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On December 19, 2023, the California Air Resources Board (“CARB”), which administers the California Low Carbon Fuel Standard (“LCFS”), released a rulemaking package (“Draft Rule”) describing proposed LCFS changes, including changes designed to make carbon intensity (“CI”) reduction obligations more stringent.

Specifically, the Draft Rule would mandate a 30% reduction in transportation fuel CI scores by 2030 and a 90% reduction by 2045 (in each case, versus a 2010 baseline). Current CARB rules, which the Draft Rule would modify, require only a 20% reduction by 2030.

The prevailing wisdom is that increased carbon reduction obligations will spur renewable fuel demand, leading to an increase in the value of LCFS credits (which are created when renewable energy is used in producing transportation fuel, and can be transferred to industry participants subject to emission reduction obligations for use in meeting their obligations).

Near-Term Impact

Among other things, the Draft Rule includes a near-term CI benchmark step-down (requiring a 5% reduction in CI benchmarks in 2025, accounting for an 18.75% total reduction that year) and an automatic acceleration mechanism designed to increase the stringency of the CI benchmark by requiring that when the credit bank to average quarterly deficit ratio exceeds 3, the CI benchmark for all subsequent years would advance by one year. In other words, if a surplus of credits exists, carbon reduction thresholds will occur a year ahead of schedule to spur the depletion of that surplus.  

Methane Avoidance Credits for RNG Projects

The Draft Rule further proposes that for renewable natural gas (“RNG”) projects that break ground after December 31, 2029, avoided methane crediting will be available through 2040 for RNG used as a transportation fuel, and through 2045 for RNG used to produce hydrogen. RNG projects that break ground before January 1, 2030, would remain eligible for the current rule’s avoided methane crediting framework (which can last up to 30 years).  

RNG Deliverability Requirements

For projects that break ground after December 31, 2029, the Draft Rule would also impose new RNG deliverability requirements. For projects generating RNG used in natural gas vehicles, these new requirements would start January 1, 2041. For projects using RNG to produce hydrogen (other than hydrogen directly used in fuel cell vehicles), these new requirements would start January 1, 2046.

In each case, the Draft Rule would require sellers claiming emissions avoidance credits to demonstrate that eligible RNG was carried through common carrier pipelines that physically flow within California or toward end use in California, in either scenario at least 50% of the time annually. Not much detail is available regarding which pipelines meet that requirement. Notably, RNG projects breaking ground before January 1, 2030, would be exempt. CARB hopes the 2030 deadline will “encourage rapid buildout of RNG capture projects this decade.”

Credit Reconciliation

CARB further proposes an annual credit reconciliation beginning in 2025: projects whose annual verified CI scores are less than their original certified CI scores would receive additional credits to match their “real” CI scores upon annual verification. To avoid excessive bookkeeping and market disruption, CARB advises that initial project CI scores be calculated with a conservative margin. In contrast to that advice, however, the Draft Rule would create a penalty for projects whose verified CI scores exceed their certified CI scores by a certain amount.

The Comment Box

CARB will accept written comments on the Draft Rule from January 5, 2024, until February 20, 2024, and a public hearing is expected on March 21, 2024. This timing suggests the Draft Rule will go through at least one set of revisions (which would be subject to their own notice-and-comment period). Like most proposed regulations, the Draft Rule is a mixed bag: while credit reconciliation offers some upside that might otherwise have gone uncaptured, delivery requirements could prove burdensome for developers of future RNG projects with limited interconnection options.