The Michigan Senate recently introduced legislation in an attempt to join several North American jurisdictions that have established clean fuel standards. The Michigan Clean Fuel Standard aims to reduce the average carbon intensity of transportation fuels sold and used in Michigan and incentivize investment in the production, distribution, and use of clean alternative fuels. Several other states are also advancing initiatives to establish clean fuel standards in a growing trend that will create new opportunities and business considerations for fuel producers and project developers.
Senate Bill 275 requires that, by the end of 2035, the carbon intensity of all transportation fuel produced or imported for use in Michigan be reduced to at least 25% below the baseline carbon intensity of all transportation fuel produced or imported for use in Michigan in 2019. California (2011), British Columbia (2011), Oregon (2016), Canada (2021), and Washington (2022) each employ similar reduction targets utilizing a past annual carbon intensity average as a baseline and a percentage reduction goal set for a specific future year. Each regime also utilizes credits that are generated by the production or distribution of clean fuel or other carbon reducing activities. In Michigan, businesses that produce fuels above the standard will receive credits that can be traded or sold, while fuel providers that produce fuel below the standard will be required to reduce the fuel’s carbon intensity below the standard or offset the deficit by purchasing credits.
Michigan is not the only state seeking to establish clean fuel standards. In fact, eleven additional states, including New York, Illinois, and Colorado, have introduced legislation or are otherwise advancing initiatives to establish clean fuel standards. Marketplaces for credits related to fuel standards have created significant economic opportunities for fuel producers and generated sizeable fees for administering states. California saw over thirty million Low Carbon Fuel Standard Credits traded in 2022 at an average price of $125. [[1]] British Columbia generated $425 million CAD in credit trading in 2022. [[2]] From inception in 2016 through 2021, Oregon’s Clean Fuels Program generated $328 million in credits. [[3]]
The expansion of clean fuel regimes, and the potential for enhanced commercial viability through the sale and trade of credits, may serve to create more vibrant and interconnected markets for clean fuels. As additional fuel standard credit markets emerge, fuel providers and project developers will be tasked with evaluating numerous state regimes in order to maximize the value of their product and projects. Producers seeking to accrue credits within a specific state may be incentivized to build relationships with new customers and distributors. Conversely, producers of fuels that do not meet increasingly stringent fuel standards may be forced to incur deficits or invest in carbon reduction in their current markets should clean fuel programs be introduced. Further, it is not yet clear how different state clean fuel standards will interact with one another, if at all, and how new entrants will impact clean fuel credit prices. What is certain is that clean fuel programs are emerging as a popular means for states to reduce emissions and promote the development of clean energy. Michigan has joined the race to be the sixth North American jurisdiction with an effective clean fuel standard, but the field is steadily growing.
[1] California Air Resources Board. LCFS Credit Transfer Activity Report – Monthly. July 2023.
[2] Ministry of Energy, Mines, and Low Carbon Energy Innovation. Low Carbon Fuel Credit Market Report – Quarterly. February 2023.
[3] Wind, C. et al. Oregon Clean Fuels Program: Program Review. Department of Environmental Quality. February 2022. Page 24
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