White paper

Development and analysis of a durable low-carbon fuel investment policy for California

In order to reduce the carbon footprint of California’s transport sector and meet the state’s ambitious climate goals, California must transition away from petroleum and first-generation biofuels towards ultralow-carbon fuels with a carbon intensity of 30 grams of carbon dioxide equivalent per megajoule (gCO2e/MJ) or less. This report analyzes the market and political uncertainty associated with existing fuels policies and provides a policy proposal for a contract for difference (CfD) approach to support ultralow-carbon fuel production in California.

Despite the technical feasibility of a variety of ultra-low carbon fuels production pathways, economic and political barriers hamper their commercialization and widespread adoption. Policy uncertainty and fluctuating credit values have reduced the effective support seen by investors. To combat this effect, a CfD policy would mitigate investor uncertainty by implementing a guaranteed 10-year price floor for qualifying ultra-low carbon fuel producers. A strike price, or price floor, is established by means of a reverse auction: projects competitively bid to set the lowest price floor for their fuel production. The winning bidder then enters a contract to secure a 10-year strike price for a set amount of production.

This report assesses a CfD policy supported by either one-time or recurring funding from California’s greenhouse gas reduction fund (GGRF) and then evaluates its potential to support the production of ultralow-carbon fuels. We assess the policy’s impact through a scenario analysis that estimates the CfD program costs and supported fuel production under a variety of policy scenarios.

A CfD approach would provide cost-effective support by leveraging other, existing incentives, and could act as a sort of insurance program for ultralow-carbon fuel investment. We find that the CfD policy could accrue funding during years of high policy certainty and low payouts to contracted producers and disburse funding during years where market and policy support is lacking. Our scenario analysis suggests that the program could grow from smaller facilities at the outset towards full-scale, commercial facilities by 2030. A baseline, business-as-usual scenario with annual funding indicates that California could expand from supporting 4 million gasoline gallon-equivalents (GGE) of cellulosic ethanol in the first auction to nearly 50 million GGE of annual production by the tenth year of the program.

Alternative fuels