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California LCFS: Low-Carbon Fuel Supply Scenario Analysis Overview

California’s Low Carbon Fuel Standard (CA-LCFS) has created one of the biggest regional carbon markets for the transportation sector. As the world transitions toward a low-carbon economy, governments and businesses across the world are looking for proven templates to decarbonize the transportation sector. The lessons learned by California in developing and implementing the CA-LCFS are invaluable to everyone pursuing a similar course in other regions. 

A portion of all proceeds from any sale of our LCFS study will go to the Low Carbon Fuels Coalition (LCFC), a technology-neutral trade association dedicated to the support and expansion of market-based low carbon fuel policies. The LCFC tracks and analyzes developments in low carbon fuel policies, advocates for the expansion of sound low carbon fuel policies and assists on policy design issues worldwide. For more information on LCFS, please visit https://www.lcfcoalition.com.

Report Objective

EcoEngineers has analyzed 10 years of CA-LCFS data to project credit generation under the program in the year 2023 in its new report, “California LCFS: Low Carbon Fuel Supply Scenario Analysis.” We look at the potential supply of low-carbon alternatives to both gasoline and diesel and project three credit supply scenarios. The key question we try to answer is whether the low-carbon fuel supply currently in the pipeline is sufficient to make credit markets whole in California and increase the cumulative credit bank. We also project when this may happen. 

The CA-LCFS has been successful because it is displacing high-carbon diesel and gasoline with low-carbon alternatives. The diesel alternatives are primarily biodiesel, renewable diesel, and renewable natural gas (RNG); gasoline alternatives are primarily electricity, hydrogen, and ethanol. 

CA-LCFS credit prices have stayed around USD $200 per metric ton (MT) of CO2e since 2018, providing a strong incentive to supply low-carbon fuels. For example, in 2020 there were over a dozen renewable diesel projects with an aggregate 2.6 billion gallons of supply in the pipeline. These projects will have a global impact, since the supply can be directed to other markets. Other U.S. states, nations, or regions planning low-carbon fuels policies now have an assured supply scenario. 

Similarly, RNG has seen unprecedented growth in the U.S. as a result of the CA-LCFS, which credits dairy digester gas with “methane offset credits” for closing methane leakage at manure lagoons. A key feature of the CA-LCFS that led to the successful launch of the RNG sector is the “book-and-claim” system for environmental attributes. Book-and-claim accounting refers to the chain-of-custody model in which decoupled environmental attributes are used to represent the ownership and transfer of transportation fuel without regard to physical traceability. 

Book-and-claim, methane offset credits, and a host of other policy features have evolved with the CA-LCFS, and together they provide a wealth of experience and policy insights in how to structure a good program. Anyone attempting to draft a low-carbon fuel policy should pay close attention to the lessons learned by California and adapt them to regional needs. EcoEngineers’ report, “California LCFS: Low Carbon Fuel Supply Scenario Analysis,” highlights some of the key policy drivers that makes the CA-LCFS successful and what other regions can learn from it.

Who Should Read?

Fuel policies will influence the type of fuels consumed, and a clean fuel standard that is technology-neutral and market-based will incentivize supply and use of low-carbon fuels. It will also achieve several ancillary benefits, such as jobs creation and sectoral boosts to a wide cross section of industry including construction, agriculture, logistics, power generation, etc. 

This report should be of interest to policy makers, low-carbon fuel advocates, fossil fuel refiners and suppliers, project developers and financiers, and anyone actively pursuing the development and supply of low-carbon fuels or trying to decarbonize their supply chains. 

Source: https://ww3.arb.ca.gov/fuels/lcfs/dashboard/dashboard.htm

Key takeaways:

1. Energy demand in the transportation sector continues to increase steadily in California. Fossil gasoline’s contribution to energy demand in the gasoline pool will stay steady in the short term, as wider adoption of electric vehicles grow at a slower rate. In contrast, fossil diesel’s contribution to energy demand in the diesel pool will be eroded to 65% or lower by 2023. 
2. As a result of a court ruling in 2020, biodiesel (BD) blends up to 20% can now be stored and retailed in California. R80B20 blends – a combination of 80% renewable diesel and 20% biodiesel – will become popular. 
3. In 2023, about 2.6 billion gallons of RD capacity could be available from the 12 publicly known projects. The actual number of projects being planned is greater. However, the disruptive effect of the sudden emergence of significant renewable diesel volumes is complicated by five factors, each of which require further study:
   a) California refiners’ willingness to sacrifice refining capacity for reduced compliance costs
   b) The growth of the sustainable aviation fuel sector and the demand it creates for RD
   c) The development of LCFS type policies in other countries and US states
   d) Feedstock price movements relative to LCFS credit
   e) Growth of an electric heavy-duty vehicle (HDV) segment 
4. CNG fueling infrastructure will continue to grow at a steady pace and reach about 240 million diesel gallon equivalents (dge) in 2023. 
5. There is significant change coming in the RNG sector from the arrival of ultralow carbon RNG from dairy/swine manure and food waste biogas projects. In 2019, about 94% of RNG consumed in California was RNG derived from landfill gas, with an average CI of 45 gCO2e/MJ . However, RNG from animal manure with ultralow CI’s (-100 to -300 gCO2e/MJ) is on track to be 43% California consumption by 2023. 
6. Cumulative sales of electric vehicles (EVs), which include battery-electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and fuel-cell electric vehicles (FCEVs), are growing rapidly in California. The number of registered EVs in California will grow at a rate of around 130,000 per year and reach about 1.2 million vehicles in 2023 and exceed California’s 1.5 million EV goal in 2025. 
7. The current trend line for electric fuel use in transportation suggests that 214 million gge consumption in 2023, from a mixture of light duty (LDV) and heavy-duty (HDV) vehicles. Even if all the projected 214 million gge electric fuel use in California in 2023 was a gasoline replacement, electric fuel use would not create a serious dent in gasoline demand. 
8. A testament to the program’s success is the wide variety of entities registered for electric and hydrogen pathways. The program has attracted municipalities, car manufacturers, IT companies, cattle ranchers, municipal utilities, food manufacturers, grocery chains, public transit and a variety of entrepreneurs to switch over to electricity for transportation energy or to develop and distribute electricity for transportation. 
9. Ethanol use will remain at around 11% of gasoline demand. The average CI of ethanol continues to fall and will drop to about 52gCO2e/MJ in 2023. The ethanol industry’s ability to sequester/reuse CO2 from ethanol plants, their ability to reduce process energy CI through a book-and-claim methodology for clean electricity and RNG and their ability to secure credits for low CI farming practices will all play a key role in their ability to lower their CI further and generate more credits. 
10. The potential growth of sustainable aviation fuel (SAF) is a key uncertainty in credit supply for the California LCFS. In this analysis we have assumed it will stay at nominal levels until 2023.