LCFS Credit Market: Challenges
Three challenges that the LCFS credit market is facing are CCS financing, litigation and measurement, reporting verification (MRV).
CCS Project Financing
- For years, Carbon Capture and Sequestration(CCS) projects whose major revenue generation are dependent on the monetization of low carbon fuel standard (LCFS) credits and renewable fuel standard (RFS) have found it difficult to secure capital. The factors responsible for this challenge are "traditional capital providers’ lack of familiarity with the LCFS and the RFS, change-in-law risk, litigation risk, and credit price risk".
- The LCFS allowed CCS projects to generate LCFS credits in 2018 and implemented it in January 2019. They were expected to generate these credits by "reducing the emissions associated with the production of transport fuels or by directly capturing CO2 from the air".
- The CCS projects financing issue impacts the LCFS market because they were created to produce "alternative fuels at the volumes required to generate an adequate number of LCFS credits to achieve the CI reduction targets". CCS projects were allowed to generate LCFS credit in the LCFS extension package to combat price increases that could threaten its political dependability and likely shortages in the credit market.
- Current high LCFS credit prices and possibilities of future increase will attract interest in this market segment.
- A lowered carbon intensity score for alternative fuels and federal 45Q tax credits for CCS projects will cause CCS projects to gather momentum.
Measurement, Reporting, and Verification (MRV) Challenges
- The MRV challenge stems from the life cycle analysis (LCA) that the LCFS uses to measure the carbon contained in the full life cycle of petroleum-based and alternative fuels. Completing LCAs in an unbiased manner can be complicated and thus it's verification is complex and rigorous.
- MRV challenge affects the LCFS market because only when measurements, reporting and verification of success within the LCFS program is trusted will there be increase in the " production of low-carbon alternative fuels, investments in emissions-reducing refinery technology, and CCS implementation".
- To combat this MRV challenge, the greenhouse gas management institute (GHGMI) is partnering with Climate Action Reserve (CAR) and The Climate Registry (TCR) to train, test and accredit 3rd party LCFS verifiers.3
- The use of 3rd party verifiers will increase trust in the LCFS program.3
- Several court cases have been brought to overturn California’s low carbon fuel standard (LCFS), seeking to fully suspend the LCFS or remove diesel fuels from its program.
- POET, LLC challenged the California air resources board (CARB) in 2015 over its adoption of LCFS and Alternative Diesel Fuels (ADF) regulations. The case was dismissed.
- It was later appealed and the ruling was in favor of POET, LLC finding that CARB didn't comply with the California environmental quality act when it was adopting the LCFS. The case is currently in court again for argument about CARB's LCFS program extension.
- These litigations can impact the market by causing a market reaction with "concomitant impact on LCFS credit prices". LCFS credit prices fall could cause an overall negative impact on low carbon intensity fuel development and deployment.4
- CARB reviewed and corrected the LCFS. It also reanalyzed and "repeated the necessary procedural steps and substantive analysis".