The California Low Carbon Fuel Standard (LCFS) has increasingly become a victim of its own success. The state’s LCFS credit incentive draws the lowest carbon fuels into the state for consumption, displacing higher carbon fuels and generating an increasing number of credits against a declining volume of deficits. Credits have vastly outpaced deficits for two years, resulting in a record bank of cumulative credits at over 16.5 million. The structural oversupply has weighed on credit pricing, eroding the value of the incentive to renewable fuel producers. Credits reached the lowest levels in over six years at $59/t in February of 2023.
To address mounting oversupply, the California Air Resources Board (CARB) has undertaken a state-required Scoping Plan examining stricter carbon reduction targets of 30% and 35% compared to a 2010 baseline, increasing off the current target of 20%. A public workshop held by CARB on August 16 covered the implementation of its California Transportation Supply Model (CATS). The optimization model was used to simulate supply and demand of the California transportation fuel market. Materials provided by CARB laid out inputs used in the model and, perhaps more importantly, indicated what was not factored into current modeling efforts. CARB’s latest CATS model explores a 30% reduction scenario with a sizeable 5.00% step-down reduction taking place in 2025.
Below, we explore four LCFS scenario models AEGIS Hedging’s Emissions Advisory Team developed. The models are consistent in the timing for the rebalancing of the LCFS credit market while providing a range of cumulative credit bank estimates to guide stakeholders in likely developments as the LCFS program rulemaking goes into effect.