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California jet fuel decarbonization hits turbulence

Houston, 5 April (Argus) — Airports have joined airlines in asking California to throttle back plans to require lower-carbon jet fuel in the state.

California Air Resources Board (CARB) staff proposed requiring jet fuel used on intrastate flights to meet carbon intensity reduction targets under the state’s Low Carbon Fuel Standard (LCFS) as part of a rulemaking proposal published in December. But experts, including proponents of renewable jet fuel, warn airport infrastructure would not allowtracking fuel blends by flight.

“It’s not possible,” said Kristi Moriarty, a senior engineer for the Center for Integrated Mobility Sciences at the National Renewable Energy Laboratory. “For California airports, you have to do an accounting exercise.”

LCFS programs require yearly reductions to transportation fuel carbon intensity. Higher-carbon fuels that exceed these annual limits incur deficits that suppliers must offset with credits generated from the distribution to the market of approved, lower-carbon alternatives.

CARB considered setting standards for jet fuel before exempting the fuel from obligations in a 2019 rulemaking. Staff renewed the idea for this rulemaking for fuel burned in flights between California airports beginning in 2028. Inclusion would help meet state goals to satisfy up to 80pc of aviation fuel demand with renewable liquid jet fuel by 2045, staff said.

Some fuel producers encouraged regulators to impose the standards even faster to help make renewable synthetic aviation fuel (SAF) more competitive with renewable diesel and hydrogen.

“The slow uptake of SAF in California can be traced, in part, to state regulatory rules, including the lack of an obligation on fossil jet fuel under the LCFS,” a coalition including Darling, Green Plains and LanzaJet told the board.

Airline trade groups have repeatedly warned that approach would land in court. The Federal Aviation Administration (FAA) governs US jet fuel specifications, preempting even the US Environmental Protection Agency. FAA in turn sets its standards by specifications determined by engine manufacturers. Current regulations allow 10-50pc blends of renewable synthetics to produce finished, on-specification jet fuel.

Comments focused less on whether the plan was physically possible. Airports, like many retail gasoline stations, receive bulk, on-specification fuel blended upstream in the supply chain for just-in-time delivery. Fueling infrastructure may sit on airport land, but it is run separately from other airport operations.

“I am not aware of any airports in North America, or even in the world, that are currently receiving and doing on-site blending of SAF,” San Francisco International Airport sustainability and environmental policy director Erin Cooke said.

Special, one-off flights could receive boutique blends delivered to specific planes. But at scale, SAF blended to specification upstream mingles with the rest of the airports fuel for delivery as needed. The alternative would require additional tanks, testing and time that schedule-crunched flights do not have, Cooke said. Representatives for county airports warned regulators that they could not afford such investments.

“Implementing this proposal could impose substantial operational burdens on county airports, potentially disrupting the progress toward our state’s sustainable aviation future,” the California State Association of Counties warned CARB.

CARB did not address questions this week on how regulators saw the plan working.

San Francisco International did not take a position on the current proposal. The airport would welcome tools to better track and understand rising SAF use, she said.

“But in terms of actually tracking the direct fuel and its uplift to an aircraft serving a domestic or California market — I honestly do not know how you would do that,” Cooke said.

Regulators could address that by allowing the use of book-and-claim to shed more light, indirectly, on the volumes of fuels that individual customers bring into the overall system, Cooke said. It’s a system that World Energy, a supplier of renewable jet fuel to Los Angeles International Airport, would prefer, president Scott Lewis said.

“We do not want to get between CARB and our customers, because I think that it runs the risk of being confusing,” Lewis said. “I am just concerned about losing the plot.”

Book-and-claim allows detailed accounting for the purchase and transfer of renewable fuels by parties that may not ultimately receive the molecules they acquired. It aligns with a system of offering closely-tracked carbon reductions for airlines or for their customers — major corporations that might include air travel in their overall carbon footprint goals, Lewis said.

