Is a feedstock crackdown coming to California’s LCFS?

California’s Low Carbon Fuel Standard has been in effect for a decade now and the program has been a very effective way for the state to reduce carbon emissions—with biobased diesel providing the greatest climate benefits. Through much of that time, the state Air Resources Board (CARB) oversight of registered fuels’ carbon intensity (CI), which is largely influenced by feedstock, has been limited. But in the last rulemaking in 2018, CARB made a number of amendments to focus and strengthen the regulation, implementation and certainty of the carbon credit market, said Floyd Vergara, director of state governmental affairs for the National Biodiesel Board. Vergara spent three decades at CARB before joining NBB.

“The LCFS relies on accurate data monitoring, reporting, and verification to support implementation and tracking of effectiveness,” CARB’s website states. “In 2018, the board approved amendments to add third-party verification requirements to the LCFS to ensure data completeness, accuracy, and conformance with the regulation—consistent with the verification programs under California’s Cap-and-Trade Program and international best practices. The LCFS verification program, under CARB oversight, provides confidence and reliability in reported data for stakeholders, market participants, and the public.”

One area on which changes focus is feedstock verification. “Before then, fuel pathways were approved by engineers and scientists looking at life cycle analyses and using their best engineering judgement to prove CI scores,” Vergara said.

Until recently, efforts to verify what was actually happening on the ground have been described by some as less than exhaustive. “Particularly on critical points that move the needle on carbon intensity,” Vergara said, “such as energy and mass balances, product mixing, and allocations of multiple feedstocks.”

The lower a fuel’s CI, the more value it can provide via the LCFS carbon-credit system. Simply put, high-CI fuels cost money while low-CI fuels generate it.

Vergara

Vergara told Biobased Diesel Daily that CARB staff identified a number of fuels—certain biofuels in particular, such as biodiesel and renewable diesel from used cooking oil (UCO) or renewable natural gas (RNG)—for which the CI was “so low that the [consensus] was there is potential for folks to game the system.” RNG, for instance, can have a negative CI score.

The purpose of verification is to be able to trace the CI all way through the supply chain to the point of origin, so fuels that claim to have a CI of 15, for instance, “which is very low,” can actually be confirmed as having that CI, Vergara said.

“The verification process looks at where the feedstock is grown or, in the case of animal fats and UCO, where it’s collected, and then follows it through the chain—who’s

collecting it, where it goes, how it’s processed, what are the inputs, and then blending into the final product,” Vergara said. “It looks complicated, but it’s really just being able to trace the origin to confirm the CI is what [the applicant] claims it is.”

The process consists of an initial verification. “CARB calls this validation,” Vergara said. Once a CI pathway is approved, the producer hires a verification body to perform an initial assessment. An onsite audit or “desk review” is generally sufficient, Vergara explained. This looks at paperwork and engineering analyses, and the CI’s most dependent variables. Then an initial confirmation may be given stating that the CI appears to be what is claimed.

From there, the producer is required to have a similar process performed annually.

“This also involves an onsite audit, or a desk review, or a combination of the two,” Vergara said, adding that the coronavirus pandemic has limited onsite audits. Now that the health crisis appears to be waning in the U.S., this may ramp up.

Although the annual verification process is just that—yearly—Vergara said there is nothing stopping CARB from pursuing verification beyond once a year at any point, especially if it receives information or reports about a producer or feedstock supplier “doing something under the table.”

Several high-profile fraud cases roiled the biodiesel industry after the second installment of the federal Renewable Fuel Standard was implemented a decade ago. Renewable identification number (RIN) credits for biomass-based diesel were priced high, much like they are today, and anytime there is money to be made, a few bad actors attempt to cash in by gaming the system. Since then, however, quality assurance plans (QAP) for RINs have been installed, making the program much more robust and less easy to game.

But today, in the similar but different world of carbon-based fuel programs like California’s LCFS, there is “incentive” for biofuel producers to use as much low-CI feedstock like UCO as possible, and thus, incentive for suppliers to fulfill that demand.

With UCO in short supply as a result of the pandemic and high percentages of any domestic material that does exist being exported overseas, some cautious market participants suggest there is a greater possibility of an emerging scheme: fake feedstocks.

