California to consider tougher LCFS, biogas limits

California will target 50pc tougher transportation fuel carbon targets by the end of the decade, impose new obligations for intrastate jet fuel and reduce the use of one of the top credit-producing fuels under changes to state regulations that could be adopted early next year.

The California Air Resources Board (CARB) late today posted materials offering the first details on proposed changes to its Low Carbon Fuel Standard (LCFS), a market-based carbon-reduction program helping to drive a surge in renewable diesel and other alternative fuel production to the state.

The Standardized Regulatory Impact Assessment (SRIA) includes carbon targets requiring a 30pc reduction in transportation fuel by 2030, compared to the current 20pc. New, more aggressive reductions would begin in 2025 under the amendments submitted to California's Department of Finance for review.

Staff also proposed phasing out avoided methane crediting for dairy biogas, an accounting that grants outsized carbon-reducing credits that helped the fuel rise to the second-largest source of new credits generated in 2022. CARB would also require book-and-claim accounting for biomethane seeking California LCFS credits under the proposal.

The program would expand to impose carbon-reducing obligations on federally-regulated petroleum jet fuel used in flights between destinations in California. And staff proposed a mechanism to automatically adjust the program to tougher targets based on certain, unstated market conditions - an idea meant to more quickly respond to the record volumes of unused credits weighing on the program today.

Under pressure

LCFS programs require yearly reductions in transportation fuel carbon intensity. Higher-carbon fuels that exceed annual limits incur deficits that suppliers must offset with credits generated from the distribution of approved, low-carbon alternatives.

Credits in California's market have sunk from near $200/t in January 2021 to $60/t in February. Spot credits have moved between $85/t and $70/t since May.

Towering supplies of unused credits have helped drag prices lower. Available credits rose to a record 16.5mn t by the end of the first quarter, according to the latest state data - enough to satisfy nearly four out of every five new deficits generated in all of last year. Some found bullishness in net credits growing at a slower pace for two consecutive quarters, but the increase still marked the largest first quarter build in program history. LCFS credits do not expire.

Participants have instead focused on how the program may change to address a widening gap between the flow of credit-generating fuels into the state and the dribble of deficit-generating CARBOB demand since the coronavirus pandemic. But long-standing regulatory obligations slowed CARB's ability to adjust targets as credit prices fell by more than half.

Foot on the gas

Through nearly two years of workshops feeling out California's next LCFS steps, few have been more outspoken for aggressive measures than biogas participants. Industry representatives have consistently pushed for the toughest possible targets and lightest revisions to eligible fuels as biogas grew to generate 14pc of all new credits produced last year.

Critics of biogas have added pressure both through CARB and the state legislature. Opponents fault the LCFS for providing incentives to consolidate and grow dairy operations to the detriment of neighboring communities while providing little new methane reduction.

Methane captured from dairy and swine operations and from landfill diversion projects would be phased out by 2040. Amendments would include at least one ten-year crediting period for avoided methane applications certified before the end of this decade, and allow a five-year crediting period for projects certified between 2030 and 2035.

Limits on renewable diesel feedstocks, another target of environmental opponents this year, were not discussed in the document posted today. Renewable diesel generated a third of all new LCFS credits in 2022, and has led credit generation since 2020.

Moving forward

The SRIA lurches the closely-watched amendment process toward a planned formal proposal before the end of the year and board vote in early 2024. The state Department of Finance will review the filing. Staff for that agency responded last year to CARB filings on Advanced Clean Fleets and this year on zero-emissions forklift rulemakings after 30 days. Submitting the document today would suggest a response no earlier than 8 October.

CARB will then post proposed amendments for at least 45 days of review and comment before a board vote. The board could accept, reject or require their own amendments on the proposal.

By Elliott Blackburn

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