“We need to show that the customers that are acquiring these are getting something for it, and they are willing to pay for it,” Lewis said. “Airlines don’t consume fuel for themselves, they consume it to fly planes with people in the seats.”

By Elliott Blackburn

Chart of LCFS new credits, new credits, new electric charging credits, and available credits since 2018, showing rising unused credit volumes.

California posts new record LCFS credit build

A record build pressures LCFS prices. Available to read at and property of ArgusMedia.com.

A second consecutive record build in California Low Carbon Fuel Standard (LCFS) credits added pressure to spot and forward markets today.

New LCFS credits outpaced program deficits by a record 1.7mn metric tonnes (t) in the third quarter of 2022, building unused credits available for compliance to 13.4mn t, according to California Air Resources Board (CARB) data released today.

New credits have exceeded deficits for six consecutive quarters, and posted new record increases for the past two. The rising volume of credits that can be used to comply with state mandates and do not expire have raised alarms from renewable fuel producers seeking tougher new standards for one of the top low-carbon fuel markets.

LCFS programs require yearly reductions in transportation fuel carbon intensity. Conventional, higher-carbon fuels that exceed the annual limit incur deficits that suppliers must offset with credits generated from the supply of approved, low-carbon alternatives.

Rising supplies of these low-carbon fuels have met sluggish demand for California’s gasoline blendstock and largest LCFS deficit source, CARBOB. The fuel still generated 79pc of all new deficits during the third quarter, even as overall consumption fell by 3.1pc from the previous quarter and by 8.5pc from the third quarter of 2021. Petroleum diesel consumption fell by 29pc from the third quarter of 2021.

Deficits generated from the consumption of petroleum gasoline and diesel in the state fell by 3.5pc from the previous quarter as demand for both shrank during the period.

Credit generation meanwhile continued to climb, up by 2.7pc from the previous quarter, as renewable natural gas, ethanol and electric vehicle charging all produced more credits than in the previous quarter.

Renewable diesel credits meanwhile shrank, as smaller volumes of higher-carbon production found their way to the state during the quarter. Both used-cooking oil- and tallow-based renewable diesel consumption exceeded volumes in the third quarter of 2021 but fell by a combined 22pc from the previous quarter. Corn oil-based renewable diesel increased sharply. Renewable diesel remained the leading source of new credits, at 39pc of all generated during the third quarter of 2022.

Lower, longer

California LCFS credit prices have groaned under the weight of record supplies. Credits do not expire, and so parties may use the growing bank of untapped credits to meet current and future obligations.

Spot credits that traded around $200/t in January 2021 slumped to a six-year low in September 2022, near $60/t. Spot credits have traded between $60-70/t since then, even as CARB reported the previous 11.3mn t record volume of unused credits at the end of October.

Credits immediately sank following the data release early in the second half of today’s trading session. Bids for prompt through second quarter 2023 credit transfers briefly dipped to $58/t.

Renewable fuel suppliers have clamored for CARB to respond to the rising unused credit volume with tougher targets. CARB staff have said that a rulemaking to consider revisions to the LCFS would begin early this year.

By Elliott Blackburn

portrait of cow standing in pasture

Falling LCFS prices narrows RNG prospects

Will sinking credit prices put a lid on dairy gas? Read at ArgusMedia.com.

Sliding prices may narrow development of one of last year’s fastest-growing sources of California Low Carbon Fuel Standard (LCFS) credits.

Interlocking incentives led by the state’s transportation fuel program spurred a nationwide build-out of projects to harvest methane from dairy cattle and swineherds over the past five years to produce more renewable natural gas (RNG).

But a surge in new credits helped cut LCFS prices by nearly half since January 2021. The drop may refocus investment in the largest, cheapest projects.

“Not every dairy farm is created equal,” said Tyler Henn, Clean Energy Fuels vice president of business development and renewable natural gas investment.

