lead

Decarbonization in the US has had its biggest boost to date thanks to the recent Inflation Reduction Act (IRA). Authorizing $396 billion in clean energy and decarbonization expenditure over 10 years, the historic law seeks to enhance US energy security, expand clean and renewable energy production, jump-start carbon reduction and sequestration technologies, accelerate decarbonization of the vehicle fleet, and promote a host of other climate policies.

Whilst the hope is that the Inflation Reduction Act will set off a movement to establish a national energy policy, the reality is that climate change policies in California are far from new or revolutionary. In fact, eleven years ago, the Low Carbon Fuels Standard (LCFS) was designed to reduce emissions from transportation fuels, the largest source of greenhouse-gas emissions.

To discuss California, the state leading the US’ energy transition, we recently hosted a panel joined by Tiffany Roberts, State Government Affairs Manager, Western Region, Phillips 66 , Melinda Palmer, Vice President – Regulatory & Public Affairs, Kern Energy , Shant Apekian, Vice President, California Policy and Strategic Affairs, Western States Petroleum Association and David Brown, Director, Scenarios and Technologies, Wood Mackenzie to reflect on how California has responded to some of the state and federal level climate goals, to consider how it will balance short term affordability with the need to balance long term decarbonization objectives and discuss policy recommendations for the state to advance its decarbonization agenda.

An evolution of climate policy

Firstly, looking at how California’s energy industry has responded to climate goals. There is a lot of history with the state’s role in climate policy, where the first targets were passed in 2005. Over time there has been an evolution in the conversation around climate policy, to which the industry has responded in an evolutionary way.

In 2006 when AB 32, (the Assembly Bill 32/California Global Warming Solutions Act) was passed, there was a lot of ambivalence about what the targets actually meant, and a lot of ambivalence about the role of markets vs command-and-control (CAC).? Over time the industry has become more accustomed to the distinction between markets and command and control approaches to climate policy, highlighted by the industry’s support of the cap-and-trade reauthorization in 2017.

California has some of the most ambitious goals and regulations in the world which came on thick and fast; AB 32, LCFS, Cap-and-Trade, Truck and Bus, Off-Road Vehicle & Equipment. This layering of multiple regulations and policies in quick succession certainly threw the industry in at the deep end.

Policies and goals continue to be pushed as the state looks to go further, faster. Shifting the conversation from goals to compliance, and from the what? to the how? key questions today include “how do we comply?”, “how do we do it in a cost-effective manner?” and “how do we do it in a technology neutral manner?”??

All of the above approach

As California, the US, and the world faces an energy affordability crisis, discussion turned to the options for California to balance short term affordability with medium term decarbonization. Rather than ask what options does California have, instead we have to ask what is California open to? Is the state open to an all of the above approach underpinned by the idea that the common enemy is fossil carbon, not the industry Itself? The industry has existing talent and infrastructure that can be part of the solution. There are incremental benefits still available by improving and cleaning up existing assets and processes through carbon capture, efficiency, and waste heat recovery etc.??

Looking specifically at some of the options, conversation turned to California’s openness to CCS. Despite the state being very progressive when it comes to climate change, far ahead of many in many ways, when it comes to CCS, California is far behind. The state is struggling to put in place the policy and legal frameworks to actualize it. A lot of the pushback is not policy. The regulators and public understand its importance and key role to achieve climate goals. There is not one scientist or academic institution that doesn't say you can get to 2045, 2050 without significant investment in CCS, however the political barriers are still too great.

Exacerbating this is California’s environmental justice community. The EJ movement came out of California, which the state is very proud of. Despite their value and legitimate issues, they have gone to the extreme on a lot of the climate issues, putting enormous pressure on policymakers and the administration, ultimately stifling progress moving forward. One of the main reasons why CCS policy is not moving forward is in large partly through the opposition of that community.?

