After Pushback, California Delays Extension of Rewards for Oil and Gas Companies

California directs billions of dollars to oil and gas companies that produce fuels made from “renewable” sources, such as vegetable oil and dairy cow manure. It does this by setting the rules of a pollution-trading market. Now, with the market rules up for an extension, opponents are lobbying to change them. 

The state agency that oversees the market delayed a hearing where it was expected to greenlight a plan to extend the rewards. The California Air Resources Board (CARB) postponed it from March to a later, unspecified date. 

The conflict highlights a major rift in climate policy: Whether fossil fuel companies, whose products have caused the climate crisis, should be eligible for publicly-sourced funds meant to eliminate greenhouse gas emissions.
 

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California encourages the production of “renewable hydrocarbons” as part of the state’s goal to cut greenhouse gas emissions. California is committed to cutting those emissions to half the level of 1990 by 2030, and mostly eliminate them by 2045. The agency says incentives for cleaner fuels like biofuels, as well as hydrogen and electricity, will help California reduce pollution by the equivalent of 124 million gasoline-fueled cars driven for a year.

A spokesperson for CARB said that its proposed rules would end California’s reliance on “combustion technology over the coming decades.”

In an emailed notice sent to stakeholders, CARB said the delay would “enable additional discussion” about how much it should cap overall emissions from the transportation sector and “guardrails” on biofuels. 

Environmentalists have said the incentives, which they liken to subsidies, are a kind of life support for an industry that should go out of existence. Oil and gas companies produce biofuels through processes close to those for refining fossil fuels. With the incentives, the companies are able to do so profitably. Meanwhile, opponents say, the dairy farms and refineries used for biofuels continue to pollute the communities surrounding them. 

They say more money should instead be directed toward forms of energy use other than those based on combusting hydrocarbons, such as zero emissions public transit and electric trucks. They hope to persuade agency board members to redesign the Low Carbon Fuel Standard (LCFS) program to accomplish this. The LCFS was created to cut emissions from transportation, the largest source of greenhouse gas emissions in California. 

“This is a litmus test” for California’s commitment to a society powered by electricity generated from solar, wind and batteries, said Sasan Saadat, a policy researcher at Earthjustice who opposes the subsidies.

The LCFS created a carbon credit trading system in California. Fossil fuel producers incur “deficits” for each gallon of gasoline or diesel they sell. To balance those deficits, they must purchase credits. One credit is good for one ton of carbon dioxide emissions. Oil refiners offset their emissions by buying credits—adding a charge to the price at the pump in order to do so. Or they can generate credits themselves, by producing biofuels.  

When the LCFS took effect in 2011, petroleum and agriculture industry groups unsuccessfully sued to stop the program, arguing it discriminated against ethanol and petroleum producers outside of California. Since then, those agriculture and petroleum interests have lobbied for favorable rules that allow biofuels to receive a very high volume of credits. 

Companies making and selling renewable diesel and dairy gas generated almost three-quarters of all LCFS credits from July 2022 to September 2023, with a value of roughly $1.7 billion based on average credit prices. A smaller number was generated by utilities that supply electricity for zero emissions vehicles. 

The United Nations says governments must quickly stop giving subsidies to coal, oil and gas in order to avoid worsening heat waves, drenching rains and other effects of climate change. But directing money toward companies producing biofuels could also be “problematic,” said Benjamin Preston, a senior policy researcher at the RAND Corporation who worked for the Biden administration and co-authored the 2022 U.N. International Panel on Climate Change report. California is “helping to perpetuate the success of those industries when many would argue we should be doing the opposite,” Preston said.

Opponents of the subsidies say CARB is underestimating emissions from biofuels. A recent analysis of satellite data by Food and Water Watch identified plumes of methane emitted from a dozen dairies, even though they are supposed to be capturing the potent greenhouse gas. And diverting soybean crops to produce renewable diesel, instead of food, may lead agribusinesses to raze rainforests in order to plant food crops. Scientists have warned that there is uncertainty about whether this will increase emissions, meriting limits on plant-based fuels.

Biofuels also emit air pollutants, such as lung-damaging nitrogen oxides that harm residents living near refineries and large dairy farms. In early February, members of CARB’s environmental justice advisory committee, an independent group chosen by CARB, stated at a meeting that the proposed rules did not reflect concerns they shared over the last year. 

Committee member Luis Olmedo, who runs an Imperial Valley farmworker and environmental advocacy group, said that instead of subsidies such as assisting electric car purchases for low-income residents, CARB seems to “continue to create programs that somehow continue to incentivize the [oil and gas] industry.”

Industry Lobbied Successfully For Continued Subsidies 

Four major oil companies — Valero, Chevron, Marathon and Phillips 66 — are on track to produce 3 billion gallons of plant-based diesel and aviation fuels a year. Much of it will likely be sold in California, for which they will generate credits.  

Farmers in the U.S. are increasingly growing soybeans for fuel production rather than food. To meet global demand for edible vegetable oil, farmers in places including Brazil cut forests and disturb soil to plant soybeans. When that happens, the land releases carbon dioxide. Countries including China and India that rely on soybean oil for food may also start importing more palm oil, the production of which is a major cause of deforestation.  

There is “a strong consensus within the environmental community” that a limit on credits for crop vegetable oils is necessary, said Colin Murphy, deputy director of the Policy Institute for Energy, Environment, and the Economy at UC Davis. He co-authored a study that forecasts plant diesel demand rising due to federal and state subsidies, increasing deforestation risks. 

CARB staff previously said it would consider a credit limit for fuels made from fresh vegetable oil (the limit would not have applied to used cooking oil). Oil companies lobbied against it. Marathon said it would slow innovation in farming methods that lower emissions. Chevron said the proposal was “counterproductive” because the LCFS already accounts for climate impacts of crop-based fuels. The Western States Petroleum Association, which represents companies including Valero and Phillips 66, said the benefits of restricting crop-based fuels are not supported by data.

Rather than limiting credits, the agency now proposes that refiners track vegetable oil supplies to ensure it is not sourced from farming that causes deforestation. That was a “surprise,” said Jeremy Martin, a senior scientist at the Union of Concerned Scientists, because that idea had not come up in past public discussions. Tracking soybean oil produced for fuel would not stop deforestation because it does not encompass the additional crops grown for food. 

Groups also take issue with CARB’s approach to companies that produce gas from cow manure. The environmental justice committee had recommended ending the rewards this year. Instead the agency proposes extending them to the 2040s and as long as 2059. 

That is more than even some of the agency’s board members suggested was appropriate. “We regulate every major source of methane,” said board member Gideon Kracov at a meeting last September, “but not the dairies?” Krakov added he would “support” a phaseout of rewards and instead force dairies to cut methane. He declined to comment when reached by email. 

In a letter to regulators in September, the Coalition for Natural Gas wrote that “many” renewable gas projects depended on LCFS revenues “to be built and operated.” It requested indefinite subsidies. The letter was signed by 76 industry representatives, including two who formerly held senior roles at CARB, Sam Wade and Floyd Vergara.

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