California’s LCFS program reduces the carbon intensity of transportation fuels through steadily falling annual limits on the amount of CO2 emitted during their production and use. Higher-carbon fuels that exceed the annual maximum incur deficits that suppliers must offset with credits generated by distributing approved lower-carbon fuels.

The lower or higher a fuel’s score compared with the annual limit, the more credits or deficits it will generate. Dairy methane harvested and supplied to compressed natural gas vehicles has surged, in part due to scores that can place individual projects hundreds of points below the annual limit, many times lower than the nearest low-carbon competitor.

The gap translates to outsized credit generation. RNG made using dairy and other animal methane generated 2.1mn t of LCFS credits in 2021, or about 11pc of all new credits for the year. But dairy digester or animal waste gas made up just 1.5pc of alternative fuel volume in 2021 — displacing less than 2,800 b/d of equivalent diesel. Renewable diesel, which generated three times the credits of dairy and swine RNG last year, displaced more than 20 times the volume of petroleum diesel.

Spot credits have fallen to nearly $100/metric tonne from about $200/t at the beginning of last year. Supplies of new credits from renewable fuels outpaced the demand for higher-carbon gasoline and other fuel in 2021.

Dairy deluge

Thin margins and economies of scale have helped consolidate especially western US dairies to larger herds, according to the US Department of Agriculture (USDA).

Such concentration can reduce the investments needed to capture, process and connect harvested biomethane to US natural gas pipelines. It takes thousands of cows, either at a single large dairy or clustered across several operations, to produce sufficient gas. Projects need not always build new feeder pipelines — trucks can move compressed gas from some sites for injection.

State regulators need dairies and renewable natural gas infrastructure to capture more. California hosts about 20pc of all US dairies, and the operations produce the largest share of the state’s methane emissions. California was on pace to meet just half of a targeted 40pc reduction in dairy methane emissions by 2030, according to California Air Resources Board estimated last year. The agency estimated that at least 160 additional dairies would need to use methane capture and processing to meet state goals.

California utilities also face renewable natural gas requirements. Southern California Gas expects RNG including landfill methane to make up 12pc of the gas it delivers to customers in 2030. Pacific Gas & Electric, California’s largest utility, plans for RNG to make up 15pc of its gas by 2030, and already serves 22 CNG stations.

Competition for large or otherwise well-suited dairies soared with the combination of mandates and incentives, said Kevin Dobson, vice president of biomass for DTE Vantage.

“We are part of a big, $10bn company, and we are competing against, literally, people that work off of their kitchen table and drive a pickup truck into the farm,” Dobson said.

But some dairies may lack manure management infrastructure, may lack easy access to offtake infrastructure, or need costlier equipment to produce the gas, Henn said.

The falling price environment raises the bar on project selection without halting it, Dobson said.

“You got to sharpen the pencil, you got to be a little bit more efficient,” he said.

Reined in

Regulatory action could again curb the RNG boom. California limits methane emissions from landfills via another regulation. To generate LCFS credits, landfills must go beyond the cuts the state already requires. Gas captured from landfills averaged 8,260 b/d of diesel replacement but produced just 624,630 t of credits in 2021.

Regulators could still apply credit-slashing, landfill-style methane reductions to dairies. California’s SB 1383, passed in 2016, authorized the state to regulate dairy methane as early as 2024. The state would need to consider dairy prices, the potential for dairies to move to other, less rigorous states, and assure that the regulations were “cost effective.”

CARB has focused on incentives in communications about meeting dairy methane goals.

Environmental justice and animal welfare groups insist the incentives perpetuate large-scale agriculture that harms cattle, concentrates odors and wreaks other environmental damage. Some truck operators also question the long-term demand for the fuel.

The industry faces state mandates to electrify its fleets, with requirements that manufacturers making rising numbers of zero-emissions medium- and heavy-duty trucks available beginning in 2024. Major fleets that would otherwise prefer compressed natural gas were wary of heavy spending on those fuel systems, Western States Trucking Association head of regulatory affairs Joe Rajkovacz said.

