Subgroup 6: Indirect Effects of Other Fuels Draft Recommendations and Issues for Consideration Presented to the LCFS Expert Workgroup Indirect Effects November 5, OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 1

Subgroup 6 Membership Blake Simmons, Sandia (Subgroup Co-Chair) Bob Larson, U.S. EPA (Subgroup Co-Chair) Phil Heirigs, Chevron Jesper Kløverpris, Novozymes Seth Meyer, University of Missouri Wally Tyner, Purdue University Paul Wuebben, SCAQMD Invited External Experts Brooke Coleman, New Fuels Alliance Bjorn Pieprzyk, Energy Research Architecture 2 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE --

A Note on Perspective Management Many of the topics presented do not have unanimous agreement among all members of the SWG, and some are deeply contested In order to retain a balanced, professional perspective that recognizes these disagreements they are presented as “Perspective #1” and “Perspective #2” in the report Wherever possible, we have used the recommendations as suggestions for ARB to develop solutions that resolve these differences in perspective 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 3

SWG General Principles  The LCFS should carbon score fuels symmetrically in terms of their evaluation of direct and indirect effects, thereby creating a level playing field for all fuel types  The LCFS should use average and marginal data across different fuel pathways in a consistent manner, and when data and models are not available to do so they should fund research activities to address the gaps  It is recognized that there may be data gaps in the attribution of indirect effects of fuels that should be addressed by ARB  ARB or related entity should support an analytical effort, including but not limited to economic modeling, to try to estimate what petroleum fuel is on the “resource margin” in different reasonable scenarios (e.g. reference, high oil price, low oil price)  ARB or related entity should support an analytical effort, including but not limited to economic modeling, to determine if increased biofuel production has a significant impact on marginal refining of fossil fuels in different reasonable scenarios (e.g. reference, high oil price, low oil price)  ARB or related entity should support an analytical effort, including but not limited to economic modeling, to determine the type of electricity generation that is on the “resource margin” in targeted scenarios (e.g. reference, high oil price, low oil price) and as a function of the major fuel types that would rely on electricity or otherwise influence power markets (electric drive, hydrogen and natural gas) 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 4

Immediate Recommendation  ARB should conduct an analysis, including but not limited to economic modeling, of the marginal barrel of oil. The magnitude of the change and the timeframe under consideration should be consistent with that used for other fuels. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 5

Short-Term Recommendations  ARB should conduct an analysis, including but not limited to economic modeling, of the marginal supply of natural gas, including but not limited to the GHG emissions from newly developed extraction techniques (e.g., hydraulic fracturing). The magnitude of the change and the timeframe under consideration should be consistent with that used for other fuels.  ARB should conduct an analysis, including but not limited to economic modeling, of the potential market-mediated effect on electric power markets of using increased quantities of natural gas in the transportation sector. The magnitude of the change and the timeframe under consideration should be consistent with that used for other fuels.  ARB should conduct a reevaluation of marginal electricity, stemming from the work conducted by McCarthy et al. The magnitude of the change and the timeframe under consideration should be consistent with that used for other fuels.  ARB should conduct an analysis, including but not limited to economic modeling, of the impact of petroleum substitutes on refinery operations. The analysis should include, but not be limited to, the impact on major refining inputs and co-products. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 6

Long-Term Recommendations  Conduct an analysis of the substitution of fossil fuels with biofuels. The analysis should include all the factors influencing the substitution process in the short- medium and long term (e.g. market power of the OPEC Cartel, correlation between production costs and carbon intensity, predictions of conventional and unconventional fuels)  ARB should initiate a preliminary scoping analysis of the potential direct and indirect effects of upstream heavy metal mining and processing. If potentially significant effects are identified, ARB should conduct an analysis of these effects, prioritizing the effects identified in the scoping analysis. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 7