California?s governing body of the LCFS program, the Air Resources Board (CARB), will raise the 2030 GHG reduction target of 20%. CARB's scoping plan will be finalized in early 2023 and in place in 2024 with the new target, but during the latest CARB workshop, the agency suggested potential caps on RNG and crop-biofuel credit generation. Credit prices are likely to recover with a more aggressive 2030 target, but electricity may be the only fuel pathway without caps and able to generate the lucrative credits...

Analysis

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All eyes are on California&rsquo;s Air Resources Board (CARB), the regulator of the Low Carbon Fuel Standard (LCFS) as they try to implement policy changes to boost the credit price, which has fallen from 2021 prices of about $200/MT to current levels below $70/MT due to credit surpluses. CARB is likely to announce changes to the program in early 2023 in order for implementation to occur on 1 January 2024. In&nbsp;<a href="~/members/lcfs-forecast-credit-prices-to-continue-slide-as-high-diesel-prices-and-electricity-gains-support-credit-build/2022-06-07t000000-0400" target="_self">our previous analysis</a>, we covered some possible directions the program could take given CARB&rsquo;s announcement that they would be raising their 2030 greenhouse gas (GHG) emissions reduction target and the need for a market signal to stop the slide in LCFS credit prices. However, the market is still waiting for definite policy and thus the credit price has continued to languish.
Due to CARB's latest workshop presentation, Stratas has increased the GHG reductions in our three modeled LCFS scenarios when compared with&nbsp;<a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2022/06072022-lcfs-forecast" style="background-color: #ffffff;">our previous analysis</a>: our base case 2030 GHG reduction case has been increased to 30%, with a 35% target as the upside case and a 25% target as the downside case. CARB is likely to raise the 2030 target to at least 30% due to neighboring market developments and political pressures...
[shoojuview id="qgiivjhpgiodxxwfsiqd"]
Source: California Air Resources Board, Stratas Advisors
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*This graph includes a forecast out to 2030 that is available in the full version of this article.
In the workshop CARB unveiled ideas, modeled in their scenarios, for reducing credit generation such as capping crop-based biofuels, eliminating eforklifts, sunsetting RNG credit generation in 2030 and/or limiting RNG projects to just Western US states. Stratas Advisors expects eforklift credit calculations to be reduced, if not eliminated by CARB, since it has long been recognized as a problem in the program that felt contrary to the spirit of the transport-sector legislation. Many observers find it excessive that&nbsp;eforklifts contributed 29% of total electricity credits and 70% of off-road electricity credit generation in 2021.&nbsp;However, the crop-based biofuels and RNG suggestions would be more problematic for many low carbon fuel producers and in future credit generation to meet the program's requirements. Many projects rely on a combination of credits to break even including LCFS program credits, combined with RFS RIN credits and tax credits such as the Blender&rsquo;s Tax Credit, and project investors will find the potential to lose the LCFS credit troubling. However, CARB did not announce these proposals as official policy, yet, and recognized that they must balance aggressive targets with limiting pathways they think would be better served in other markets in reducing overall global GHG emissions. CARB is asking &ldquo;where is this energy best used?&rdquo;, but does not want to see digester projects mothballed and also recognizes that the California market is driving much of the investment in low carbon fuel projects.&nbsp;When modeling a successful 30% by 2030 GHG reduction, or even more so 35%, crop-biofuels and RNG are essential for program due to the credits generated from renewable diesel volumes as well as the extremely strong carbon intensity (CI) scores of RNG. Tellingly, CARB did not include a scenario in their presentation with a 35% target and caps on crop-biofuels and RNG, highlighting the difficulty of implementing both policy changes at the same time. Eliminating or capping these fuel pathways would require a much faster adoption of zero-emission vehicles (ZEVs) in the California market, in addition to a stronger CIs of electricity used for EV charging. ZEV sales now represent over 17.7% of new LDV sales in California as of Q3 2022 data (~5%&nbsp;of total LDV fleet), up from 12.4% in 2021 (4.2%) and 7.8% in 2020 (3.6%) and electricity&rsquo;s LDV/MDV CI has strengthened from 30.9 gCO2e/MJ in 2018 to under 9.5 gCO2e/MJ in 2021...