“Those trucks are not even part of the future of what the California Air Resources Board wants to allow,” Rajkovacz said.

Refiners integrate for renewables

A look at the investments underway to shift refineries from crude oil to bean oil. Available to read at and property of ArgusMedia.com.

Petroleum refiners have committed billions of dollars to speed up expansions beyond the oil patch and into bean fields.

Oil major Chevron’s $3.2bn acquisition of US biofuels company Renewable Energy Group (REG) disclosed this week tipped the scales on a new wave of investment rushing through the feedstocks sector. The rush to convert under-performing oil refining equipment to produce more lucrative renewable diesel for the US brings established energy traders into unfamiliar markets.

“It is an area that we do not — to be completely blunt, we do not have deep expertise,” Chevron chief executive Mike Wirth said. “We have been moving into these markets, but REG brings decades of experience and people that relationships, insights, technical understanding that we simply do not have.”

US refiners have plunged into renewable diesel production to balance federal environmental obligations, extend the life of less competitive equipment and capture state and federal incentives for the drop-in diesel fuel.

Refiners leverage assets already connected to power and logistics networks and their operating expertise. Valero, Phillips 66, Marathon Petroleum, BP, Chevron and HollyFrontier have already converted or partnered on facilities to produce renewable diesel in the US.

A federal blender’s tax credit — slated to expire at the end of this year — and state low-carbon fuel standards (LCFS) along the west coast help make renewable diesel competitive with conventional supplies. But refiners comfortable wringing margins from a dizzying array of petroleum feedstocks must now enter global agricultural markets.

Few elected to do that alone.

The REG acquisition would roughly double Chevron’s renewables feedstock access already bolstered in early February through a joint venture with agribusiness giant Bunge. Neste this week announced a $1bn investment in Marathon Petroleum’s planned renewable diesel conversion in Martinez, California, which Neste says would make it the first company to produce the fuel in Asia, Europe and North America. Marathon previously created a soybean processing joint venture with US agribusiness ADM.

Valero partner Darling Ingredients has pursued a $1.1bn acquisition of fats and oils collector Valley Proteins to buttress supplies to their Diamond Green Diesel joint venture, the largest US producer of renewable diesel. ExxonMobil in late February acquired a 25pc stake in Global Clean Energy Holdings (GCEH), which plans to produce renewable diesel from camelina feedstock processed at a converted Bakersfield, California, refinery. The major also acquired a 33pc interest in a GCEH feedstock subsidiary.

US independent refiner CVR Energy expected its fertilizer business and farm belt operations to lead to a partnership with a feedstock supplier for renewable diesel plans in Oklahoma and Kansas. But not all refiners want to split projects. HollyFrontier said it had looked at about 20 proposed oilseed crush projects that lacked sufficient benefits for the vertical integration.

“We have not seen returns that are clearing any sort of hurdle, which is pushing us back toward just an outright lifting or an offtake agreement,” HollyFrontier Renewables president Tom Creery said.

Farmers’ market

The jostling will transform the flows of fats and oilseeds. LCFS markets prize used cooking oils and collected fats as low-carbon feedstocks. But the US collects nearly all of the available domestic supply, meaning there is little room to grow that feedstock alongside renewable diesel demand.

The fuel will instead shrink US soybean exports or even flip the US to a net importer, and draw opportunities for canola or other oils in as feedstocks, according to agribusiness firms.

“There is going to be a daisy chain effect that goes on, which, frankly, is actually supportive for the entire vegetable oil complex,” ADM chief financial officer Ray Guy Young said.

Farmers will explore additional production options, including cover crops or varietals enhanced to boost oil potential, according to Bunge.

“I think it is going to take, kind of, everything to supply that industry,” chief executive Greg Heckman says. “We think we are right in the bull’s-eye of that.”

