Will the California Low Carbon Fuel Standard Be a Victim of Its Own Success?

March 22, 2022

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by Roxby Hartley (EcoEngineers) California’s Low Carbon Fuel Standard (CA-LCFS) continues to be the largest regional carbon credit market. It’s been successful in driving carbon reduction across the state. CA-LCFS credit prices hovered around $200 per metric ton (MT) of CO2e for several years from 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 most significant promise for credit generation. The only fly in the ointment is that CA-LCFS prices have been falling for the last year, and the numbers don’t lie. The price drop can no longer be attributed to the demand destruction of the gasoline pool. The credit market is in surplus, the average carbon intensity of RNG is in free fall, and more and more renewable diesel (RD) is entering the marketplace.

EcoEngineers analyzed ten 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 critical question we tried to answer centers on the low-carbon fuel supply; how will nascent projects affect the credit market?

EcoEngineers is in a unique position when it comes to modeling credit markets. We are the boots-on-the-ground auditors for Renewable Fuel Standard Quality Assurance Programs (QAP) and LCFS verification and the go-to life-cycle analysis modelers for the California market. We are integral to multiple fuel companies’ strategic plans. This allows us a deep insight into the fuel that is coming to market and the CI of that fuel. It is an insight that no other analyst can match. We predicted that the LCFS market would soften in our previous report, which was released in 2021. This report goes one step further and gives a price analysis.

We show that by 2024, CA-LCFS supply and credit price are likely determined by the amount of RD supply into California. The floor price for CA-LCFS credits is established as the price at which part of RD supply becomes unprofitable, and at those volumes, biomass-based diesel will be on parity with petroleum diesel. Our analysis uses the demand elasticity of renewable diesel to bracket prices ranges in different scenarios.

Anyone who is actively investing in the LCFS markets or is considering hedging against CA-LCFS price volatility will gain from this insight and will be able to answer the question: “Will the LCFS be the Victim of its Own Success?”

RFS RIN Pricing Analysis

EcoEngineers has simultaneously been developing a RIN Credit Pricing Analysis, which is also available. The report seeks to project the impact of renewable identification number (RIN) credit prices under the United States Environmental Protection Agency’s Renewable Fuel Standard (RFS) for the next three years along with various factors that impact RIN pricing, Renewable Volume Obligations (RVOs), cellulosic waiver credits (CWC), and RIN bank scenarios. READ MORE

California set off a biofuel boom — but can it manage the fallout? (Los Angeles Times/Granthshala News)

Excerpt from Los Angeles Times Granthshala News: ... To the state of California, this collection of animal excrement is a climate success.

The state has enabled farmers and their business partners in California and far beyond to make millions diverting such methane into a web of futuristic machinery that processes and pumps it into natural gas pipelines.

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Yet California’s aggressive promotion of trapped methane and other forms of biofuel has touched off a high-stakes drama. It is drawing cries of protest from some of the most vocal climate activists and words of caution from sober analysts, who warn it threatens to set off an unwelcome chain reaction around the state and across the country.

California is leading the nation into a new era of climate-friendly fuel, or “biofuel,” made out of animal fat, cooking oil and methane from cow manure. These biofuels burn cleaner in engines, but California’s aggressive push for them might fall short as a solution and could be setting off an unwelcome chain reaction around the state and across the country.

As the state tries to lead the nation into a new era of climate-friendly car, truck and jet fuels, it is hitting turbulence. California’s Low Carbon Fuel Standard is meant to be an exemplar of the energy transition — a model for marrying the interests of big agriculture and the state’s climate goals that carefully sidesteps the collateral environmental fallout caused by earlier experiments with biofuels.

The effort is leading to fuels that burn cleaner in engines. But California’s climate policies are pushing demand for these biofuels to a place that is sending tremors through the nation’s agriculture economy. The state is trying to strike a balance between hitting its own climate targets while avoiding actions that propel global warming elsewhere. Whether it is succeeding is hotly debated.

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Separate from the methane push, California’s bullishness on biofuels is also moving some of the country’s large refineries to retrofit their operations to no longer process crude oil. They are shifting to the business of making “renewable” diesel and jet fuel from plants and animal fats.

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“We don’t have all the right solutions yet,” said Gene Gebolys, chief executive of World Energy, which has converted a refinery in Paramount into one of the world’s first operations that makes jet fuel without using a drop of crude oil. “But the stuff we are working on right now will lead to the right solutions, because it has to. We have no choice but to figure this out. The status quo is not going to work.

“To say we need to slow things down is absolute insanity,” Gebolys said. “People lose sight that the alternative is suicide. You’ve got to keep moving to keep improving, and sometimes the moving won’t be perfect.”

California’s Low Carbon Fuel Standard is a product of the state’s landmark 2006 climate law, Its goal is to reduce the climate impact of transportation fuels by 20% by the year 2030. Unlike other biofuel mandates, California’s requires what is meant to be a meticulous “life cycle” assessment of fuels used in the state. That means fuels are judged not just by how clean they burn, but also the greenhouse gases created over the course of their production.

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So fuels made from waste products that might otherwise make their way into the trash — like corn husks or used fryer grease — generate the highest incentives in the program. Fresh soybean oil scores lower, as the formula factors in all the resources used to grow and transport the ingredient.

The concept is wildly popular among climate regulators. California’s program is being copied across the nation, with Oregon and Washington already creating replicas. Colorado, New Mexico, New York and Utah are looking into doing the same.

The enthusiasm is driven by a need to create more climate-friendly bridge fuels as the state and nation gradually electrify vehicle fleets. The fuels tend to be targeted at the biggest fuel guzzlers, such as jet planes and long-haul trucks, for which widespread electrification may not be feasible anytime soon.

Even without other states launching their own programs, California’s outsize economy has compelled fuel producers — and farmers — across the country to change the way they do business, as they rush to take advantage of the state’s incentives.

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The perspective from California’s large dairy farms is sharply different. “Dairies work on milk economics, not gas economics,” said Michael Boccadoro, executive director of Dairy Cares, a coalition of California dairy farmers. “You can’t simply add cows to make more gas.” What you can do, Boccadoro said, is limit the damage from the gas getting created. He argues that California has created a national model for that.

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What stands out in Paramount is how much the refinery looks as it did when it processed crude oil. The facility’s infrastructure has not changed that much. Most of the machinery used to make diesel and traditional jet fuel also works to make the “renewable” jet fuel and diesel the refinery sells now. READ MORE