California LCFS trades lower on credit record

California Low Carbon Fuel Standard (LCFS) credits traded lower today after regulators confirmed first quarter supplies reached a new record.

New credits generated in the first quarter exceeded deficits by more than 9pc as growing consumption of renewable diesel more than offset rising gasoline use, according to California Air Resources Board (CARB) data released today.

New deficits did rise at a faster rate than new credits during the quarter as conventional fuel demand rose during the period. But total credits available for compliance with the program surpassed 10mn for the first time as regulators contemplate tougher targets for the market.

Credits were heard to trade at $88/metric tonne soon after the early afternoon release. Argus assessed LCFS spot credits at $91.50/t yesterday. Total available LCFS credits had fallen in every previous first quarter since 2016. Credits under the program do not expire, and so unused credits each year remain eligible for future compliance.

The LCFS requires reductions to transportation fuel carbon intensity each year. Higher-carbon fuels that exceed the annual limit incur deficits that suppliers must offset with credits generated from the distribution of approved low-carbon fuels. California requires a 10pc reduction this year — halfway to a 20pc reduction target by 2030.

Producers of rising volumes of renewable diesel have pointed their fuel toward the California market, where gallons receive the state LCFS credits in addition to federal fuel blending incentives and credits needed to comply with the US Renewable Fuel Standard. Renewable diesel made up 38pc of all new credits generated during the first quarter — more than double the share of second-largest credit generating source, ethanol.

New renewable natural gas credits fell by 1.6pc from the previous quarter but made up 13pc of all new credits for the period.

CARBOB consumption generated 7.6pc more deficits than the previous quarter. The combination of physical fuel usage and associated, incremental penalties made up 84pc of all new deficits for the first quarter.

CARB reported growing credit generation from electric vehicle charging during the quarter. Total electric credits rose by 10pc to make up 23pc of all new credits generated for the period. Residential charging made up most of the growth, higher by 20pc from the previous quarter.

CARB early this month tipped interest in new, aggressive reductions and potential limits on credit generation at a workshop on the future of the program. Current regulations target a 20pc reduction in transportation fuel carbon intensity by 2030. Regulators sought comment on a potential 25pc or 30pc target by 2030, as well as whether to reconsider credit generation from electronic forklift charging or biofuels generated from potential food sources. Electronic forklift charging rose by 3.4pc from the previous quarter to 5.7pc of all new credits for the period.

Soybean oil remains a common feedstock for both renewable diesel and biodiesel, accounting for about 6pc of all new credits in the first quarter. Producers distill most US fuel ethanol from corn, which generated 10pc of all new credits for the quarter.

US independent refiner Phillips 66 has supply agreements for soybean oil, used cooking oil and other feedstocks for converted units at its 120,000 b/d Rodeo refinery in San Francisco, California. The refiner began operating an 8,000 b/d renewable diesel production unit in spring 2021, and plans to fully convert the refinery in early 2024.

"Just the conversation itself seems to have stabilized the LCFS credits over the last several weeks, and that seems to be a good signal," Phillips 66 vice-president of refining Richard Harbison said today. "However, we are still not clear as to where this whole discussion is going."

By Elliott Blackburn