By Elliott Blackburn

Sources of rising LCFS credits over time

Argus: Outlook on California’s low-carbon fuel policy

This 2021 viewpoint examined the forces pulling down prices for California’s Low Carbon Fuel Standard (LCFS), a state program forcing reductions to the carbon intensity of transportation fuels supplied to the largest US market. You can read this (as of early 2022) and other analysis at ArgusMedia.com.

Viewpoint: RD, fuel demand weigh on California LCFS

New low-carbon fuel supplies will add pressure in 2022 on California Low Carbon Fuel Standard (LCFS) credits already trading near three-year lows.

California this year recorded some of the nation’s largest drops in transportation fuel demand compared with pre-pandemic levels in 2019. The slump in associated LCFS deficits helped push spot credits down nearly 30pc this year, dropping in November to their lowest levels since 2018. Federal mandates and US refiner strategies threaten to deluge California with renewable diesel credits in 2022.

A $1/USG federal blending tax credit offers a first layer of support for biodiesel and renewable diesel (RD). Proposed federal Renewable Fuel Standard (RFS) mandates for 2022 will add a second.

The US Environmental Protection Agency (EPA) projects that refiners, importers and other obligated parties will rely on renewable diesel and biodiesel to meet a 21bn ethanol-equivalent USG renewable fuel blending requirement for 2022. The price for credits associated with biodiesel and renewable diesel used to comply with the RFS have averaged about $1.54/USG since EPA proposed the mandates earlier this month, compared with about $1.03/RIN in January.

Low-carbon crosshairs

California’s LCFS and Oregon’s Clean Fuels Program complement the LCFS with an additional layer of incentives. While the RFS mandates minimum volumes, LCFS programs set a maximum carbon intensity for transportation fuels each year. Fuel distributors supplying low-carbon fuels including renewable diesel and biodiesel receive credits that offset deficits incurred by conventional, higher-carbon fuel.

The combination of compliance incentives and significant fuel demand has kept California lucrative for renewables. California accounted for more than 60pc of US renewable diesel blending in 2020, based on EPA and state data. That increased to 70pc of renewable diesel blended in the US through the first half of this year.

California LCFS credit prices began sinking in August. Credit generation climbed faster than the state’s transportation fuel demand after business and travel restrictions imposed to limit the spread of the coronavirus in 2020. That imbalance lingered, even as the state eased restrictions.

California has consistently reported one of the five largest deficits to 2019 gasoline demand in all but one of the first nine months of the year, according to EIA data. State data show that September taxable gasoline volumes supplied fell to a more than 20-year low, trailing the same month of 2019 by 7pc. CARBOB represented almost 80pc of all LCFS deficits generated in the second quarter, the most recent period for which data are available.

The official balance of LCFS credits and deficits for the third quarter will be published at the end of January. But third quarter taxable gasoline gallons fell by 12pc compared with 2019. Taxable gallons have closely tracked volumes associated with official LCFS deficits, falling within 0.7pc of the second quarter California Air Resources Board (CARB) data.

Lower and lonesome

Some producers have urged CARB to halt the drop in credits to signal support for long-term investments needed to deliver low-carbon fuels. California and Oregon cap credit prices, but regulators for both states have said they will not set a floor.

Low credit prices indicate room for tougher standards, regulators said. But neither program can lower targets quickly.

Because any new LCFS standards must align with ongoing, broader updates to California’s policies on climate change, new targets will not be implemented before 2024, CARB staff said.

Lower credit prices could offer some long-term advantages, Darling Ingredients chief executive Randall Stuewe said this month. Darling partnered with US independent refiner Valero on the largest US renewable diesel producing joint venture, Diamond Green Diesel, and processes renewable feedstocks as part of its core business.

Prices well below their maximum levels will help LCFS programs spread to new markets and set tougher future goals, he said.

“That gives regulators the courage to accelerate the trajectory of decarbonization,” Stuewe said.

