California LCFS: Will Credit Generation Match Deficit Generation?

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February 25, 2021

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by Shashi Menon (EcoEngineers) The LCFS is demonstrating to the world that good policy can drive decarbonization -- California’s Low Carbon Fuel Standard (CA-LCFS) has created one of the biggest regional carbon markets for the transportation sector. CA-LCFS credit prices have stayed around $200 per metric ton (MT) of CO2e since 2018, providing a strong incentive to send low-carbon fuels to California. Renewable diesel, renewable natural gas, and electric vehicles are the rising stars with the greatest promise for credit generation.

EcoEngineers analyzed 10 years of CA-LCFS data to project a short-term outlook of credit generation under the program. We looked at the potential supply of low-carbon alternatives in the gasoline and diesel segments and projected three credit supply scenarios. The key question we tried to answer was whether the low-carbon fuel supply currently in the pipeline is sufficient to match deficit generation in 2023. I am happy to say that the verdict is a resounding, “Yes!” The CA-LCFS is demonstrating to the world that good policy can drive decarbonization.

First, it is important to note the significance of what California has done. California’s policy, combined with the Air Resource Board (CARB) staff’s consistent implementation of it, has created a sea change in the low-carbon fuels market and many opportunities in California. It has driven investment in the production, distribution, and use of new low-carbon fuels, which will leave a lasting impact on the rest of the world for years to come.

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Low-carbon fuel projects built to meet California’s demand in the short term will have a long-term global impact, since the supply can be directed to other markets as they evolve.

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Other states and regions must begin enacting and implementing similar programs, so that investment continues in these low-carbon fuels past the point of California market saturation. These new programs will be most effective if they are tailored to the specific resources, needs, and communities in each region, but they can follow the CA-LCFS model and benefit from many of the lessons learned from CARB’s experience.

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Some of the key insights we gathered from our study of the CA-LCFS include:

Energy demand in the transportation sector continues to increase steadily in California. And we would assume that we will see the same trend globally, as economic progress requires greater movement of people and goods.
Fossil gasoline’s contribution to energy demand in the gasoline pool in California will stay steady in the short term as wider adoption of electric and fuel cell vehicles grow at a slower rate. In contrast, fossil diesel’s contribution to energy demand in the diesel pool in California will be eroded to 65% or lower by 2023.
Renewable diesel (RD), renewable natural gas (RNG), and electricity are the rising stars with the greatest promise for credit generation by 2023. Approximately 300-600 million gallons of renewable diesel in combination with the growth RNG with of ultralow carbon intensity (CI) will be sufficient to match deficit generation in California by 2023.
In 2023, about 2.6 billion gallons of RD capacity could be available globally from the 12 publicly announced projects. The actual number of projects being planned is greater.
There is significant change coming in the RNG sector. Ultralow CI RNG from dairy/swine manure and food waste biogas projects will be over 40% California consumption by 2023. These projects have carbon footprints as low as -300 gCO2e/MJ because they prevent methane emissions that would have occurred in the project’s absence.
Cumulative sales of electric vehicles (EVs) including fuel cell vehicles, are growing rapidly in California. The number of registered EVs in California will likely grow at a rate of around 130,000 per year and reach about 1.2 million vehicles in 2023. This would exceed California’s 1.5 million EV goal in 2025. Despite this growth, the projected electric fuel use in California in 2023 will not create a serious dent in gasoline demand.
A testament to the success of the CA-LCFS is the wide variety of entities registered for electric and hydrogen pathways. The program has attracted municipalities, car manufacturers, IT companies, cattle ranchers, municipal utilities, food manufacturers, grocery chains, public transit, and a variety of entrepreneurs to switch their fleets over to electricity or to develop and distribute electricity for transportation. Note: Policy drives behavior change.
The potential growth of sustainable aviation fuel (SAF) is a key uncertainty in credit supply for the CA-LCFS. We believe it will stay at nominal levels until 2023, but that is a function of how airlines respond to the increasing pressure to reduce emissions.

The CA-LCFS is successful because it is driving investments to low-carbon fuel production. We should all thank the staff of the California Air Resource Board for doing the pioneering work during the first 10 years of the program and giving us a working model to decarbonize the transportation sector. Now it is up to the rest of the world to build on it. READ MORE Access Report

EcoEngineers publishes report on the future of the LCFS (EcoEngineers)

CARB Needs to Do More to Help the State Meet Its GHG Emission Goals (Transport Energy Strategies)

Study: Eco-friendly car owners are undermining environmental gains by buying second vehicles (Fast Company)

EcoEngineers publishes report on the future of the LCFS -- California LCFS: Low-Carbon Fuel Supply Scenario Analysis Overview (EcoEngineers)

Excerpt from EcoEngineers:

As a result of a court ruling in 2020, biodiesel (BD) blends up to 20% can now be stored and retailed in California. R80B20 blends – a combination of 80% renewable diesel and 20% biodiesel – will become popular.
In 2023, about 2.6 billion gallons of RD capacity could be available from the 12 publicly known projects. The actual number of projects being planned is greater. However, the disruptive effect of the sudden emergence of significant renewable diesel volumes is complicated by five factors, each of which require further study:
a) California refiners’ willingness to sacrifice refining capacity for reduced compliance costs
b) The growth of the sustainable aviation fuel sector and the demand it creates for RD
c) The development of LCFS type policies in other countries and US states
d) Feedstock price movements relative to LCFS credit
e) Growth of an electric heavy-duty vehicle (HDV) segment

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9. Ethanol use will remain at around 11% of gasoline demand. The average CI of ethanol continues to fall and will drop to about 52gCO2e/MJ in 2023. The ethanol industry’s ability to sequester/reuse CO2 from ethanol plants, their ability to reduce process energy CI through a book-and-claim methodology for clean electricity and RNG and their ability to secure credits for low CI farming practices will all play a key role in their ability to lower their CI further and generate more credits. READ MORE