California sets sights on tougher LCFS

California will target deeper cuts to its transportation fuel carbon intensity and be pickier about the alternatives it allows to achieve them under a proposal issued late Tuesday.

Potential revisions to the Low Carbon Fuel Standard (LCFS) include a 50pc tougher target in 2030 accelerated with a 5pc more restrictive target in 2025. The agency will propose an automatic mechanism to advance to tougher annual targets when unused credits more than triple average deficit generation. And California would for the first time impose emissions reduction requirements on jet fuel used in intrastate flights, which the agency estimated at about 10pc of the jet fuel supplied in the state.

The agency would explore new restrictions on credit-generating fuels, including tracking requirements for crop-based feedstocks and a phase-out of new renewable natural gas (RNG) used directly in transportation by 2041. But CARB would only apply new, tougher eligibility for out-of-state RNG to projects built next decade.

Today's filing allows market participants a pre-holiday look at where regulators want to move the program, but does not mark the beginning of a required 45-day public comment period. CARB now expects to begin that clock in early January, with a public hearing scheduled for 21 March.

Board members must approve the proposal by vote after the public comment period, and language will also undergo a standard review by the state's Office of Administrative Law.

LCFS programs require yearly reductions to transportation fuel carbon intensity. Conventional, higher-carbon fuels that exceed the annual limit incur deficits that suppliers must offset with credits generated from approved, lower-carbon alternatives.

CARB began workshop discussions on how to change the LCFS in late 2021, with spot credits above $140/t. Spot credits have traded at less than half that level through large swaths of 2022 and 2023.

Prices have groaned under the weight of new credits generated in excess of obligations that have doubled since the workshops began, to more than 18mn t — nearly enough to satisfy all the deficits generated in the 2021 compliance year. These credits do not expire. Tougher targets and the mechanism to make the benchmarks harder if credits greatly exceed deficits would attempt to address that imbalance.

The agency advanced the current rulemaking in September with draft documents suggesting a 30pc reduction target, new obligations for intrastate jet fuel and a reduced role for RNG. The new language also included requirements to trace crop-based and forestry-based feedstocks to their point of origin, with independent certification. The agency would also formally remove palm-derived fuels from eligibility — no palm-based fuel has received credits under the program so far.

California's proposed changes come after other jurisdictions had already completed updates to their programs.

Oregon in September 2022 extended the state's Clean Fuels Program through 2035 with tougher targets. Washington regulators will begin a rulemaking to better incorporate aviation fuels into that state's program early next year, but will not touch the decade of annual targets set by lawmakers.

Canada's new Clean Fuels Regulation began enforcement this year. British Columbia adopted North America's steepest 2030 target and will next year set targets for jet fuel supplied in the province.

By Elliott Blackburn