Use of Natural Gas in Industrial Processes
In some industrial processes, natural gas is used but not combusted or released into the atmosphere. As an example, natural gas is used as a feedstock in fertilizer manufacturing and natural gas is also used in pharmaceutical production. In these applications, natural gas is used without combustion or release, and the natural gas does not contribute to GHG emissions. No parties support including non-combustion uses which do not lead to GHG emissions within the natural gas sector. SDG&E/SoCalGas and IP believe the vast majority of the sources in this category would qualify as large point sources subject to regulation by ARB. IP also believes there are limitations in the availability of data for these sources. El Paso/Mojave believe that a voluntary reduction program should be implemented to address non-combustion uses.
Before we determine a recommendation for regulating GHG emissions in the natural gas sector, it is useful to define the scope of the sector to which the regulations would apply. We note that ARB did not identify natural gas as a separate sector in its inventory of GHG emissions for California. Instead, the inventory includes natural gas-related emissions in the electricity, residential, commercial, industrial, and transportation categories, depending on the type of entity that uses the natural gas.
Our inquiry began by considering all potential sources of natural gas GHG emissions, whether from combustion or from direct release of methane into the atmosphere. However, certain portions of these natural gas emissions will be regulated based on ARB's definition of other sectors of the economy with GHG emissions. Therefore, for purposes of today's decision, we define the natural gas sector as the remainder of natural gas combustion emissions and direct emissions, excluding those sources that we anticipate ARB will address through regulations for other sectors.
ARB proposes to regulate emissions from large end users of natural gas (with emissions of 25,000 or more metric tons of CO2e per year) as individual industrial sources. Therefore, we propose that they not be included in the natural gas sector. Should ARB lower the threshold for reporting and/or regulation of industrial point sources, the additional entities captured under that regulation would not be considered part of the natural gas sector for purposes of regulating GHG emissions from the natural gas sector.
In addition, natural gas that is used to generate electricity that is delivered to the California grid should not be considered part of the natural gas sector, because it would be regulated under the deliverer approach that we recommend for the electricity sector.
The proposed decision recommended that natural gas used by CHP facilities to generate electricity delivered to California grid be regulated as part of the electricity sector, with other natural gas used by CHP facilities considered either as point sources or within the natural gas sector, depending on the size of CHP operations. However, comments on the proposed decision (chiefly from EPUC/CAC) cause us to question whether all natural gas used by CHP facilities should be treated instead as a separate sector, because of concerns about potential negative unintended consequences of splitting CHP natural gas usage between electricity, natural gas, and industrial sectors. We defer this issue at this time, in order to conduct further analysis of CHP options and potential in the next portion of this proceeding. We plan to make comprehensive recommendations to ARB at a later date regarding the regulation of GHG emissions from CHP facilities. In the case of distributed generation fueled by natural gas, to the extent that the electricity is used on site and not delivered to the electricity grid, natural gas used for that purpose would be considered part of the natural gas sector.
Some parties argue that emissions from natural gas vehicles should be excluded from the natural gas sector, by instead including them in the transportation sector. We do not make a recommendation at this time, but will work with ARB as it determines the appropriate regulatory treatment for GHG emissions from natural gas and other alternative-fuel vehicles.
Finally, some natural gas is used for non-combustion purposes in industrial processes. The record is very limited regarding the extent of such uses. Because non-combustion uses of natural gas generate no emissions, it would be appropriate to exclude them from the natural gas sector for purposes of GHG regulations. However, since the natural gas utilities currently do not collect information on non-combustion uses and quantities, further analysis may be needed to determine whether it would be feasible to exclude these non-combustion uses from GHG regulations, for example, if emission caps were applied to the natural gas utilities.
With exclusion of CHP at this time, and of natural gas uses that do not produce GHG emissions or are likely to be regulated separately by ARB, there are four main sources of emissions in the natural gas sector:
1) End-user combustion sites with annual emissions below the ARB threshold for separate industrial point-source regulation,
2) Natural gas infrastructure used in the provision of storage, transportation, and distribution of natural gas to end users,
3) Fugitive emissions, and
4) Emissions from distributed generation facilities for the portion of electricity that is used on site.
For purposes of assessing GHG regulatory options, we include these four uses of natural gas in the definition of the natural gas sector.
4.3. Types of GHG Regulation
As in the electricity sector, we consider two main options for reducing GHG emissions from the natural gas sector under the AB 32 framework. These are direct/mandatory emission reduction measures or programs and a market-based cap-and-trade system.
4.3.1. Position of the Parties
4.3.1.1. Increased Reliance on Direct Emission Reduction Measures
Many parties favor increased reliance on direct emission reduction measures to achieve GHG reductions for smaller end-users including PG&E, SDG&E/SoCalGas, DRA, NRDC/UCS Kern, Southwest, El Paso, GPI, Wild Goose, and CMTA. In general, these parties support increased building and appliance standards and expansion of energy efficiency programs mandated by the Public Utilities Commission. They have differing opinions, however, regarding the use of direct emission reduction measures to reduce GHG emissions from infrastructure and fugitive sources.
