Analysis: Amendments spark LCFS market

OREANDA-NEWS. June 19, 2015. The release last week of amendments to California's Low-Carbon Fuel Standard (LCFS) appears to have lit a brushfire in the credit market.

The credits today traded up to \\$33/metric tonne for the first time since last August, breaking out of the mid-to-low \\$20s range where the market has sat for many months. The amendments, issued for 15 days of public comment, were taken as a sign that state regulators are close to finishing their re-adoption of the program, market sources said.

The amendments likely represent the final draft of the rules that the state Air Resources Board (ARB) is expected to vote on next month when it re-adopts the LCFS program. The agency is under a court mandate to issue final rules this fall, but the board generally does not meet in August, making a later vote unlikely.

The amendments mostly make minor adjustments to the LCFS regulations, including changes to the program's proposed price ceiling, which allows covered entities to roll over compliance obligations to future years if they cannot find LCFS credits below \\$200/t in the open market.

One significant change is the application of a provisional credits provision to new facilities that produce conventional low-carbon fuels, known as Tier 1 fuels. In a previous draft of the re-adoption package, the provision applied only to Tier 2 facilities that produce advanced fuels such as hydrogen or cellulosic ethanol. The change could prevent new facilities from shipping their products to California until they have been in operation for two years.

The provisional credit system allows new facilities to receive carbon intensity scores after one calendar quarter of operation, but any credits they generate cannot be sold until ARB gets enough data to revise the carbon intensity score or confirm it with two years' worth of data. The provisions prohibit anyone but the biofuel producer who applies for the pathway from generating provisional credits. The producer cannot use the credits for any compliance obligation they may have.

The point of the program is to help commercialize new low-carbon fuels, but the provisional credit provision creates two years of uncertainty for affected producers unless they are comfortable with waiting up to two years before they can sell the credits and bank their cash value.

The regulations could lock up significant amounts of credits or actual fuel supplies from new conventional low-carbon fuel producers, said Philip Sheehy, a technical specialist at consultant ICF. Credit prices could rise up to near the program's price cap of \\$200/t in 2018 or 2019, according to recent ICF forecasts that account for the provision credits system.

In the case of a new corn oil biodiesel producer, "you have to use a carbon intensity score of 35g CO2e/MJ until you can demonstrate that the ethanol facility that the corn oil came from is actually reducing its energy use accordingly because of lower drying energy for distillers grains," Sheehy said. "That erodes the benefit of corn oil unless you have been in operation for two years and have the data."

It is also unclear from the proposals who would get the credit in such a case, the ethanol producer or the biodiesel producer, but it would cut the carbon intensity for the biodesel in to the single digits, Sheehy said.

The provisional credits rule may be particularly tricky for new biogas facilities, which have to submit new pathways for each new combination of a source of biogas and facility that is turning the gas into its compressed or liquefied states for vehicle fuel.