The renewable diesel revolution: How California is reshaping world oil markets

Despite all the attention on the new Biden Administration’s efforts to combat climate change, one state, California, is reshaping the world’s oil markets through its progressive climate policies.

Most dramatic has been the state’s shift to renewable diesel (RD). Unlike its green cousin, biodiesel, RD is molecularly identical to conventional ultra-low-sulfur-diesel (ULSD), making it a “drop-in” fuel. No modifications to engines, gas stations or pipelines are needed. It can be mixed with conventional diesel seamlessly. It is made from bio feedstock such as vegetable and animal oils such as canola, soybean, and corn oil, used cooking oil, tallow, and even municipal solid waste; the exact recipe varies. Current production methods reduce carbon emissions 50 to 85% compared to conventional diesel. RD burns cleaner than conventional diesel, producing 30% less particulates. In addition to less air pollution, this also means less wear on engines.

A 20% RD mixture is called R-20. The ferry boats in San Francisco Bay are running on R-100. UPS, Amazon Prime, and Cherokee Freight Line trucks are now switching to RD, at least in California where the fuel is available. Internationally, cargo vessels with diesel-electric engines are adopting the fuel.

Many cities in California – Oakland, San Francisco, Sacramento, San Diego – now exclusively use RD in city-owned heavy-duty trucks, buses and equipment.

Renewable diesel already accounts for 20% of California’s diesel supply and is projected to grow well beyond 50% by 2024, expanding to include jet fuel, where it is called “sustainable jet fuel”. Renewable propane is also produced during the refining process. Renewable gasoline, unfortunately, is still not economically feasible.

California’s RD comes from a variety of sources. It is imported from Singapore (Neste) and North Dakota. At the latter, the Marathon refinery in Dickinson, North Dakota, originally built to refine fracked Bakken oil, has converted to taking soybeans to make RD for the California market.

The California Energy Commission has identified enough proposed RD projects to supply all of the state’s needs in the future.

Increasingly, refineries in California are ramping up to produce RD from local feedstock. Two of the state’s largest refineries, Phillips 66 and Marathon in the Bay Area, are currently closed, using the Covid downturn to retrofit their operations into making RD. They will each produce 20% of the state’s diesel in the form of RD; they will completely cease using crude oil as an input. Other smaller refinery conversions are underway in southern California.

The California Energy Commission (CEC) projects that the state’s overall oil use, already down 20% due to the pandemic, will scarcely rebound and then continue declining in the future.

Washington and Oregon are taking steps to increase RD supply in their states. (Phillips 66 had originally sought to convert their Cherry Point refinery near Bellingham, WA, to RD production but ran into permitting problems. They are now trying again.)

This is all being driven by a combination of federal and state laws. The federal government already offers a $1/gallon tax credit for conversion to renewable fuels. Since the credit is bankable and tradeable, it’s essentially real cash. The program is set to expire at the end of 2022 but is likely to be extended with bipartisan support.

At the state level, California’s ever-lowering cap of tradeable permits under the AB32 cap-and-trade program is finally biting hard enough to change incentives. Carbon credits are now yielding about 30 cents/gallon and is likely to rise. Because this comes from traded permits, it is not a direct payment from government funds.

Combining federal and state incentives, a refinery converting from conventional to renewable diesel reaps an additional $1.30/gallon. If the Phillips 66 project goes to its full 800 million gallons/year, that’s at least a billion dollars each year in subsidies – from tax credits and tradable carbon credit sales.

California has already reduced greenhouse gas emissions 15-20% since the peak in 2004. This has been achieved during a period of significant economic and population growth; emissions per gross domestic product are down about 45%. Because the transportation sector has been among the most challenging for reducing emissions, the RD revolution will go a long way to helping California reach net zero by 2050. The Biden Administration is using California’s carbon reduction measures as a model for the nation.

The RD revolution is a transition to more dramatic decreases in oil use due to electrification of the vehicle fleet.

