California refineries face possible free-rider problem under new fuel standard

Concerns have arisen among California oil refineries that the state's new Low Carbon Fuel Standard could lead to a free-rider problem, in which some refineries are forced to accept the cost of other companies' non-compliance, according to Platts.

The LCFS requires that fuel in the state reduce its carbon intensity by 10 percent by the end of the decade. However, the rule imposes this requirement on an industry level, allowing some refineries to produce carbon-intensive fuels while passing on the costs to all refineries in the form of industry-wide penalties.

"A refiner may opt to purchase lower CI (carbon intensity) crude oil at premium prices in order to avoid generating any deficits," Melinda Hicks from Kern Oil & Refining wrote to the California Air Resources Board "However, as currently proposed, if the industry average exceeds the baseline target, this refiner would still incur deficits."

Platts notes that CARB has recently proposed new rules that would take individual performance into account, but the details on this approach remain hazy.

Meanwhile, Bloomberg reports difficulties in the state's oil refining plants have led fuel prices to record-highs, enough so to force many gas stations to shut down.

Oil refining in the U.S. is detailed at PennEnergy's Research area.


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