California’s Eco-Fuel Initiative Overwhelmed by Popularity

California’s Eco-Fuel Production Surge Impacts Renewable Energy Sector. The increasing production of environmentally-friendly trucking fuel is causing challenges for renewable energy producers across the nation, as California’s market for low-carbon fuel credits undergoes significant changes.

Over the past three years, the production of renewable diesel, derived from sources like beef tallow and soybean oil, has tripled in the United States. This growth is attributed to federal incentives and California’s Low Carbon Fuel Standard program, which grants tradable credits to companies selling low-carbon fuels such as ethanol within the state.

These credits make biofuels more profitable for producers compared to petroleum-based alternatives. Since renewable diesel producers can only earn California credits for selling their products within the state, they actively direct the majority of national production to California.

Unexpectedly, the surge in green-diesel production has led to a decline in California’s credit market. The credit price has dropped to approximately $84 per metric ton, a significant decrease from over $200 at the beginning of 2021.

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The price of a Low Carbon Fuel Standard credit, known as California’s Eco-Fuel, reflects the cost, in dollars per metric ton, of carbon emissions surpassing the state’s targets. Supply and demand dynamics determine the credit price, with low-carbon fuel producers actively earning credits based on a predetermined formula. The demand for these credits comes from refiners and importers of conventional petroleum fuels who purchase them to offset their carbon footprints.

The adoption of renewable diesel, a significant aspect of California’s Eco-Fuel program, has propelled biofuels to account for nearly 50% of the state’s diesel usage. This transition has played a vital role in reducing greenhouse gas emissions by 13% since the program’s establishment in 2011.

However, the current low prices of these credits pose economic challenges to renewable energy projects, revealing unexpected market dynamics that can jeopardize government objectives. Carbon-credit markets, including California’s Eco-Fuel program, which is mandatory, and voluntary markets increasingly relied upon by U.S. companies to achieve their climate goals, have become indispensable tools in the global fight against warming.

Previously, experts in the industry held the belief that the credit price would not dip below $150 or $125 per metric ton. However, with the current low prices, the viability of projects, including Anaergia’s Rialto facility in California, renowned for converting methane emissions from food waste into fuel for specialized trucks, has become marginal. Consequently, other initiatives have been temporarily suspended.

Furthermore, the surplus of credits also impacts renewable gas producers operating beyond California’s borders. Many of these producers accumulate credits for gas that may never physically reach California. Instead, as long as marketers sell the gas and ensure that an equivalent amount is consumed by the state’s extensive fleet of natural gas-powered trucks, the credits can still be utilized effectively.

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Renewable-gas projects relying on landfills or animal manure are more likely to assign zero value to the Low Carbon Fuel Standard, as opposed to two years ago, as indicated by Matthew Deveney, an analyst at Forest Avenue Capital Management.

The consequences of low credit prices extend to the expansion of electric-vehicle charging infrastructure across the country. Companies like EVgo, operating approximately 900 stations in 30 states, earn credits for charging California’s electric vehicles. However, the per-kilowatt-hour value of EVgo’s credits has more than halved since the price peak, hindering their expansion plans.

The California Air Resources Board, responsible for managing the program, acknowledges the implications of declining credit prices. As a result, they are contemplating raising the 2030 carbon-reduction goal from the current 20% to 30%, which could potentially drive the price of Low Carbon Fuel Standard credits up to the set limit of $253.53 in June.

Such a price surge would likely increase already high gasoline and diesel prices in California, impacting producers’ costs. The estimated potential increase of up to 32 cents per gallon in gasoline prices due to maximum Low Carbon Fuel Standard credit prices may temper the appeal of the decision.