A Flood of RD and a Snowballing LCFS Credit Bank – Is a Step-Change in CI Reduction Schedule the Answer?

by Kendra Seymour (Stillwater Associates) ... A flood of renewable diesel production and snowballing net credits have left California’s Low Carbon Fuel Standard (LCFS) with a historically large and growing credit bank. This glut in the LCFS credit market has tanked credit prices, giving renewable fuels investors pause and leading the California Air Resources Board (CARB) to consider amendments to the LCFS program to take advantage of this opportunity to increase carbon reduction requirements and keep the program relevant.

CARB aims to adopt the next set of amendments to the LCFS regulation in 2023, becoming effective as early as 2024. Through initial amendment workshops, CARB has indicated an intention to increase the stringency of the 2030 carbon intensity (CI) reduction target and extend the reduction goals to 2035 or later. So, what would an increase in the stringency of the program do to credit balances (and ultimately credit prices)? And exactly how aggressive should CARB get with these targets?

Stillwater’s Carbon Crew tracks the LCFS (and other LCFS-style programs in North America) closely.

In CARB’s February 2023 workshop, Staff indicated an openness to a step-change in CI reduction in 2024 on top of a steeper CI reduction curve out through 2035.

As illustrated in the figure above, we expect that quarterly credit surpluses under the current regulation would continue at a steady pace through the outlook period as the market absorbs increases in RD production, the EV population grows, and the CI of renewable natural gas (RNG) continues to decline. The Accelerated CI Reduction Case is a variation on the Current Regulation Case in which credit balances are shown growing in 2023 as deficit generators are expected to build their credit banks ahead of the very steep CI reduction step change assumed for 2024 and a continuing ramp-up in program stringency through the outlook period. Unlike the Current Regulation Case, however, in this case the market is seen as being net deficit from 2024 onward, and net deficits produce upward pressure on credit prices.

For the program to remain viable, the cumulative bank of credits needs to remain positive so that parties requiring credits can stay in compliance through purchases of available credits, while not becoming so large as to depress prices to a level where developers of new low-CI fuel production projects are unable to secure funding. Given historic precedent, if the credit bank is perceived as too large or too small, CARB will continue to adjust the program with each regulatory amendment process to keep it viable while maximizing CI reductions. READ MORE