LCFS market gains more certainty

OREANDA-NEWS. July 29, 2015. California Low-Carbon Fuel Standard (LCFS) market participants will gain some regulatory certainty in the coming months as the state finalizes rules that will govern the program for the next several years.

How the market will respond to those rules, and ultimately how the the state will reduce the carbon intensity of its transportation fuels a further nine percentage points by 2020, remains to be seen.

The release by the state Air Resources Board of the final set of amendments to the program in June sparked a surge in market activity and the price of LCFS credits more than doubled from the low \\$20s to \\$50/metric tonnes. But the market has leveled off in recent weeks following the delay of the final vote on the amendments and re-adoption of the overall program. ARB had originally scheduled a vote on the regulations for last week, but delayed it for two months in order to finish answers to public comments. Despite the delay, the regulatory language is unlikely to change.

The board action will put the LCFS back on a path toward its final carbon intensity reduction target of 10pc by 2020. The program has been frozen at a 1pc target since a state court in 2013 ruled ARB did not act properly regarding the way it adopted the original regulations. That decision required ARB to take up the current amendment and re-adoption package in order to put the program back on track.

It remains to be seen if the market's pace will pick back up once the rules are final, but the jump to the 2.5pc reduction target next year will require greater cuts in carbon intensity than have been achieved in recent quarters. While fuel suppliers and importers have generated 4.9mn t of credits beyond the program's targets since 2011, the scale of the cuts that will be required from 2018-2020 means that many entities will likely bank those credits for use in the later years.

As the targets ramp up, fuel demand in California is also increasing. Vehicle miles traveled in California rose by 2.6pc last year, and fuel demand has been strong this year despite tight supplies and relatively high prices for the state's unique specification of gasoline. Higher sales of gasoline and diesel will require greater volumes of low-carbon fuels to bring the overall carbon intensity down. But with the LCFS market price hovering in the low \\$20s since spring 2014, the program has not been pulling in the supplies of new low-carbon fuels that the state will need to hit its upcoming targets.