Will the California LCFS be the Victim of Its Own Success?

 

Once-steady credit prices are falling, and we want to tell you why

 

By Roxby Hartley, Ph.D., 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.

 

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Roxby Hartley, Ph.D.

Dr. Roxby Hartley is Biodiesel and Renewable Diesel Services Director at EcoEngineers, a consulting and auditing firm that specializes in low-carbon fuels and decarbonization strategies. He has expertise in biofuel production, carbon capture and sequestration, compliance management, and sustainable program development. He is an expert on the California Low Carbon Fuel Standard. For more information about low-carbon fuels, or decarbonization strategies, contact Roxby at rhartley@ecoengineers.us.