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The gasoline pool is likely to be most affected by ZEV adoption, given the current situation of ethanol blending limits and carbon intensity. As shown in the graph above, the gasoline pool is also the source of the majority of deficits in the LCFS program and has a larger potential volume to decarbonize. In addition to ZEVs, ethanol has been the other larger player in credit generation in the gasoline pool. However, ethanol's impact in the LCFS market has declined as it's volumes are interlinked with a declining gasoline pool and blending limits currently inhibit expansion. However, there is potential for ethanol's CI to be strengthening through Carbon Capture and Sequestration&nbsp;<a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2021/11192021-low-ci-ethanol" style="background-color: #ffffff;">(CCS) projects.&nbsp;</a>&nbsp;CCS ethanol projects will benefit from the increase to the 45Q&nbsp;tax credit values included in the&nbsp;<a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2022/08222022-inflationreductionact" style="background-color: #ffffff;">Inflation Reduction Act&nbsp;</a>from $50/MT of CO2 to $85/MT of CO2 in 2026, improving project economics and the likelihood of successful development greatly...
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CARB has a stated goal to attract investment in low carbon fuels and knows the importance of the California market given its size and the relative absence of similar programs incentivizing investments elsewhere in North America (and any potential future markets years off from relevance). Further announcements from CARB are likely needed to turn the LCFS credit price direction as the expectation of further credit building seems to be entrenched. In addition to the GHG reduction target increase, CARB is considering some other changes to the program under its scoping plan that is likely to be implemented in 2024 at the earliest&hellip;
Given the near-term uncertainty about certain fuel pathways and lack of clear announced policy support for LCFS prices, Stratas projects LCFS credit prices to recover only slightly in the near term from the current five-year lows of sub $70/MT. The increased 2030 GHG reduction target and other policy announcements are likely to support LCFS credit prices, but the effects of this more aggressive schedule on credit and deficit generation and the credit bank will take a few years to fully manifest in the quarterly data...
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[shoojuview id="zlmyftagwipkfdloclha"]
Source: California Air Resources Board, Stratas Advisors
*This graph includes a forecast out to 2030 with three scenarios that is available in the full version of this article.
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LCFS credit prices are likely to continue to languish in the absence of a firm announcement from CARB about an ambitious GHG reduction target, extension of the program and/or a minimum credit price with a major announcement likely to stabilize prices. However, the regulatory body is likely to take time to review the options, solicit feedback and announce the new target and finalize the scoping plan. Even with such an announcement&hellip;
If crop-biofuels and/or RNG would be excluded from the LCFS program in the future, there are promising market developments elsewhere these fuel pathways could look towards. Washington&rsquo;s LCFS program is set to begin in 2023 and Canada&rsquo;s federal Clean Fuel Regulation enters into effect in July 2023, with the potential to stack credits with British Columbia&rsquo;s LCFS program. The state of New York is again revisiting its own LCFS program and included it as a strategy to achieve its 2050 net-zero emissions target and the states of New Mexico, Colorado and Minnesota are also debating LCFS programs. At the US federal level, the introduction of &ldquo;eRINs&rdquo;, RINs generated from EV charging with electricity generated by biogas producers, in the RFS, the Inflation Reduction Act tax credits and increased interest from voluntary markets are all fueling increased investments in biogas and RNG projects...
Subscribers&nbsp;can&nbsp;<a href="~/members/lcfs-forecast-new-reduction-target-to-lift-credit-prices-rng-and-crop-biofuels-at-risk-of-credit-caps/2023-01-05t000000-0500" target="_self">access the full report</a>&nbsp;from our&nbsp;<a href="~/services/renewable---alternative-fuels/global-biofuels-outlook" target="_self">Global Biofuels Outlook</a>&nbsp;service. 
