In September 2018, the California Air Resources Board (CARB) approved several significant changes to California’s Low Carbon Fuel Standard (LCFS) that will take affect on January 1, 2019. [1] The LCFS is California’s “cap and trade” regime for transportation fuels, where fuels are assigned a Carbon Intensity (CI) that varies depending on their feedstock and how they are produced or manufactured.  Producers of fuels with a CI under the annual cap (for 2018, 93.55 grams of CO2 equivalent per Megajoule) earn credits while producers of higher-carbon fuels like gasoline and diesel incur deficits and are required to buy offsetting credits to meet the annual average CI value.  Credits are bought and sold in the secondary market, and the current LCFS credit price of nearly $200/Metric Ton is driving the development of many facilities that are able to produce transportation fuels with low CI scores. 

While the amended LCFS regulation makes several significant changes, the following highlights could impact renewable fuels development in 2019 and beyond:

• LCFS Extension through 2030, with new opportunities to generate credits.  CARB extended the LCFS program through 2030, providing market participants with more regulatory certainty on the annually declining CI targets.  LCFS credits can now be generated for carbon capture and storage projects, alternative jet fuel, innovative oil production projects, and certain electric vehicle and hydrogen fueling infrastructure, among others.  Observers predict that these changes could have the biggest impact in electric vehicle charging and renewable natural gas/biomethane projects through the mid-2020s. 
• Renewable Natural Gas is poised for growth and may benefit the Agriculture Sector in particular.  Renewable Natural Gas (RNG)/biomethane projects, especially livestock manure anaerobic digester projects, will receive a lot of attention due to the low CI associated with renewable natural gas.  The CI of biogas generated from on-farm digester systems  is approximately negative 285 gCO2e/MJ because it mitigates business-as-usual methane emissions while also displacing traditional fossil fuel use in transportation.  Stabilization of the LCFS market is expected to create valuable opportunities for the agriculture industry to generate much-needed revenue from waste streams while reducing its carbon footprint. Renewable diesel is another low-CI fuel that is expected to surge, which could drive a need for waste oil feedstocks.
• More interest in Hydrogen and Electric Vehicle Fast Charging Infrastructure.  For the first time, CARB will begin awarding LCFS credits based on the capacity (not just the fuel dispensed) associated with hydrogen and direct current fast charging electric vehicle fueling infrastructure.  Although there are programmatic limits on how many LCFS credits can be awarded based on charging capacity, such credits should help spur the infrastructure needed for California to meet its goal of 250,000 electric vehicle charging stations by 2025. 

• Third Party Verification.  CARB’s amendments will introduce third-party verification for those parties generating LCFS credits, similar but not identical to what exists with the federal Renewable Fuel Standard/RINs program.  This verification is meant to mirror the structure under California’s sister Cap and Trade Program for power and industry, and CARB believes that verification is a key component of carbon markets nationwide.  The third-party verification requirements will be phased-in starting in 2020. 

In sum, the credit generation possibilities and high price of LCFS credits should spur additional investment in California’s renewable fuels industry in the coming years. K&L Gates attorneys will continue to monitor the industry and assist our clients develop projects and navigate the carbon compliance markets.

[1] This assumes that the California Office of Administrative Law approves the new regulations, which is widely expected.