I. LCFS Readoption

The California Air Resources Board (“ARB”) is on the cusp of readopting the Low Carbon Fuel Standard (“LCFS”) regulation to remedy legal defects in the initial adoption process found by the California Court of Appeal on July 15, 2013.  In conjunction with the LCFS readoption, ARB is expected to propose significant changes to the program.  ARB staff has been vetting potential revisions via a series of workshops this year, and ARB plans to float a draft revised LCFS regulation next month.  The readoption process gained momentum this summer when the Supreme Court denied certiorari regarding the constitutionality of the program.  A new cost containment mechanism, an updated carbon intensity model, and a reanalysis of fuel availability are among the significant changes that could materially impact program participants, both obligated entities and opt-in fuel producers. 

II. Cost Containment

In an August workshop presentation outlining potential changes to the LCFS, ARB staff proposed that the revised regulation include a cost containment mechanism to increase market certainty.  Staff is evaluating two cost containment options:  (1) a “credit clearance” market; and (2) a “credit window.”  Staff has made clear in recent workshops that it prefers the former.    

Under the credit clearance market approach, regulated parties lacking needed LCFS credits would be allowed to carry over deficits to the next compliance period so long as they purchase their pro rata share of all credits made available for sale during a “credit clearance” period.  Credit clearance periods would occur at the end of compliance years and make available for sale any credits that parties holding excess credits voluntarily pledge to sell.  In other words, this would be conducted like a reverse auction where LCFS market participants could use the platform to sell credits.  ARB has been work-shopping a potential price cap on credits sold during the credit clearance period, which would start at $200/credit in 2016 and be indexed to inflation.  Further, any deficits that a regulated party carries over would need to be repaid—with interest—in subsequent years.  Last month, staff proposed an interest rate of 3 percent per year for carried-over deficits. 

Under the alternative “credit window” approach, compliance-only credits would be available for purchase from ARB at a pre-determined price if regulated parties were unable to obtain sufficient credits on the open market.  ARB staff appears to have all but jettisoned the “credit window” approach in favor of the “credit clearance” market as ARB believes the clearance market would:  (1) minimize price spikes and credit shortages; (2) minimize the potential for unintended negative market consequences; and (3) enable conventional fuel suppliers to comply with the program without paying for credits or fuels that the market has failed to produce.

Staff also has suggested that a price floor might be proposed with the credit clearance market.  ARB is requesting comment on the cost containment mechanisms by November 17. 

III.  CA-GREET / iLUC

ARB staff also is proposing revisions to the models it uses to calculate the carbon intensity (CI) of transportation fuels in the program.  In workshops this fall, staff proposed revisions to both the “CA-GREET” model and the indirect land use change (iLUC) analysis that it uses to determine fuels’ CI values.  CA-GREET measures “well to wheel” direct life cycle emissions of transportation fuels for the LCFS, and iLUC measures emissions associated with conversion of land to agricultural use in connection with fuel production.  Together, the proposed changes have the potential to significantly alter the CI values of certain fuels covered by the program, as shown in the following table. 

Source:  http://www.arb.ca.gov/fuels/lcfs/ca-greet/ca-greet2.0-v180.xlsm.

IV.  Low CI Fuel Availability

Over the past several years, some stakeholders raised concerns as to whether low-CI fuels will be available in quantities sufficient for compliance in future years.  As a result, ARB is analyzing what low-CI fuels are likely to be available for compliance in 2020 and beyond.  ARB projects that certain fuel volumes (such as corn and cane ethanol) for the gasoline standard will decrease as we approach 2020, but that others (such as renewable gasoline and electricity ) will increase.  For example, ARB is projecting that electric vehicles will generate 10 times as many credits in 2020 as in 2013, and that renewable CNG credit production will multiply by 32 times during the same time period.  These fuel availability projections have not quelled criticism from industrial stakeholders, with some companies viewing the projections as too high and others as too low for certain fuels.  ARB also appears to be incorporating post-2020 figures into its analysis, again signaling ARB’s intent to extend the LCFS.

V.  Next Steps

ARB’s LCFS readoption activities continue apace.  In addition to the open comment windows, ARB will hold its next workshop on proposed revisions to the LCFS regulation on November 13.  ARB plans to initiate a formal rulemaking in December, with a 45-day comment period beginning circa January 2, 2015.  The Board is scheduled to hear testimony on staff’s proposal at the February 2015 Board Meeting, with a readoption vote targeted for the summer of 2015.  ARB likely will feel pressure to achieve this timeline as it remains subject to a peremptory writ of mandate issued by the Fresno County Superior Court that requires ARB to “proceed in good faith without delay” in readopting the LCFS.  If the court finds that ARB is not proceeding in good faith or is delaying, then the court theoretically could immediately suspend the LCFS.