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LCFS Forecast: New Reduction Target to Lift Credit Prices, RNG and Crop-Biofuels at Risk of Credit Caps

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All eyes are on California&rsquo;s Air Resources Board (CARB), the regulator of the Low Carbon Fuel Standard (LCFS) as they try to implement policy changes to boost the credit price, which has fallen from 2021 prices of about $200/MT to current levels below $70/MT due to credit surpluses. CARB is likely to announce changes to the program in early 2023 in order for implementation to occur on 1 January 2024. In <a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2022/06072022-lcfs-forecast">our previous analysis</a>, we covered some possible directions the program could take given CARB&rsquo;s announcement that they would be raising their 2030 greenhouse gas (GHG) emissions reduction target and the need for a market signal to stop the slide in LCFS credit prices. However, the market is still waiting for definite policy and thus the credit price has continued to languish. 
In CARB&rsquo;s latest workshop, the agency shed more light on potential policy changes they could make. The largest market development and change to our scenarios has been due to CARB&rsquo;s modeling of a 35% 2030 GHG reduction target in addition to a 30% reduction (up from the current 20%). In addition, CARB shared their modeling of a 90% 2045 GHG reduction target, in line with California&rsquo;s statewide target of becoming carbon neutral by 2045. While the LCFS program has not been formally extended beyond 2030, an extension and aggressive 2045 target could help to reverse the credit price direction. CARB&rsquo;s model is a cost optimization model which solves for the cheapest GHG reduction from a combination of fuels to meet the requirements of the modeled LCFS scenarios. It models what is currently on the books, in that E15 assumptions or other potential future fuel policy market developments are not included. 
Due to the workshop presentation, Stratas has increased the GHG reductions in our three modeled LCFS scenarios when compared with <a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2022/06072022-lcfs-forecast">our previous analysis</a>: our base case 2030 GHG reduction case has been increased to 30%, with a 35% target as the upside case and a 25% target as the downside case. CARB is likely to raise the 2030 target to at least 30% due to neighboring market developments and political pressures. Recently, British Columbia increased its 2030 GHG reduction to 30% from 20%; Oregon&rsquo;s version of the LCFS, the Clean Fuel Program, established a 37% target for 2035; and Governor Newsome has publicly pushed for CARB to increase its 2030 target aggressively. An aggressive increase of the 2030 target would be a positive signal for LCFS credit prices since the market is currently generating surplus credits. However, the deficits generated from a more aggressive target would rapidly expand in the latter half of the 2020&rsquo;s, making program compliance more difficult. In addition, CARB reiterated the idea of including intrastate flights as deficit-generating transportation, and many market participants submitted comments supporting another proposed mechanism to automatically increase the GHG reduction targets if the credit bank is in a surplus &ndash; both bullish proposals for LCFS credit prices. However, some market participants currently generating credits were taken aback by CARB&rsquo;s suggestions of limiting some fuel pathways, which would potentially exclude them from the LCFS market and generating LCFS credits crucial to many projects' economics.
<div id="vlahocscyynkvijcxyru"></div><script src="https://stratas.shooju.com/api/1/views/vlahocscyynkvijcxyru.js?element_id=sjview_vlahocscyynkvijcxyru&jwt=JWT_TOKEN"></script>
Source: California Air Resources Board, Stratas Advisors
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<h4 style="margin-bottom: 20px;">CARB's Scoping Plan&nbsp;</h4>
In the workshop CARB unveiled ideas, modeled in their scenarios, for reducing credit generation such as capping crop-based biofuels, eliminating eforklifts, sunsetting RNG credit generation in 2030 and/or limiting RNG projects to just Western US states. Stratas Advisors expects eforklift credit calculations to be reduced, if not eliminated by CARB, since it has long been recognized as a problem in the program that felt contrary to the spirit of the transport-sector legislation. Many observers find it excessive that&nbsp;eforklifts contributed 29% of total electricity credits and 70% of off-road electricity credit generation in 2021. However, the crop-based biofuels and RNG suggestions would be more problematic for many low carbon fuel producers and in future credit generation to meet the program's requirements. Many projects rely on a combination of credits to break even including LCFS program credits, combined with RFS RIN credits and tax credits such as the Blender&rsquo;s Tax Credit, and project investors will find the potential to lose the LCFS credit troubling. However, CARB did not announce these proposals as official policy, yet, and recognized that they must balance aggressive targets with limiting pathways they think would be better served in other markets in reducing overall global GHG emissions. CARB is asking &ldquo;where is this energy best used?