California's recalibrated low-carbon ambitions will add pressure to the state's already sensitive gasoline prices.
An historic drop in the Low Carbon Fuel Standard (LCFS) prompt credit price over the past two years has slashed the program's per-gallon cost, even as lawmakers have handed regulators new tools to scrutinize what California motorists pay at the pump. Regulators next year will tackle LCFS changes that could drive costs higher.
LCFS programs rejigger the transportation fuel mix by requiring yearly reductions in the state's overall transportation fuel carbon intensity. Conventional, higher-carbon fuels that exceed these annual limits incur deficits that suppliers must offset with credits generated from the distribution of approved, lower-carbon alternatives. California wants these programs to spread beyond the west coast. New York, Minnesota and New Mexico have all considered standards.
California leads the nation in electric vehicle adoption, with zero-emissions vehicles making up more than 25pc of new sales in the third quarter. But CARB data attributed barely a tenth of the reduced CARBOB consumption for the same period to charging. Most drivers — many of them also voters — still traverse the state in gasoline-powered rides that will remain on those roads for decades.
California gasoline consumption has generated the majority of LCFS deficits since the beginning of the state's program. Gasoline use generated less than 75pc of new deficits for the first five years of the program. In the first half of 2023, gasoline deficits accounted for nearly 89pc of all new deficits — a record high.
These deficits drive incentives that helped make California the leading US destination for renewable diesel and support electric vehicle charging infrastructure. But credits from distributing lower-carbon alternatives have overwhelmed new deficits for more than two years, amassing enough available, unused credits to satisfy nearly all the deficits generated in 2021.
This supply has dragged the spot price lower, from near $200/metric tonne (t) in early 2021 to trade at less than $70/t in December. The per-gallon cost of those credits fell over that period from 20¢/USG to less than 9¢/USG this month — even as targets continued to get tougher.
That has provided some relief, as California wrestles with new supply dynamics that have kept the state's gasoline the most expensive in the nation. Few global refineries make CARBOB, California's unique gasoline blend, and supply has fallen as some of those refineries shift to renewable diesel production. Per gallon costs from the state's cap-and-trade program, California Carbon Allowances (CCA), grew from roughly 18¢/USG in early 2021 to nearly 40¢/USG in November.
If next year's LCFS rulemaking lifts credit prices back to $200/t, the new targets would by 2030 add a projected 67.28¢/USG to cover LCFS costs — up from 45.76¢/USG under the current targets.
California governor Gavin Newsom (D), who has raised his national profile on social and environmental issues, maintains the state's eye-watering fuel costs have a simple source — the oil industry. "Oil companies are screwing us," Newsom said in September, adding that it was a topic he monitors "very closely."
Newsom eased some environmental hurdles in September when he approved a faster transition to cheaper winter gasoline. State lawmakers this year adopted, at Newsom's urging, new tools for the California Energy Commission to monitor margins refiners collect on fuel in the state.
Its first report cited what the commission considered poor inventory planning during maintenance and an "unusual transaction" in the spot market in September. Refiners cried foul, arguing the added scrutiny made operating in the state even harder — and more expensive. Newsom maintained his criticism of oil companies when Republican presidential hopeful governor Ron DeSantis (R-Florida) needled him on fuel costs in a November debate.
The debate showed that rivals will continue tying the governor to high costs. This year's action adding state tools on fuel costs show that Newsom will respond. As California works toward a zero-carbon 2045 goal, there will be more eyes on which ambitions take precedence, and at what cost.