Modern climate change is 10x faster than historic global warming mass extinction events

There have been several mass extinction events in the history of the earth, most of them caused by global warming due to “sudden” releases of carbon into the atmosphere, and it only took an increase of 4 to 5 degrees Celsius to cause the cataclysm. The current carbon emissions rate is 10 to 100x faster than during those events. And we’re already a quarter of the way there in terms of warming.

CLICK TO ENLARGEemissions rate

The current warming trends, RCP 8.5 and RCP 4.5, refer to estimates of carbon emissions under high and moderately low projections by the International Panel on Climate Change. The straight lines on the extinction events are approximate; there may have been episodic spurts and stops as different thresholds, positive feedback loops, and other natural events occurred. But these lines connect the dots we have.

The earth is 4.5 billion years old. Land animals with backbones didn’t really evolve until 300 million years ago (mya), so we’ll start there.

The most massive mass extinction event in the history of the earth was the End-Permian extinction event (also known as the Permian-Triassic extinction event or the Great Dying) 252 mya. It was caused by a massive release of carbon. The equatorial regions, both on land and in the ocean, were too hot for most life forms, including plants. The cause of the warming event is debated, but was most likely due to a series of volcanic eruptions from the Siberian Traps that lasted two million years. The extinction occurred during an initial 60,000 year period, which is “sudden” in geologic terms. Recovery of the ecosystem, basically a whole new evolutionary period to create new animals, took 2 to 10 million years.

The End-Triassic extinction event came next, 201 mya. It was also associated with volcanic activity and the massive release of carbon, this time from the mid-Atlantic ridge. It probably triggered a positive feedback loop, with melting permafrost releasing tons of methane. The extinction period, affecting plants and animals, lasted about 10,000 years and paved the way for the rise of the dinosaurs.

The dinosaurs dominated after that, until all but the avian dinosaurs (the ones that evolved into birds) were wiped out by another mass extinction event 66 mya. This may have been caused by a comet or asteroid striking the earth, or by extreme volcanic activity creating global warming similar to the other events here (8 degrees Celsius over 40,000 years). This one is not shown on the graph.

Finally, there was the Paleocene-Eocene Thermal Maximum (PETM) and associated extinction event 56 mya. Likely caused by a combination of carbon and methane releases, this global warming event is the most recent, offers the most evidence and information, and is most analogous to climate change today. The continents were in roughly similar positions as today. The warming, 5 degrees Celsius in about 5,000 years, wiped out much benthic marine life, pushed the tropics to Wyoming and alligators to the Arctic Circle, warmed oceans to 97 degrees, and made the equatorial regions too hot for many species. The PETM is well-studied, with hundreds of papers available on-line, plus quite a bit of media coverage.

The high temperatures lasted for about 20,000 years. Eventually, the Arctic Ocean became covered with algae. These algae slowly absorbed CO2. When it died, it sank, taking the carbon with it to the bottom of the sea, lowering the carbon in the atmosphere and cooling the earth back to normal. This process took 200,000 years.

Climate change during these past events, considered rapid in geologic time, would have scarcely been noticed by animals on the ground. Animals didn’t go extinct by dropping dead; they just had a lower reproductive rate such that their populations slowly declined until none were left. Also, they evolved. In fact, there was a pulse of evolution during the PETM, producing, among other things, the first primates.

The current warming is 10 times faster than during the PETM. It is noticeable within the lifespan of an individual animal. Adaption thru evolution is not an option. Scientists mince no words:

“We conclude that, given currently available records, the present anthropogenic carbon release rate is unprecedented during the past 66 million years. We suggest that such a ‘no-analogue’ state represents a fundamental challenge in constraining future climate projections. Also, future ecosystem disruptions are likely to exceed the relatively limited extinctions observed at the PETM.”  – Zeebe (2016)

The PETM raised average earth surface temperatures 5 C. We’re at 1.1 C now, with probably up to 2 C already built into the system, meaning we’ll reach that even if we stop all carbon emissions tomorrow. We’re likely to reach 2 C even if we dramatically reduce emissions and successfully implement Direct Air Capture of ambient CO2 in the atmosphere. Assuming business as usual, we may reach PETM levels in 140 years.

Note: See hyperlinks for sources.