&rdquo;, but does not want to see digester projects mothballed and also recognizes that the California market is driving much of the investment in low carbon fuel projects. When modeling a successful 30% by 2030 GHG reduction, or even more so 35%, crop-biofuels and RNG are essential for program due to the credits generated from renewable diesel volumes as well as the extremely strong carbon intensity (CI) scores of RNG. Tellingly, CARB did not include a scenario in their presentation with a 35% target and caps on crop-biofuels and RNG, highlighting the difficulty of implementing both policy changes at the same time. Eliminating or capping these fuel pathways would require a much faster adoption of zero-emission vehicles (ZEVs) in the California market, in addition to a stronger CIs of electricity used for EV charging. ZEV sales now represent over 17.7% of new LDV sales in California as of Q3 2022 data (~5% of total LDV fleet), up from 12.4% in 2021 (4.2%) and 7.8% in 2020 (3.6%) and electricity&rsquo;s LDV/MDV CI has strengthened from 30.9 gCO2e/MJ in 2018 to under 9.5 gCO2e/MJ in 2021. While ZEV adoption and electricity&rsquo;s LCFS credit generation have grown faster than previously expected, it is unlikely that they will increase enough to meet a 30% or 35% GHG reduction target while limiting crop-biofuels and/or RNG. Therefore, we expect CARB to opt for aggressive GHG reduction targets and recognize the need for crop-biofuels and RNG to meet these targets in the medium-term. CARB could announce a phasing out or capping of these pathways post-2030 in order to allow the market and zero-emission vehicles the time necessary to make up for the gap in credit generation and reduce the volumes of deficit producing petroleum fuels in order to ensure a successful LCFS program.
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<h4>Active and Planned US RD Production Facilities</h4>
<img height="600" alt="us rd map" width="800" src="https://cdn.aglty.io/stratas-advisors/reports/analysis/01052023-LCFS-Forecast1.png?h=600&amp;w=800" style="height: 600px; width: 800px;" />
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Renewable diesel (RD) has historically been the marginal source of credit generation and compliance in LCFS-style programs due to its global market and ability to be easily transported and blended. Many refiners have announced plans to build or convert refineries into RD production facilities due to declining refinery margins, increasing regulatory burden, and a desire to try to generate their own LCFS and RIN credits to reduce their annual liability in credits to be purchased for program compliance. This adds additional political lobbying pressure for and against renewable diesel as these projects come online. There are over 6 billion gallons of announced US RD production capacity set to come online by the end of 2026 compared to about 2 billion gallons of capacity today, with most of the projects targeting the California LCFS market. Not all projects are likely to be completed successfully, a growing amount of capacity will be used for sustainable aviation fuel for the aviation sector and fierce competition for feedstock will likely lower utilization rates, but this increased RD production would still amount to a large increase in the 1.25 billion gallons of RD consumed in California currently. We project that RD will account for a majority of California&rsquo;s diesel pool by 2030 at around 2 billion gallons in volume. While RD pathways CI scores are unlikely to strengthen due to the scarcity of feedstock, each gallon of RD replaces a deficit generating gallon of petroleum diesel in a one for one swap, unlike with blended ethanol and biodiesel, which due to blending limits only displace a portion of petroleum fuel and have less potential for increasing volumes significantly. Thus, increased RD volumes will help compliance with the LCFS program as the reduction schedule strengthens, but California&rsquo;s gasoline pool is about four times the size of its diesel pool and so petroleum gasoline gallons will continue to drive up deficits generated. 
