California regulators will once again shape the flow of North American renewable fuel next year when the state considers key updates to its Low Carbon Fuel Standard (LCFS).
Emerging rival programs will give suppliers new options as the oldest and largest LCFS program seeks a credit price recovery from six-year lows.
The California Air Resources Board (CARB) plans to begin a rulemaking to update its LCFS in early 2023. Renewable fuel producers worldwide will watch the year-long project to better understand one of the highest margin markets for low-carbon fuels. Changing how fuels generate credits or deficits in the state risks far-reaching consequences for renewable fuel ventures. Spot credits that will begin 2023 at roughly half the price of January 2022 have already weighed on investment decisions. Forward and futures credit markets have shifted into contango as the expected rulemaking draws near.
Regulators in November for the first time publicly considered requiring suppliers to cut transportation fuel carbon intensity in 2030 by 35pc from 2010 levels. The aggressive target would require average gasoline- and diesel-equivalent fuel carbon intensity to fall by more than 30pc from today's levels in what was once the largest US liquid fuel market. Such a target would require "a lot of things coming together" to be feasible, staff said in presenting the scenario. California today targets a 20pc reduction from 2010 levels by 2030. New targets floated earlier in the year included 25pc and 30pc reductions. Governor Gavin Newsom (D) has encouraged an aggressive approach.
Staff have repeatedly suggested that jet fuel used in intrastate flights should generate deficits. That concept could boost state sustainable aviation fuel demand and generate a new source of deficits to offset. But contemplated limits on agricultural feedstocks used to supply renewable diesel and renewable natural gas prompted dire industry warnings this year. New limits on existing credit generation risk cooling investor interest in the facilities delivering the fuels that California will need to meet its targets.
Bank run
LCFS credits stack with US Renewable Fuel Standard credits and other state and federal programs in a potent mix of incentives to deliver to California. The state demanded 72pc of all renewable diesel produced or imported into the US during the second quarter of this year, and more than 30pc of domestic renewable natural gas used in US transportation for the period, according to state and federal data.
The surge of California renewable fuel supply overwhelmed lingering, sluggish demand for CARBOB gasoline in 2022. A promising start for higher consumption quickly slipped back below prior-year levels in the second quarter as in-state refinery outages, rising crude prices and other factors smothered the nascent driving demand. New, unused credits outpaced deficits by 1.3mn metric tonnes in the second quarter, the largest build in program history. California LCFS piled up 11.3mn t of unused credits available for compliance by the end of June.
Work on California's plan to reach carbon neutrality in 2045 prevented CARB from rebalancing the LCFS in 2022. Without gasoline demand or regulatory intervention, spot California LCFS credits fell by more than half over the course of the year. Spot credits have fallen from more than $200/t in January 2021 to no more than $70/t since late September.
More markets developing
Producers will have more options in 2023. Oregon already has approved aggressive new targets of 20pc reductions by 2030 and 37pc reductions by 2035. Washington state will begin registration and enforcement of its Clean Fuel Standard on 1 January. Renewable fuels delivered into Canada began generating provisional Clean Fuel Regulation credits in the second half of 2022 as the country moves toward enforcing a federal LCFS in July 2023. The credits will stack with British Columbia's provincial LCFS program, updated in late 2022 to set North America's lowest fuel carbon intensity targets for 2030.
And New York State included a Clean Fuel Standard among strategies approved in December for net-zero emissions by 2050. Regulators and lawmakers there must decide next year whether to pursue such a market through a rulemaking or legislation to implement programs to achieve their emissions goals by the end of the decade.
But so long as California remains the dominant consumer of low-carbon fuels, LCFS credit prices will first rise in the west. Decisions made in 2023 could shape the flow of transportation energy through the end of the decade.
