February 22, 2023
Today, CARB hosted an all-day workshop to discuss potential changes to the California LCFS. If you’re nerdy like us, you can view CARB’s Presentation, Draft Regulatory Text, and Draft Tier 1 Simplified Calculators and Lookup Table Changes for yourself. If you’re not that kind of nerdy, don’t worry; Stillwater’s Carbon Crew tuned into the entire six-hour workshop and distilled the main points for you here.
The stated objectives of the workshop were:
- Review objectives for rulemaking updates
- Present staff’s latest thinking on rulemaking changes
- Share preliminary fuel supply modeling results
- Provide overview on rulemaking process and release of draft regulatory text
- Continue public discussion on LCFS updates needed
This is CARB’s first LCFS workshop since the approval of the final 2022 Scoping Plan in December. Although CARB staff began laying the groundwork for a new set of LCFS amendments as the Scoping Plan was finalized, these amendments could not officially progress until the Scoping Plan was approved.
Finalized Scoping Plan Provides Direction ⬇️
At the start of the workshop, CARB reminded attendees why they are exploring adjustments to the LCFS program. In short, CARB seeks to align with recent climate policy shifts and respond to realities within the LCFS program. The 2022 Scoping Plan implications for the LCFS are:
- Increase stringency for 2030 target and propose post-2030 targets
- Support transition away from fossil fuel demand
- Support continued private investment in low-carbon fuel production
- Support transition of refineries to clean fuel production
- Considering integrating opt-ins, like aviation, into the program
- Ensure that fuel/technology deployment does not result in unintended consequences
Potential CI-Reduction Stringency Adjustment and Extension 📉
In the November 2022 workshop, CARB laid out three new scenarios as potential paths forward for the LCFS amendments process – 25%, 30%, and 35% CI reductions by 2030 with steeper reductions to 90% by 2045 in all scenarios. As a reminder, status quo is a 20% CI reduction target by 2030.
In today’s workshop, Staff modeled the middle scenario – 30% by 2030 and 90% by 2045 – because the majority of stakeholders supported that compliance target shift. According to CARB and many stakeholders, this schedule would provide the strong and steady price signal needed to encourage investment in low-carbon fuel production infrastructure. You can see the modeled example in Figure 1 below.
Figure 1. Example CI Schedule: 30% by 2030
Keep in mind that neither November’s three proposed scenarios nor today’s single modeled scenario are set in stone, and Staff is still actively requesting public feedback to guide the process.
For example, Staff have received feedback concerning a potential CI-reduction target step-down in 2024 to strengthen near-term price signals and support near-term investment. Staff are also considering a potential compliance target acceleration mechanism (which we have previously referred to as a “self-ratcheting CI-reduction mechanism”). The specifics of such a mechanism remain unclear, and Staff are seeking public feedback concerning what appropriate market indicators might serve as the best triggers for increases in CI-reduction stringency and over what time period. Staff did clarify that they view this mechanism as only functioning in one direction – to strengthen the CI-reduction targets but not to soften them. A few concepts presented concerning potential market indicators for a one-way accelerated CI-reduction mechanism included average credit price, credit-to-deficit ratio, and total credit bank. CARB Staff are still open to feedback concerning how much the CI target might increase in various situations whether it be proportional to excess credits, advanced existing compliance, or another option.
Potential Impact on Credit Prices 📈
One interesting item presented by CARB is the Preliminary Credit Price Estimates chart, which we have included below. The preliminary CATS modeling of the 30% reduction scenario in 2030 shows very sharp credit price increases in the 2026-2033 timeframe but downward pressure in the longer term. If this result from the CATS analysis holds, it potentially implies implementation of a more moderate reduction schedule in the near term with an acceleration sometime after 2030. This CATS analysis and preliminary credit price estimate does not take into account three potential items: a near-term step down in CI-reduction target, a compliance target acceleration mechanism, or how the credit price cap would impact the market. CARB will need to complete modeling of these and other potential provisions that would be part of the ISOR for the proposed amendments package.
Figure 2. CATS Preliminary Credit Price Estimates (30% reduction in 2030 and 90% reduction in 2045)
Additional proposed adjustments 📜
CARB continues to consider some significant shifts in the LCFS program, including the phasing out of the avoided methane crediting portion of RNG projects by 2040 (the base LCFS credits for RNG would remain), restrictions for crop-based biofuel feedstocks, inclusion of intrastate jet fuel as a deficit generator (with airlines as the reporting entity and therefore the deficit generator), and phasing out petroleum-based project crediting (excluding CCS) by 2040.
CARB is also considering:
- Including additional credits for Light-Duty Zero-Emission Vehicle Refueling Infrastructure equal to 1% of prior quarter deficits The current refueling infrastructure crediting provisions expire in 2025 (2.5% of prior quarter deficits for DC fast-charging and an additional 2.5% for hydrogen refueling). This proposed 1% of deficits pool replaces the previous provision and is limited to installations in disproportionally affected communities.
- Credits for Medium- and Heavy-Duty ZEV Refueling Infrastructure that service more than a single fleet. These credits would mirror existing credits for Light-Duty Zero-emission Vehicle Refueling Infrastructure with credits of up to 2.5% of prior quarter deficits available for medium- and heavy-duty DC fast-charging and an additional 2.5% of prior quarter deficits for hydrogen refueling.
- A potential limit on crediting of Direct Air Capture (DAC) with sequestration projects to those located in the United States.
- A GREET model update – updating indirect land use change (ILUC) and other factors.
- New/updated Tier I calculators – CARB wants more pathways to use Tier I to simplify program management. CARB released initial draft proposed updates to Tier 1 calculators and Lookup Table CI values earlier this week. The updated draft calculators and Lookup Table values will be posted for all listed fuels on the LCFS Lifecycle Analysis and Models page between February 21 and April 15, 2023. To-date, draft calculators and instruction manuals have been posted for Hydrogen and Starch and Fiber Ethanol. Additionally, CARB has posted Staff’s proposed lookup table pathways technical support documentation. CARB is seeking comments on the proposed changes.
It is important to note that, by law, CARB has one year to complete a rulemaking once the Initial Statement of Reasons (ISOR) has been published. We have not yet seen the ISOR for this amendment rulemaking process. CARB’s stated intention is to develop the full regulatory text to be considered at a public board meeting tentatively slated for late summer. CARB Staff aim to have the regulatory package ready for public review 45 days ahead of that board meeting.
Our Take 🤓
There’s still quite a bit of uncertainty around the reduction schedule, but the outcome is starting to come into focus. There is more certainty around the program changes that impact fuels; these changes could be significant for those fuels but not leveraging to the program. The preliminary CATS price results illustrate a dilemma which CARB alludes to – namely, a steepening of the curve to 30% by 2030, which was almost universally supported by commentors, is viewed as strengthening the near-term prices but overcompensates and causes the opposite problem (i.e. a credit price surge) before 2030. We believe this is one reason CARB Staff are keeping a step change on the table. A step change would enable the regulation to tighten the immediate credit market while targeting something less than 30% in 2030. Such an approach would eliminate the overcompensation problems described above. Furthermore, this approach is consistent with CARB’s and the Scoping Plan’s longer term objectives.
As we say in our title, baby steps.
We are keeping a close eye on the LCFS amendment process and will report in as we learn more about the likely path forward. We will also include insights from the latest workshop into the next quarterly edition of our LCFS Credit Price Outlook which will be available March 14th.