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Acronym	Definition
BC-LFS	British Columbia Low Carbon Fuel Standard
BD	biodiesel
C&I	Cap & Invest
C&T	Cap and Trade
CARB	California Air Resources Board
CCA	California Carbon Allowance
CFP	Clean Fuels Program
CFR	Canadian Clean Fuel Regulations
CFS	Clean Fuel Standard
CI	carbon intensity
CO2e	carbon dioxide-equivalent
CPG	cents per gallon
CTFP	Clean Transportation Fuel Program
CTFS	Clean Transportation Fuel Standard
EA	environmental attribute
EER	Energy Economy Ratio
EV	electric vehicle
GHG	Greenhouse Gas
LCF	low carbon fuel
LCFS	Low Carbon Fuel Standard
NOx	Nitrogen Oxide
PNW	Pacific Northwest
RD	Renewable Diesel
RNG	Renewable Natural Gas
ULSD	ultra-low sulfur diesel
WCA	Washington Carbon Allowance
WECC	Western Electricity Coordinating Council

Stillwater bases this Washington Clean Fuels Program (CFS) outlook on the credit price forecast from our detailed California Low Carbon Fuel Standard (LCFS) outlook which is built on a quantitative foundation of credit supply and demand forecasting methodology. This link to the larger and more established LCFS credit market for CFS forecasting is supported by several factors:

1. 1. The CFS is nearly identical to the LCFS. There are, however, differences in reduction schedules, some fuel CIs, price caps, and regulatory specifics.[1] We take these differences into account in our CFS forecasting methodology. For this outlook, we assume that the current CFS reduction schedule remains in place through the forecast period.
      • A feature unique to the CFS is the provision allowing for emergency deferrals (due to fuels shortage) or fuels forecast-related deferrals. The former may be triggered by restrictions of low-CI fuel supplies or natural disasters if in the public interest. The latter may be triggered if the Washington Department of Ecology’s (Ecology) annual fuel supply forecast indicates that the number of credits that will be available during the forecast compliance period will be less than 100 percent of the credits projected to be necessary for compliance. Stillwater’s analysis indicates that neither provision is likely to be triggered prior to 2032. Post 2032, however, major regulatory uncertainties (discussed both above and below) render a meaningful deferral analysis essentially impossible.
   2. In addition to the CFS, Washington has in place a Cap and Invest (C&I) regulation modelled after California’s Cap and Trade (C&T) regulation. One portion of these regulations requires that suppliers of fossil fuels acquire allowances to cover their fossil carbon emissions. Since allowances are not required for non-fossil fuels, the value of the allowances imposed on fossil fuels that non-fossil fuels displace adds to the value of the non-fossil fuels in each market.
   3. Washington state’s transportation fuel volume is about one fifth the size of California’s; as such, California’s larger market sets the low-carbon fuel value in the region.
   4. The CFS and LCFS programs share the same out-of-state low-carbon fuel supply with delivery via rail, marine vessel, the Western Interconnect, and the interstate natural gas pipeline network.
   5. The West Coast transportation fuels market is isolated from the rest of the country for fuel supply. The underlying transportation fuels market has three primary enclaves – the Pacific Northwest (PNW), the San Francisco Bay Area, and Southern California – which are interlinked via marine movements. As a result, fuels prices among the enclaves tend to track one another, although there can be considerable short-term volatility between enclaves as unscheduled refinery issues or logistics shutdowns cause supply disruptions that impact a single enclave and stress the capability for marine movements.
   6. In addition to the LCFS and CFS, there are several similar LCF programs in North America. Oregon’s Clean Fuels Program (CFP) is very similar to the LCFS and CFS. British Columbia’s Low Carbon Fuel Standard (BC-LCFS) and the Canadian Clean Fuel Regulations (CFR) share the same LCF structure and core tenets. Additionally, as of this writing, New Mexico is in the rulemaking process for implementation of that state’s Clean Transportation Fuel Program (CTFP) which is slated to come online in 2026. Although the credits generated and traded in each of these LCF jurisdictions are not fungible across programs, the various credit prices will be linked via the swing low-CI fuel in each program.

RD as Washington’s Swing Fuel: Our methodology focuses on the parity of renewable diesel (RD) value under the CFS and LCFS programs in future years since the same fuel from many of the same suppliers is supplied to both regions. RD plays a unique role in these programs as it is the only fuel which can be freely and incrementally substituted for a deficit-generating fuel consumed in vehicles currently on the road in large numbers. RD supply has been rapidly growing, and this trend is the reason for the large build in credit generation under both programs. In other words, RD is assumed to be the swing fuel for credit generation between the LCFS and CFS.

