Bottom Line Up Front: Today we gained more detailed insight into why the California Office of Administrative Law (OAL) rejected the Low Carbon Fuel Standard (LCFS) Amendments Package. The administrative issues raised must be addressed by CARB in the next 120 days before resubmittal to OAL. In the meantime, the existing version of the LCFS remains in effect.

Background
On Tuesday, February 18^th the California Air Resources Board (CARB) posted a market memo announcing that OAL – the administrator responsible for reviewing rules put forth by California state agencies – has disapproved amendments to the LCFS which CARB had approved for adoption on November 8, 2024. The amendments – including the increased stringency in carbon intensity reduction schedule – cannot take effect until CARB makes corrections identified by OAL. OPIS-reported credit prices dropped by $13.50 (18.6%) Wednesday the 19^th following CARB’s Tuesday evening announcement of the OAL notice. Credit prices remain volatile but have partially recovered to $10.75 (14.8%) below where they were prior to the OAL disapproval.

On Thursday, February 20^th, a bit more detail emerged as OAL publicly posted its Notice of Disapproval “due to significant interest.” The Notice states the rule was rejected for issues of “clarity” (as CARB had stated in their February 18^th memo) as well as reasons of “incorrect procedure,” a new piece of information CARB had yet to make public. Thursday evening, February 20^th, CARB updated its market notice to say that it understands “incorrect procedure” to mean it must make “non-substantive changes” to the regulatory text before resubmittal to OAL. OAL had seven days after issuing a Notice of Disapproval to provide CARB with a written decision detailing the reasons for the disapproval.

What’s New?
OAL’s Decision of Disapproval was released by CARB on February 26^th. The Decision provides additional detail around the issues concerning clarity and procedure:

1. Clarity: 26 subsections of the proposed regulation failed to meet the clarity standard. Primarily, this means that one or more word or sentence in each of these provisions could logically be interpreted to have more than one meaning and/or the subsection presents information in a format that is not readily understandable by persons “directly affected.”
2. Incorrect Procedure: OAL indicates that they will discuss two “nonsubstantive revisions” directly with CARB – one concerning the final regulation text, including authority and reference citations, and another concerning documents incorporated by reference.
   1. According to section 40 of title 1 of the California Code of Regulations –the section cited for these revisions – “nonsubstantial” changes to the original text of a regulation are those that “clarify without materially altering the requirements, rights, responsibilities, conditions, or prescriptions contained in the original text.”

While OAL didn’t provide the specific points of concern around “incorrect procedure,” there are many complex and contentious components in the amendments which forced CARB to attempt to bridge these issues with carefully crafted language. If any of these are the issues raised by OAL, any alternative language could prove controversial and further slow the process. Meanwhile, there are currently three parties who have initiated litigation on portions of the amendments; these are unlikely to be resolved prior to CARB’s responses to OAL.

What Now?
As indicated in a February 26^th Market Notice, CARB’s next steps are to:

1. Revise the amendments to address the issues identified by OAL,
2. Open a 15-day public comment period for any substantive changes,
3. Review comments received (best case, none of those comments require further substantive changes), and
4. Resubmit the amendments to OAL.

CARB has until June 25, 2025 (120 days after receipt of OAL’s written Decision) to address the issues raised and resubmit to OAL. Assuming 30 days for CARB to develop the required revisions, 15 days for public comments, and another 30 days to review and address those comments, it would be mid-May before CARB re-submits to OAL. OAL then has 30 days to review, bringing us near the end of the second quarter of 2025 before the amendments could feasibly take effect. In the meantime, the existing version of the LCFS Regulation, which became effective in July 2020, remains in effect. Accordingly, Stillwater expects large credit surpluses in 1Q and 2Q before the 9% step change in CI reduction takes effect and brings the market close to balance.

What does this mean for LCFS credit prices?

Stillwater’s proprietary LCFS outlook is offered via our interactive and dynamic Carbon Market Outlooks Dashboard.
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