The idea behind this is that a biofuel producer or feedstock supplier—wittingly or otherwise—can claim what they process or provide is, for instance, UCO when it in fact may be a little bit of UCO blended with a lot of other, higher-CI feedstock such as palm oil.

One way a UCO vendor can protect itself is by using a digital verification system. One such system is Reiter Software’s Cooking Oil Service Tier, or COST. Biobased Diesel Daily spoke with owner Kristof Reiter recently about his company’s COST software.

Reiter suggested that biofuel producers should advise their vendors that they want liability protection against this “new game” through a system in which data is quickly and easily verifiable by a third party.

“COST provides traceability through the supply chain, generating a figurative paper trail that tracks data points—GPS, date, time, volume changes—and stores it in a secure database,” Reiter said. “And it does all that while actually saving you two to four times more than what it costs you in fuel, labor, and vehicle wear and tear.”

The COST system provides a score to the data, providing useful information for internal improvement and a hedge against any external audits. The software tracks the geographic location of where the records were entered, reducing the likelihood of fraud. The volume tracker helps identify how much legitimate oil a supplier actually has to sell, which is then used to check any suspicious volumes that may appear.

“We wanted to build a tool that costs less than it saves the user and simultaneously allows them to grow their businesses without scale-up friction,” Reiter said. “We really wanted UCO collectors to want to use the system to save their own hard-earned money and be more generally successful, not just because it helps them maintain regulatory compliance. In turn, we built this thing from the ground up to be exactly what UCO or grease collectors need to run their operations more efficiently, and we continue to add features to facilitate further client operating efficiency. I can’t even count the hours I’ve spent on the phone with our collectors listening to their challenges and then envisioning game-changing features. You may see people try to copy our product, but when you use our system, you can tell it’s built just for what you are trying to do.”

Reiter said the COST acronym is appropriate because it saves users more money than it costs. To learn more about COST by Reiter Software, click here.

According to Vergara, gaming CARB’s LCFS system in this manner through blending high-CI feedstock with low-CI material and selling or processing it under the guise of the latter is “very unlikely,” he said.

“The universe of participants in the LCFS is relatively closed,” Vergara said. “They have to go through a robust setting just to register in the program. There are already built-in safeguards against fly-by-night operations. From the earliest days, this has been a ‘buyer beware’ program, even with its enhancements.”

Vergara added that interactions between buyers and sellers have evolved into trusted relationships.

“If someone were to buy questionable credits from a supplier they hadn’t dealt with before, then that can’t be seen as a wise business decision,” he said. “Most people have gotten into contracts with others who’ve proven to be reliable partners.”

In its new auditing efforts, CARB is “unlikely to test product onsite,” Vergara said. “Verification will mostly be a paperwork exercise—looking at electronic data and paper documents, and analysis of documentation. I don’t think CARB has the resources to sample product.”

He qualified this by saying there are procedures in the regulations to test for biogenic content in coprocessed renewable diesel.

“The focus of that is to make sure a coprocessed renewable diesel, for example, has the biogenic content claimed,” he said. “But for general fuel pathways, a biodiesel made from UCO, for example, I don’t think it is likely that CARB will actually test the UCO. They’re looking at feedstock transfer documents.”

Vergara said he hasn’t seen anything yet from CARB to suggest there has been a verification issue so far.

“Validation occurred last year, so this is the first year for verification,” he said. “They’re going through a learning process with the honeymoon period for this program. With that said, LCFS is a very important program to CARB and its climate efforts, so they’ll be keeping an eye out.”

He recommends maintaining close contact with CARB staff and documenting any questionable or suspicious activity.

“Never make it look like you’re hiding something,” Vergara told Biobased Diesel Daily. Violations can start with $1,000 fines and misdemeanor charges with up to a year in jail and, depending on intentionality, go as high as a-quarter million dollars and imprisonment, if the circumstances warrant it.

“Since the program started in 2011, there have only been one, maybe two, enforcement actions involving the LCFS—a very small number vs. the number of transactions that have taken place,” Vergara said. “That should give you a sense of how well the program is going. The same thing is expected for the verification part of it.”