<div id="slvlespupxsjihortbmd"></div><script src="https://stratas.shooju.com/api/1/views/slvlespupxsjihortbmd.js?element_id=sjview_slvlespupxsjihortbmd&jwt=JWT_TOKEN"></script>
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The gasoline pool is likely to be most affected by ZEV adoption, given the current situation of ethanol blending limits and carbon intensity. As shown in the graph above, the gasoline pool is also the source of the majority of deficits in the LCFS program and has a larger potential volume to decarbonize. In addition to ZEVs, ethanol has been the other larger player in credit generation in the gasoline pool. However, ethanol's impact in the LCFS market has declined as it's volumes are interlinked with a declining gasoline pool and blending limits currently inhibit expansion. However, there is potential for ethanol's CI to be strengthening through Carbon Capture and Sequestration <a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2021/11192021-low-ci-ethanol">(CCS) projects.&nbsp;</a>&nbsp;CCS ethanol projects will benefit from the increase to the tax credit values in 45Q included in the <a href="https://stratasadvisors.com/member/analysis/fuel-and-transportation/2022/08222022-inflationreductionact">Inflation Reduction Act </a>from $50/MT of CO2 to $85/MT of CO2 in 2026, improving project economics and the likelihood of successful development greatly. Thus, we have the improved the carbon intensity of corn ethanol in our forecasts to reflect the increased likelihood of successful CCS ethanol volumes entering California. Under the 35% target scenario, we also increased the volume of ethanol in the California gasoline pool to reflect an adoption of E15 in California and the need for more credit generation under this aggressive scenario. However, due to the relatively weak CI score of corn ethanol and limited blending volumes in a declining petroleum gasoline pool, these adjustments do not have nearly as much as an effect as adjusting forecasts of the main fuel pathways of Electricity, RD and RNG.
&nbsp;
<h3>LCFS Credit Bank and Price Forecast</h3>
<div id="nkigwpwurlplrvfgbrkw"></div><script src="https://stratas.shooju.com/api/1/views/nkigwpwurlplrvfgbrkw.js?element_id=sjview_nkigwpwurlplrvfgbrkw&jwt=JWT_TOKEN"></script>
Source: California Air Resources Board, Stratas Advisors
Given the near-term uncertainty about certain fuel pathways and lack of clear announced policy support for LCFS prices, Stratas projects LCFS credit prices to recover only slightly in the near term from the current five-year lows of sub $70/MT. The increased 2030 GHG reduction target and other policy announcements are likely to support LCFS credit prices, but the effects of this more aggressive schedule on credit and deficit generation and the credit bank will take a few years to fully manifest in the quarterly data. Then, in the latter half of the decade an increasing amount of deficits generated from petroleum fuels will generate large net credit deficits and draws on the credit bank, pushing the LCFS credit price to the cap in both the 30% and 35% target scenarios. While CARB would likely react to such a scenario, policy changes as reactions to market prices are likely to take a while,&nbsp;as we have seen in the current market.&nbsp;&nbsp;
&nbsp;
<div id="sbeoudemfcdwwmkggfof"></div><script src="https://stratas.shooju.com/api/1/views/sbeoudemfcdwwmkggfof.js?element_id=sjview_sbeoudemfcdwwmkggfof&jwt=JWT_TOKEN"></script>
Source: California Air Resources Board, Stratas Advisors
&nbsp;
If crop-biofuels and/or RNG would be excluded from the LCFS program in the future, there are promising market developments elsewhere these fuel pathways could look towards. Washington&rsquo;s LCFS program is set to begin in 2023 and Canada&rsquo;s federal Clean Fuel Regulation enters into effect in July 2023, with the potential to stack credits with British Columbia&rsquo;s LCFS program. The state of New York is again revisiting its own LCFS program and included it as a strategy to achieve its 2050 net-zero emissions target and the states of New Mexico, Colorado and Minnesota are also debating LCFS programs. At the US federal level, the introduction of &ldquo;eRINs&rdquo;, RINs generated from EV charging with electricity generated by biogas producers, in the RFS, the Inflation Reduction Act tax credits and increased interest from voluntary markets are all fueling increased investments in biogas and RNG projects. Absent a national, all-encompassing US LCFS program, projects are likely to continue to follow the patchwork of tax credits and state and federal program credits most beneficial to their pathway
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