What a Carbon Cap Could Mean for Biodiesel

isramart news

The U.S. is playing catch-up to the rest of the world in terms of controlling carbon emissions. With the infant science of indirect land use change looming over all renewable fuels production, what will a carbon cap-and-trade system mean for the biodiesel industry?

In April, the U.S. Environmental Protection Agency took the first step in regulating greenhouse gas (GHG) emissions by formally acknowledging that carbon dioxide (CO2) emissions are a danger to “public health and welfare.” CO2 will now be tracked and monitored by the Clean Air Act. Increasing energy security and decreasing emissions that lead to climate change are the main motivators for escalating interest in regulation of GHG emissions. CO2 emitted from burning fossil fuels has been singled out as one of the top GHG contributors to global warming.

Capping allowable CO2 emissions appears inevitable. The initial industries affected include suppliers of fossil fuels, manufacturers of vehicles and engines, and facilities that release 25,000 metric tons or more per year of GHG emissions. Enforcing the cap on emissions will most likely be done through cap-and-trade—a system of quotas, allowances and credits. If an organization reduces emissions by more than its quota, it ends up with tradable credits. If the opposite is true, then the organization must buy credits. The CO2 cap decreases over time and credits become more expensive, so organizations have an incentive for reducing CO2 emissions.

Josh Margolis, who oversees environmental and renewable energy markets for CantorCO2e, compares CO2 cap-and-trade to acid rain legislation in the mid 1990s. “Successful reduction of sulfur dioxide (SO2) through acid rain legislation offers us lessons that we can use when designing a CO2 cap-and-trade,” he says. “The SO2 legislation granted allowances and then gradually reduced them over time. Instead of just taxing the polluters on emissions, the program incentivized utilities to turn their waste streams into profit streams, thus solving the problems sooner. And it made over-compliance a prerequisite for trading. The only sources that can sell allowances are those whose actual emissions are below the quantity of allowances that they hold.”

The Acid Rain Program was a 1990 amendment to the Clean Air Act that went into effect in 1995. Congress is now amending the Clean Air Act to reduce CO2 emissions. The amendment requires EPA to establish an emissions baseline for all fuel, and then set emission caps and determine reduction requirements. A bill drafted by Chairman Henry Waxman of the Energy and Commerce Committee, and Chairman Edward Markey of the Energy and Environment Subcommittee, was introduced this spring. In the transportation section of the bill, the EPA is tasked with determining the lifecycle GHG emissions of all transportation fuels, as well as determining the fuel emission baseline, then applying the baseline to refineries, blenders and other fuel providers. Once the baseline has been set, the annual average lifecycle GHG emissions must be reduced by a certain percentage below the fuel emission baseline. The regulation permits transportation fuel providers to generate credits by achieving greater reductions. In the proposed legislation, transportation fuel providers could generate, bank and trade credits. Credits can then be traded on carbon exchanges similar to the way stocks are traded.

Europe has done something similar by launching a European Union-wide carbon cap in 2005. The carbon cap sets a quota of carbon emissions permits called EU allowances (EUAs) for factories and power plants. This EUAs system is currently unregulated, but some political leaders and environmental trade analysts are calling for regulation. And the U.S. is paying close attention.

On lifecycle GHG emissions, the Waxman/Markey bill sets the standard emissions of biofuels at a level no higher than the fuel emission baseline. Determination of baseline GHG emissions estimates are left to the EPA administrator. So far, this has been a challenge for the biodiesel industry because EPA is incorporating indirect land use in the calculation.

Indirect land use can constitute anything from deforestation for growing soybeans and palm in Brazil and Indonesia, to a farmer’s decision to grow fuel crops instead of food crops.

Including indirect land use in the calculation has increased the lifecycle GHG contribution for biodiesel.