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[1] For example, all LCF programs contain exclusions for certain uses of transportation fuels. These exclusions are generally marginal to on-road gasoline and diesel fuel volumes.

Reduction Schedules

The CFS was modeled after the LCFS, and both programs share many of the same certified fuel pathways and basic constants that are used in credit and deficit calculations. The major differences between the LCFS and CFS are the implementation year (the LCFS became effective in 2011 while the CFS became effective in 2023) and the CI reduction schedules (displayed below).

The overarching purpose of the CFS is to reduce the CI of transportation fuels in Washington state by 20 percent below 2017 levels by 2038. Rather than specifying annual CI reduction targets, the enabling legislation provided limitations on the allowable incremental change in annual reductions. The CFS CI reduction schedule specified in the regulation is displayed in the figure below; this is the maximum reduction allowed under the guidance of the enabling legislation. Furthermore, to proceed beyond a 10% reduction, the legislation stipulates that three conditions must be met:

Underlying Fuels Market

The figures below provide perspective on the market scope for the California LCFS and the Washington CFS. The first figure illustrates the market size and gasoline-to-diesel ratios for the two markets. As can be seen, the gasoline and diesel fuels volumes covered by the LCFS are 5.1 and 4.6 times larger, respectively, than those covered under the CFS.

Fuel Volume Comparison by Program (First Half 2024)

The figure below illustrates the relative volume of credits and deficits generated in each program. As can be seen, both credit and deficit generation are markedly larger in California than in Washington. Besides the market size, there is a marked difference in the maturity of each program (with the LCFS is in its 15^th year and the CFS in its third) and in the current CI reduction standards (with the LCFS at 12.5% and the CFS at 1.0% CI reductions respectively in 2024).

Credits and Deficits Generated by Program (First Half 2024)

Finally, in the following figure we display the relative prices between Washington and California, based on the New York Mercantile Exchange (NYMEX) differential for ultra-low sulfur diesel (ULSD) in the PNW, San Francisco Bay, and Los Angeles enclaves over the past few years. This comparison highlights how closely these markets track one another despite the volatility of pricing over the short term. If the differential were averaged over the entire data period, the PNW shows a 1.6 cent per gallon (cpg) premium over California despite the seemingly extreme volatility.[1] For the purposes of a price forecast for transportation fuel, parity among the enclave markets is assumed over the long run.

ULSD Spot Basis Differentials (Pacific Northwest vs. California)

Shared Low-Carbon Fuels

In addition to the petroleum product supply, low-carbon fuels are supplied to the West Coast via production within the region as well as imports by rail and water, the Western Interconnection,[2] and interstate and intrastate natural gas pipelines.

Since local production is inadequate to meet the needs of the CFS or LCFS, suppliers of the low-carbon fuels that utilize the same sources and transportation modes to California and Washington have the option to supply either of these markets; suppliers are incentivized to sell product into the market with the highest value, thus the markets are driven to price parity that provides indifference as to whether fuels are delivered and sold into Washington or California.

The supplies of fuel that come from outside the West Coast for the LCF programs are:

• • Ethanol railed primarily from the Midwest,
  • Biodiesel (BD) railed primarily from the Midwest with a small amount imported by water and rail,
  • RD supplied by rail and by water from other regions in the U.S. and imported to the West Coast by water,
  • Renewable Natural Gas (RNG) supplied via common-carrier pipeline and granted LCFS and CFS credits via book-and-claim accounting,
  • Electricity imported to the West Coast through interties that are part of the Western Electricity Coordinating Council (WECC) that covers the 11 western states and two western Canadian provinces.

As low-carbon fuels are shared between California and Washington, their values are expected to have parity under the LCFS and CFS barring constraints around supply, demand, usage (such as blending restrictions), or local logistics. In the case of RNG and electric vehicles (EVs), demand in each state is constrained by the number of appropriate vehicles on the road, with California having a higher percentage.

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[1] Excluding the high June and July 2022 differentials drops the average over the period to a minus 0.5 cpg.

[2] Per the Transmission Agency of Northern California (TANC): The Western Interconnection is the geographic area containing the synchronously operated electric grid in the western part of North America, which includes parts of Montana, Nebraska, New Mexico, South Dakota, Texas, Wyoming and Mexico and all of Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah, Washington and the Canadian provinces of British Columbia and Alberta.

