Bullish sentiment in the California Low-Carbon Fuel Standard (LCFS) credit market shows no signs of flagging amid regulations to cap credit prices following record highs in 2019.
The California Air Resources Board (ARB) on 21 November set a hard cap on the LCFS credit price to match the price used in the credit clearance market: $200/metric tonne in 2016 dollars, adjusted for inflation. That price in 2019 sits at just over $213/t and has been a "soft cap" on the market.
Market participants see this cost-containment measure as a way to ensure the longevity of the LCFS program. The program, which is a key tool for meeting the state's transportation emissions-reductions goals, is now less vulnerable to price spikes, but still has a sufficiently robust price to support renewable fuel projects. LCFS prices have risen over the last year, hitting a program high of $209.50/t on 13 November.
California's high gasoline prices have long attracted criticism and even brought about a recent investigation ordered by the state's governor. The LCFS is not the sole reason California has the highest gasoline prices in the country, as stringent requirements for gasoline and limited access to other US refining centers keeps the state relatively isolated from alternative supplies and vulnerable to price spikes. But because it is one factor, that is enough to warrant concerns among stakeholders that the program could end up on the political chopping block if cost containment measures were not safeguarded.
With the latest move by the ARB and a successful outcome at the start of the year in a recent lawsuit against the program, its longevity is even more secure, but not at the expense of tempered growth in the market. Projects for fuels including renewable diesel, biodiesel and renewable natural gas have been profitable at current — and even lower — LCFS credit prices, so there is no immediate reason for that growth to halt.
But the ARB's decision may put at risk the next-generation technologies that are not yet commercialized, which has raised concerns among some renewable fuels producers. Additional credit generators that have recently been added to the LCFS, such as sustainable aviation fuel, and others that could be added later, might need extra investment for those projects to come to fruition. Their future is now more tenuous.
And whether California LCFS prices will trade daily at the cap level in coming years remains to be seen, largely dependent on the size of the credit bank, participants said. How heavily electricity will play a role in the program will be a significant factor in the size of the bank, as market participants are keeping a close eye on the state's moves to support zero emission vehicle growth.
For now, the market is waiting to see exactly when this cap will come into effect and how it will be enforced. The cap may not come into force until next summer, depending on how long it takes the ARB to clear remaining procedural hurdles. But few doubt that the program is here to stay.
By Jessica Dell
