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.
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.
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.
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.