In developing our outlooks, we observe that most low-carbon fuels are constrained by the availability of supply (e.g., dairy and swine digester RNG) or the limited demand from the corresponding vehicle technology (e.g., electricity, hydrogen, and liquefied natural gas/compressed natural gas [LNG/CNG]). Recently, however, RD (which is a true drop-in replacement fuel for diesel) has become increasingly available with numerous projects under construction. Furthermore, BD blending, which has been constrained by technical specifications related to nitrogen oxide (NOx) emissions, is allowed to increase with larger amounts of RD blending. Therefore, RD and BD are the fuel types which can be varied in the short-term to achieve program compliance since they replace ULSD for existing vehicles.

RD has played a key role in the recent performance of the CFS and LCFS programs and is expected to continue as the pricing link between the two programs as RD capacity grows. Beginning in 2021 for the LCFS and 2023 for the CFS, these programs saw accelerated growth in credit generation and a sharp decline in credit prices with corresponding leaps in RD use first in California and then in Washington. The figure below illustrates the increase in RD volumes under the CFS and LCFS programs in the past four years, and the rapidly growing percentage of RD in the liquid diesel pools on the West Coast.

RD Volumes by Program

To illustrate how RD has affected credit generation in these programs, the following figure demonstrates how credits from RD have grown as a percentage of the total credits since 2020 in the CFS and the LCFS, establishing a lead position among fuels in both programs.

RD Credits by Program

Valuing RD in Different States 

The value of a low-CI fuel is a combination of the value of its environmental attributes (EAs)[1] and the commodity value of the fuel it displaces (including the cost of EAs added to the displaced fuel).

For Washington and California, the EA values for low-CI fuels in each of the state programs are CFS and C&I values in Washington and LCFS and C&T values in California. The total EA value stack includes the low-CI fuel’s EA value plus the EA cost of the fuel they displace (as these costs will no longer be borne when low CI fuel is supplied). The following figure illustrates the value of the EA stack for 60 CI RD fuel replacing ULSD in Washington and California. Since the suppliers of these fuels can supply either state, we expect there to be parity of the state EA values over any extended time. To illustrate the relative values and trends, the figure includes the EA component values of each program.

Environmental Attribute Values for RD (Washington & California)

Since both CFS and C&I were initiated in 2023, credit markets for CFS credits and Washington Carbon Allowances (WCAs) were in development for most of that year, and affected parties were on a learning curve. In 2024, we saw the California and Washington EA values converge as the markets for CFS credits and WCAs developed and matured.

Given parity for EA values with California, the value of CFS credits will vary with the differences between WCA and California Carbon Allowance (CCA) prices. However, Washington is moving to join the Quarterly Joint Auction of Cap-and-Trade allowances held by California and Quebec. If Washington successfully joins that joint auction, the C&I and C&T allowance values would be at parity. To date, there has been some offset with WCA prices exceeding CCA prices.[2] For this outlook, we assume that C&I linkage with the California-Quebec C&T Auction will occur by 2027, immediately following the current four-year compliance period ending 2026.

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[1] For low-CI and renewable fuels in domestic markets, the fuel EA value is the value of RINs and federal tax credits if applicable, and any state and local incentives (like CFS, LCFS, C&I, C&T, etc.). In addition to the direct EA value, there is additional value in the EA cost of the displaced fuel. The value of the displaced fuel, if fossil based, is the commodity value or wholesale value plus the costs imposed by programs (RFS, LCFS, CFS, C&T, C&I) along the value chain from the point of production of importation. Note the renewable volume obligation (RVO) cost levied on refinery production or imports are embedded in the commodity price of the fuel. For domestic markets, the differences in EA value between states is the difference in the state and local incentives as the RINs and federal tax incentives apply to the domestic market (excluding Alaska for the RFS).

[2] The WCA credit market was impacted in 2024 by the uncertainty caused by ballot Initiative 2117 which would have overturned the statute underlying the C&I program. The initiative was defeated on November 5, 2024, and C&I remained in effect.

Stillwater’s CFS outlook is based on the cases developed in the December 2024 LCFS outlook. Our California LCFS cases are:

1. 1. Base Case – Developed from our expected petroleum and EV fuel demand assumptions.
   2. High Case – Developed from a projection of higher petroleum fuel demand and lower EV electricity demand portraying a scenario of slower EV penetration.
   3. Low Case – Developed from a projection of lower petroleum fuel demand and higher EV electricity demand portraying a scenario of higher EV penetration.
   4. Alternate Case (LCFS Base w/ Automatic Acceleration Mechanism Triggered) – This variation of the Base Case forces a triggering of the AAM in 2028 in order to provide an estimate of the potential impact on credit prices.

The figure and table below show the forecast CFS credit prices using the methodology described above applied to the three primary LCFS outlook cases. Note that these are annual-average credit prices; we expect considerable volatility to be observed between the two programs in shorter-term views.