Discussion moved to the Biden administration and recently announced $9.5bn of government funding for the development of atleast four regional H2 hubs. What’s the appetite for hydrogen development in California? Specifically in Kern Country, it has a rich wealth of resources, positioning it as an energy leader, both in terms of oil and gas, but also renewable energy which supports the creation of one or more of those hubs to continue to grow the rich renewable resources and carry it forward. California is a diverse state in terms of its population and resources, which requires a diverse set of solutions to meet its energy needs.?

?Reflecting on what California can learn from its Europe counterparts who, like California, have robust and aggressive decarbonization goals, the main take-away is the need for an ‘all of the above approach’, and not just to talk about it, but demonstrate it. There is a role for renewable diesel, a role for hydrogen, a role for traditional fuels and so on. Regulators have a tendency to put their finger on one technology, but there is no silver bullet.??

Digging further into the point around the need for a diverse set of solutions, market demand for liquid fuels will remain for some time, which lacks recognition. Even under CARB’s, the most aggressive electrification scenario that California will ban the internal combustion engine in 2035, analysis continues to shows strong liquid fuel demands well into the future.??

As put by one panellist, “the main thing is keeping the main thing, the main thing”. Why are we doing any of this? Why does any of it matter? To improve the lives of our residents, and their public health, and make energy more affordable and resilient. If we lose sight of that as we're moving forward, we're not keeping “the main thing the main thing”.?

Walking the walk??

The need for pragmatism and clarity, heavily dependent on policy was a clear take-away of the discussion. What needs to be done from a policy perspective to see some of those goals advanced? As put by one of the panellists, "we need to walk the walk”. Taking CCS as an example, the industry needs three P’s. First permitting certainty, which applies not just to CCS projects, but all conversion, and greenhouse gas reduction projects. Today, no company or developer will invest without that level of certainty on the permitting side. Second, the legal framework on pore space rights requires a legislative fix. Despite the issue in itself is not political, it's become such a hot button issue that it has become politicized, stifling progress. Finally, pipeline, and making sure that the infrastructure is there for those who want to invest (in CCS projects). Furthermore, a credit system, to ensure appropriate credit for emission reduction (whether LCFS or cap-and-trade) needs to be in place to pursue the projects.

From the bottom up?

Discussing approaches to planning in more detail. Often enough, the state has already set the table, that requires the industry to reverse engineer towards the answer. We need to change the way that we come to the table and instead build from the bottom up, and look across the board to evaluate all of the different opportunities for reducing emission reductions from a technological perspective, a sectoral perspective, and build it through analysis and optimization.?

Discussing the LCFS specifically. Does the creation and management of its goals need to be re- imagined? As we see more renewable fuels come online, the electrification credit in the programme muddies the waters. Bifurcating electricity and electricity credits associated with transportation would be a good direction to continue to incentivize the production of those fuels.??

Over time we have seen a shift in opinion of the LCFS. Today there is a recognition that there are opportunities for different fuels, and different technologies and the LCFS is a tool to ultimately achieve climate goals in a more equitable and technology neutral way. It highlights that there is more than one path to where we're trying to get to.

We need to change the way that we come to the table and instead build from the bottom up, and look across the board to evaluate all of the different opportunities.

Moving forward, the LCFS will continue to drive innovation, not only in new technologies and new feedstocks, but by forcing the industry to look at efficiencies in the different processes along the way.?

Drawing the discussion to a close, the clear take-aways and conclusions were the need for a scoping plan of priorities backed by an all of the above approach that recognizes the potential contribution of all technologies.?

Better recognition that policy design impacts consumers and impacts the price at the pump is required. A climate policy that is affordable, and equitable will move the ball forward.??

We must be open to innovation, and open to all solutions. Science must drive policy as opposed to policy trying to drive the science.?

From left to right: David Brown, Wood Mackenzie - Tiffany Roberts, Phillips 66 - Shant Apekian, Western States Petroleum Association - Melinda Palmer, Kern Energy

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Taking place in San Fransisco from 31st May – 2nd June, ESF North America will gather senior industry leaders to support the collaborations, discussions, and development of a sustainable energy future in which the oil and gas downstream industry continues to play a leading role.??

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