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Most states across the country have wrapped up their annual legislative sessions and we saw lawmakers hard at work seeking to address the most pressing issues affecting their constituents. Climate change emerged as a primary concern in most places, and state capitals across the country were buzzing with clean energy bills in response.

Underlying each of these bills is a commitment to joining the race to decarbonization. More specifically, there are ongoing, concerted efforts to implement state programs that would reduce greenhouse gas emissions (GHG) by linking economic development with clean energy solutions. These programs typically come in the form of clean fuels programs that are designed to incentivize the adoption of low carbon fuels as opposed to “command and control” directive regulations.

How Do Clean Fuel Programs Work?

Clean fuel standards create capital market systems that incentivize the development of renewable energy projects in their respective states. There are minor differences between these programs, but they share a common framework.

Clean fuel programs aim to reduce GHG emissions by creating a credit trading system wherein obligated parties must obtain a certain number of renewable energy credits to offset the GHG emissions they emit. Renewable fuel producers and importers generate credits for each unit of renewable fuel they produce. Petroleum producers and importers, known as obligated parties, can then fulfill their credit requirements in one of two ways:  (1) they can purchase physical gallons of renewable fuel to blend into their fossil fuel to reduce the carbon intensity of their product or (2) they can purchase credits that are generated by, but later separated, from physical renewable fuel. The latter option still allows the obligated parties to fulfill requirements because these credits are verified through significant compliance procedures and proceeds from credit sales help renewable fuel producers to maintain and expand their operations.

Another benefit of clean fuels programs is the economic development they can bring to a state. Renewable energy companies are incentivized to site their facilities in states that have clean fuels programs in place because they know obligated parties in these places are legally required to purchase their renewable fuel or credits. This lowers revenue risk and creates an attractive environment for potential investors.  Policies that enable the use of free-market renewable energy credits encourage investments that best use regional resources, infrastructure, and technologies to meet climate targets while increasing the supply of renewable energy at little to no extra cost to taxpayers.

Existing State Programs

California and Oregon are national leaders when it comes to clean fuel programs. California’s Low Carbon Fuel Standard (LCFS) was introduced by California’s Air Resources Board (CARB) over a decade ago with the express purpose of lowering the carbon intensity of transportation fuels in the state. The LCFS effectively reduces petroleum dependence, creates a market for clean transportation technology, and stimulates the production of clean fuels. The program has been very successful in helping to advance the production of a wide range of clean fuels while keeping consumer costs low and fostering clean fuel investments. Central to the success of the LCFS is the built-in flexibility and certainty it provides to market participants. These beneficial characteristics are byproducts of the program’s technology-agnostic approach and cost containment mechanisms that provide long-term predictability.

Oregon adopted a similar clean fuel program that has been very successful in advancing clean fuel usage, keeping consumer costs low, and fostering local job creation. Similar to California, the Oregon Clean Fuels Program adopts a technology-neutral approach that encourages a wide array of clean fuel solutions from diverse feedstocks. Oregon’s program, like California, is particularly transparent regarding the life cycle analysis, modeling, and methodology it employs. Despite small discrepancies, both programs have provided an excellent framework for other states to follow. For instance, the clean fuels programs have spurred the development of the Pacific Coast Collaborative, which is a regional agreement between CA, OR, WA, and British Columbia to strategically align policies to reduce GHG emissions and promote clean energy production. The State of Washington has adopted a Clean Fuel Standard, effective January 2023, that is very similar to California’s and Oregon’s programs and will require fuel suppliers to gradually reduce the carbon intensity of transportation fuels to 20% below 2017 levels by 2034.

When developing their own clean fuels programs, other states should consider following the example set by Oregon’s and California’s programs. Their success indicates that a technology-agnostic approach is best because it gives companies the flexibility to develop clean energy solutions that are most suitable for their region’s ecosystem and economy. Another key takeaway from existing state programs is the importance of setting clear, predictable carbon intensity reduction requirements and developing a consistent life cycle methodology; the carbon intensity values for each fuel pathway are the most critical part of any clean fuel program and sets accountability standards.

Aspiring Clean Fuel Programs

On the East Coast, a bill was introduced in New York State this session that would establish a state clean fuels program. The bill was intended to reduce carbon intensity from the on-road transportation sector by 20% by 2031, with further reductions to be implemented based upon technological advances. The bill received national attention and was recently passed by the NY Senate.

Presently, the New York State Energy Research and Development Authority (NYSERDA) is hosting a series of webinars to gather feedback on a potential Cap-and-Invest program. The program would set an annual limit on the amount of greenhouse gas emitted in New York and require large-scale greenhouse gas emitters, specifically from the heating and transportation fuel sectors, to purchase allowances for the emissions associated with their activities. If implemented, the program would incentivize businesses to transition to low-carbon alternatives. Revenue from the program would go toward projects that drive emissions reductions and maintain New York’s competitiveness in the race to decarbonization.

Additional states are considering clean fuel standards, including Colorado, Delaware, Iowa, Kansas, Missouri, Nebraska, South Dakota and Virginia. A few states introduced bills that would establish clean transportation standards requiring the carbon intensity of transportation fuels to decrease by a specified percentage over the coming decade. Several other states introduced bills that would require state public utilities to increase the amount of renewable energy in their portfolios. In Virginia, lawmakers passed the Virginia Power Innovation Program that establishes a grant program to fund grid interconnect costs and other hurdles, which would expedite renewable energy adoption and assist utilities in expanding their renewable energy output.

State legislatures across the U.S. are showing growing concern for climate change, and their interest in creating clean fuel programs and legislation that incentivizes the adoption of low-carbon fuels is quite telling…they see these programs as a valuable approach to our decarbonization efforts. As the United States moves forward with plans to meet our climate goals, California and Oregon provide excellent examples for other states to follow when formulating and implementing their own programs. The economic and environmental benefits of investing in renewable energy are paramount, and states should continue looking for innovative ways to incentivize clean, home-grown energy. Clean fuel programs play a salient role in decarbonization efforts, and we applaud statehouses around the country that are working to bring them to fruition. Next up…a federal clean fuel program that advances well beyond the existing Renewable Fuel Standard.

[email protected] Spangler Thomas