In May, the EPA announced implementation of approved changes to the federal Renewable Fuel Standard known as RFS2. Delays in enforcing RFS2 as passed in the Energy Independence and Security Act of 2007 were due in part to the complexity of measuring lifecycle GHG emissions. Enactment of the RFS2 proposal would mark the first time that lifecycle analysis of GHG emissions will be used to determine impacts over 30-year and 100-year time periods. Legislation of lifecycle CO2 would be great news for the biodiesel industry if legislators agreed with the U.S. DOE and USDA’s assessment of biodiesel lifecycle CO2 emissions.

According to the 1998 biodiesel lifecycle study, jointly sponsored by DOE and USDA, 100 percent soybean oil biodiesel reduces lifecycle CO2 emissions by 78 percent, and B20 by 15.66 percent compared to petroleum diesel. As anyone producing or burning biodiesel knows, fuel burned in an engine emits CO2 at the tailpipe. Biodiesel and petroleum diesel produce comparable carbon emissions. The difference lies in the big picture—total CO2 output over the lifecycle of the fuel. The DOE/USDA lifecycle study looked at the whole picture from “cradle to grave,” beginning with extraction of raw materials through to end-use applications. A major benefit of soy-based biodiesel is the fact that soybeans absorb CO2 from the atmosphere in the growing process. They literally use solar energy and turn CO2 into stored energy. This effectively recycles CO2 in the atmosphere because the same CO2 released from biodiesel combustion is taken up in the next soybean crop. Crude oil releases CO2 when pulled from its containment under ground. The DOE/USDA study concluded that replacing petroleum diesel with biodiesel “is an extremely effective strategy for reducing CO2 emissions.”

If only everyone would agree on this assessment, biodiesel would far exceed the renewable fuel qualifications under the RFS2. Instead, indirect land use in other countries could affect the lifecycle score for biodiesel. The U.S. biodiesel industry did see some light when EPA stated that the lifecycle analysis may not solely determine eligibility of a renewable fuel under the RFS2. The EPA indicated the displacement of petroleum by biofuels over time can overcome some land use diversions from food or forests to fuel. Even so, most U.S. biodiesel producers and farmers are using sustainable feedstocks and practices, so the industry is looking for a fair assessment from the EPA.

Margolis, who also advises the California Energy Commission on GHG mitigation strategies, stresses the importance of EPA applying equal amounts of scrutiny to all renewable fuel sources. “There’s no ‘easy button’ for lifecycle analysis,” he says. “If nuances are missed, viable solutions could be left out of the mix.”

The EPA is surely paying attention to California where the California Air Resources Board’s (CARB) Low Carbon Fuel Standard (LCFS) was adopted April 2009. California plans to reduce GHG emissions by 10 percent by 2020 or about 15 million metric tons a year (CO2 equivalent). The LCFS is designed to reduce California’s dependence on petroleum, which sounds good for biodiesel, but the LCFS also takes into account land use changes overseas. Biodiesel made from waste oil, animal tallow or sustainable feedstocks should have no problem meeting the reduction standards set forth by the LCFS.

In addition to reducing CO2, the current form of the Waxman/Markey bill requires reduction of black carbon, or particulate matter. The bill also proposes to reduce “unnecessary fossil fuel burning that produces black carbon where feasible alternatives exist.” The biodiesel industry knows that particulate matter reduction is one major benefit of burning a biodiesel blend.

Overall, the activity surrounding CO2 reduction could benefit the biodiesel industry. Legislation reducing use of fossil fuel in transportation could open new markets for biodiesel.

But recent figures on biodiesel production show a marked decrease—down to 2006 levels by March, which indicates the industry needs help. Enforcing the RFS2 may help the biodiesel industry pick up the pace as fuel producers start to fulfill their 2009 obligations to include 500 million gallons of biomass-based diesel in the mix of transportation fuel sold in the U.S. As long as the biodiesel industry continues to make gains in sustainable feedstocks, biodiesel will be viable as one of the solutions for the nation’s goals of reducing GHGs and increasing energy security.