The Biofuels Report: highlights from the West Coast Biofuels & LCFS Conference

Fabricio: Hello, and welcome to a new episode of the series, The Biofuels Report, in which we discuss all exciting things biofuels. I'm Fabricio Cardoso. I head our biofuels forward-looking analytics team here at Argus, and I'm here today with my colleague Jacqueline Reigle based in Houston. Hi, Jackie.

Jacqueline: Hi, Fab. Pleasure to be with you here today. Thank you for having me.

Fabricio: Pleasure. Jackie, as we've just come back from the Argus West Coast Biofuels and LCFS conference in Monterey, California, I'd like to get your thoughts about the conference, but also what was your key takeaway in terms of market outlook for 2025?

Jacqueline: Of course. So, my main takeaways from the conference are that actually looking ahead to 2030, the next five years for the biofuels market in North America is probably going to be volatile as the market kind of moves through a period of oversupply, followed by shortages as a lot of market participants are facing a lot of regulatory risk at the federal and state level.

Fabricio: Jackie, your takeaway in terms of market outlook for 2025 and beyond?

Jacqueline: My main takeaways from the conference are that looking ahead to 2030, the next five years for the biofuels market in North America is going to be pretty volatile as the market moves through a period of oversupply, followed by shortages as a lot of participants in the market face regulatory risk at both the federal and state level. Regulatory uncertainty in the U.S., it is creating a difficult environment to invest in, which could tighten supply over the next five years as capacity additions have become slow to come online. In addition, there's increasing scrutiny on feedstocks, and that's creating...following CI targets in many jurisdictions, which will make some feedstock pathways like vegetable oil kind of unfeasible. And so, these open policy questions, that's kind of seen in the credit market's recent price trends to lower prices, along with lower kind of biomass-based diesel margins. But credit prices and margins, they may recover as California adopts more aggressive CI reduction targets and EPA increases biofuel volume obligations next year for 2026 and onward.

Fabricio: Yeah, that's really interesting. There's definitely a lot going on in the markets. Can you also talk about some of the regulatory uncertainties that are underpinning the market over the next few months, please?

Jacqueline: Yeah, of course. So, the complex regulatory landscape is...it's evolving rapidly, particularly with initiatives like the Inflation Reduction Act and California's recent LCFS proposed rulemaking. We're kind of standing at a pivotal moment for the renewable energy market. Many of the tax credits and policy frameworks, including 45Z and California LCFS, they're raising important questions for capital providers, developers, and other participants in the market. And so, there is a need also for more alignment across state and federal biofuel policies. And right now, it's very fragmented. You know, just to kind of review the different regulatory schemes in the U.S. at the federal level, a lot of the action we're waiting for is on...it's from the IRS and Treasury, and it's around the 45Z producer tax credit under the IRA.

The industry, they haven't yet received official guidance. And the 45Z has two provisions that could impact RD trade flows and feedstock demand starting next year. The first provision is that the new tax credit only applies to RD produced in the U.S., meaning companies with overseas RD production currently receiving the $48 per gallon lender's tax credit or the BTC, they wouldn't be eligible to receive the 45Z once it comes into effect. So, domestic producers in the U.S., they stand a benefit from the 45Z if the RD is made in the country, while importers like Neste would be left out. The second provision that's important under the 45Z means...it's around a fuel CI. So, that's going to matter for the first time on a national level. And it could dramatically reshape how RD is produced and priced. So, producers of low CI fuels, they should have a significant advantage. And this means RD producers will try to find alternative means to lower their scores, not just through feedstocks and their production process, but by using other green inputs, too, like green hydrogen.

And the second provision is in flux at the moment. There's a bipartisan group of U.S. legislators that have introduced bills to both chambers of Congress that would prohibit parties from using foreign feedstocks. The bill is called the Farmer First Fuel Incentives Act. And it's unlikely to pass in the near term, just given that both chambers of Congress plan to recess in October and President Biden's administration has not released formal guidance around qualifying for the 45Z. In fact, the U.S. Treasury Department, they've said that guidance will not arrive before the end of Biden's administration. So, farm groups, they've lobbied for that guidance to restrict the use of foreign feedstocks. And the current U.S. Secretary of Agriculture, though, he has cast doubt on the idea, warning against kind of risking trade retaliation from other countries for excluding these imported feedstocks from incentives in the U.S. And the final guidance for 45Z, though, it is expected in Q1 of next year.

Fabricio: Yeah, no, I see that, Jackie. One of my takeaways is that stuff is really taking off, but a lot hangs on how the 45Z credit will be rolled out. Just shifting to California, how are things in California at the moment in terms of rulemaking? What's next?

Jacqueline: Yes. So, at the state level in California, a formal amendment was released in August. And in that amendment, CARB indicated it's going to pursue a one-time tightening of annual targets for gasoline and diesel by 9% in 2025, which is up from the current 1.25% annual reduction, and the 5% step down, which was first proposed in December of 2023. And this move follows the board's aim to draw down the oversupply of all CFS credits and revive credit prices, which have been very suppressed. And so, there is a planned November 8th public hearing and potential board vote on that day. The program changes could be in place by the end of the first quarter of next year. Final rulemaking language was also introduced. It introduced a new 20% per year cap on a company's credit generation from biomass-based diesel from soybean oil, canola oil, or sunflower oil. And so, companies that have a certified pathway and are already exceeding that cap would have until the end of 2027 to adjust supply before facing limited credit generation. All other companies would immediately face a requirement once they adopt the measure which staff expect to occur by April of next year.

Fabricio: Cool. Very interesting. Thanks, Jackie. Just a final question for me then. You moderated an all-women panel at the conference. Was that a first one for you? Can you comment on how you found it?

Jacqueline: Yes. So, in the six years I've been in the biofuel space, this was the first time I moderated an all-women panel, which was a lot of fun. And it hit some important key themes and the panelists had a lot of great insightful answers to my questions. And I would say that one of the themes we hit on was policy support for success and the idea of globalization versus protectionism. So, decarbonization and carbon neutral goals, they're global, but the rise of these nationalistic policies that prioritize domestic production, like the 45Z, which we've talked about, that inhibits access and movement of these critical renewable fuels. And that was a theme that Paola really drove home. And another theme that was more of an underlying one that all of the panelists really touched on was the time value of carbon. So, there's this concept of time value of carbon, which basically says that greenhouse gas emissions cut today are worth more than cuts promised in the future due to basically escalating risks that are associated with the pace and extent of climate action. And so, an immediate solution today is creating really the greatest value from various feedstocks and waste streams, whether through RD, SAF, renewable propane, renewable DME, renewable methanol, or hydrogen. There are basically many ways to achieve decarbonization today, and longer-term solutions like electrification are much further down the road.

Fabricio: Nice. Let's see... I mean, that's all great to hear. So, let's see how all the different rules and [inaudible 00:09:44]. Thank you very much for this chat, Jackie. It was really good to catch up and get your thoughts...

Jacqueline: Of course, likewise.

Fabricio: ...about the conference. Yeah. And thank you all for listening to this new episode. If you enjoy this podcast, please be sure to tune in for all the episodes in our series, The Biofuels Report. And for more information on Argus biofuels coverage, please visit our oil products and commodities page. See you next time.