Supporters of increased reliance on direct emission reduction measures assert that this approach is a better GHG reduction strategy than cap-and-trade for small end users of natural gas.
AGA believes that energy efficiency programs can be expanded to achieve additional GHG emission reductions from residential and small commercial customers. Among other reasons that it gives for not adopting a cap-and-trade system for the natural gas sector, AGA asserts that, unlike electricity retail service providers, gas utilities have virtually no availability to substitute low carbon alternatives for natural gas other than some limited potential for biogas.
Many supporters of reliance on direct measures assert that there would be little incremental benefit to a market-based system for the natural gas sector, beyond the benefits of existing programs to improve end-user efficiency. Southwest Gas and PG&E believe that a cap-and-trade system would be more costly than direct emission reduction measures. Supporters submit that including large numbers of individuals and small end users of natural gas in a cap-and-trade system would be administratively burdensome and too costly. PG&E and SDG&E/SoCalGas assert that they have limited control over end-user efficiency, and question the effectiveness of a cap-and-trade system that relies on gas utilities as the point of regulation for small end users. El Paso, Mojave, and SDG&E/SoCalGas argue that price signals would be difficult to pass through to customers if gas utilities act as the point of regulation in a cap-and-trade system.
DRA argues that smaller end-use customers should not be included in a cap-and-trade system until the price of emission allowances is stabilized and the overall price impacts to consumers of a cap-and-trade program are better understood.
While generally supporting market-based solutions, GPI and CMTA support direct emission reduction measures, stating that a market-based approach would be impractical due to the limited substitutes for natural gas in its principal end uses. CMTA, in particular, is concerned that a cap-and-trade system imposed on the natural gas sector would adversely affect California industrial and manufacturing end users because these entities may face higher prices for fuel and/or would have to limit their production to comply with a cap-and-trade system. Several supporters assert that a programmatic approach would avoid creating incentives for fuel switching from natural gas to electricity. CMTA notes that many thermal processes in manufacturing use natural gas directly because of efficiencies, and concludes that any regulations that discourage the use of natural gas would likely result in greater GHG emissions. Several parties acknowledge that biogas holds some potential, but submit that there are technological and environmental obstacles to be overcome before this resource can be commercialized.
Some parties argue that a cap on sources that use natural gas could cause economic dislocations. Several infrastructure providers (interstate pipelines and storage utilities) assert that a cap on emissions could reduce the availability of natural gas supplies. CMTA believes that a cap applied at the local distribution company level could result in a utility allocating or curtailing natural gas supplies among its customers. CMTA and Wild Goose also argue that a cap could result in leakage if manufacturers move their operations to other jurisdictions.
CALSEIA/SRCC recommend that in addition to energy efficiency programs, solar hot water heaters be considered as a GHG emission reduction measure. They recommend using both market-based and programmatic approaches to promote installation of solar hot water heating equipment by residential and commercial customers. CALSEIA/SRCC recommend mandating the use of solar hot water heaters for new residential and commercial construction and renovations, and using incentives to induce customers with existing natural gas fired hot water heaters to convert to solar hot water heaters.
Finally, many parties argue that the natural gas sector does not need to be regulated in the same manner as the electricity sector, including NRDC/UCS, PG&E, SCE, and SDG&E/SoCalGas.
Some parties, including Environmental Council, IP, SMUD, SCE, NRDC/UCS, and GPI, support a cap-and-trade system as the approach most likely to identify cost-effective emissions reduction options for the natural gas sector, or between this and other sectors. IP agrees with the Market Advisory Committee report that a cap-and-trade program would, as a general matter, allow California to reach emissions targets at lower cost. El Paso and Mojave argue that market-based programs would achieve environmental goals with less cost to society, would provide greater flexibility and equity for the regulated sectors, and would be easier to regulate. SMUD recommends a cap-and-trade approach on the basis that it would be more likely to encourage innovation in the covered sectors.
Several parties argue that including natural gas within a broader cap-and-trade system would lead to a more-liquid emissions trading market and better price signals. SCE, SMUD, and IP argue that a broad-based, multi-sector cap-and-trade system would allow entities responsible for compliance in individual sectors to optimize their emissions reductions across all available emissions reduction options, not just from within their own sectors. NRDC/UCS point out that excluding a single sector from an economy wide cap-and-trade system would make it more difficult to account for consumption shifts between sectors. IP also argues that if emissions from other sectors are included in an economy wide cap-and-trade system, it would be equitable to include emissions from the natural gas sector as well.
Some parties argue for trading of emissions allowances between natural gas and other sectors with the potential for competition for certain end uses. SMUD believes that a cap-and-trade system would allow for cost-effective adjustments between sectors to allow such activities as electrifying ports or the use of heat pumps for residential heating and cooling. GPI argues that competition among fuel sources is likely to become more complicated in the future with the introduction of plug-in hybrid and electric vehicles. They advocate that all fuels be included in a multi-sector GHG emissions cap-and-trade system.
Wild Goose argues that cap-and-trade is preferable to programmatic measures that could place restrictions on the way that storage facilities operate their businesses. It fears that restrictions could control "how many hours compressors could run or what type of equipment can be used," and would limit the availability of natural gas supplies in California.