Other North American markets are pursuing their own LCFS programs. Washington state regulators are crafting rules for a program legislators approved earlier this year, which could start in 2023. Canada also continues to refine its Clean Fuel Standard, an LCFS program that could begin trading in early 2023. Minnesota, New York, New Mexico and other states have all considered adopting similar programs for their markets.

But the status quo of California’s leading incentives and lagging demand will keep the state flush with credits in 2022.

California refinery conversions face skepticism

Green groups not thrilled with refineries ending petroleum processing. Read this at ArgusMedia.com.

Wariness of petroleum refinery conversions to produce renewable fuels could complicate California’s low-carbon transportation goals.

Skepticism about biofuel’s environmental benefits and growing attention to the pollution endured by communities closest to such facilities will challenge Phillips 66 and Marathon Petroleum plans to establish some of the largest renewable diesel plants in the world.

The companies say they remain confident about their projects. But regulators warn that permitting challenges could frustrate California’s efforts to transform its transportation fuel mix.

“I think there is a higher bar to meet than what it would have been in the past,” said John Gioida, one of five Contra Costa County supervisors who will decide whether to grant final permits for the projects likely next year.

“Communities in the shadow of industry have had to bear an undue burden,” Gioida said. “And we owe it to them to reduce that burden, even as part of permitting these projects.”

Phillips 66 and Marathon Petroleum plan to wind down decades of petroleum fuel production at their Contra Costa County refineries and shift production to renewable fuels.

Contra Costa County planning officials expect to issue by early September draft environmental impact reports analyzing Phillips 66 and Marathon Petroleum’s proposals. The county will take public comment for up to 60 days and must then respond before county supervisors consider approving them, potentially in the first quarter of 2022.

Marathon halted crude processing and converted its 166,000 b/d Martinez refinery to terminal operations last year. The company is targeting 14,000 b/d of renewable diesel production in the second half of next year with an ultimate capacity of 48,000 b/d.

Phillips 66 reached 8,000 b/d of renewable diesel output in July at its 120,000 b/d Rodeo refinery. The company plans more than 50,000 b/d of biofuels capacity when it ceases crude refining there in 2024.

Renewable diesel offers an immediate reduction in greenhouse gas emissions for medium- and heavy-duty vehicles. California anticipates these vehicles will need liquid fuels for decades, even as the state pursues aggressive electrification goals for its transit and light-duty vehicle fleet.

Renewable diesel faces no limits on blending and can move in existing pipelines, terminals and fuel systems. Its production gives refiners credits needed to comply with federal biofuel and California low-carbon fuel mandates.

Renewable diesel made up more than a third of credits generated to meet the state’s low-carbon fuel requirements in the first quarter of 2021. Conversions shut refining units and reduce site emissions. Yet the projects raise concerns about the environmental consequences of supplying such massive renewable diesel projects.

Smaller conversions under construction today in nearly every region of the US would expand renewable diesel production to more than 200,000 b/d in 2024, up fivefold from about 40,000 b/d in 2020. Most of these sites will use at least some soybean oil as feedstock.

Oilseed crushing capacity limits the supplies of these feedstocks. But such demand can entice farmers to expand cropland, groups warn.

“These conversions are very much happening in gold-rush mode,” said Ann Alexander, a senior attorney with the National Resource Defense Council monitoring the California proposals. “You have state officials largely taking positions that are just uncritically supportive.”

Advocates from coast to coast this year have protested the continued use of liquid fuels as extending the burden faced by communities already blanketed by emissions from tailpipes or refinery flares. Converted plants may emit less, but they also can extend the life of a facility for years.

President Joe Biden has given new momentum to a movement broadly labeled as “environmental justice,” specifically referencing it while promoting new national electric vehicle and fuel efficiency goals with the support of US automakers and union workers.

“There is no going back,” Biden said of the transition to electric.

Members of the California Air Resources Board’s (ARB) Environmental Justice Advisory Committee this month expressed frustration with the state’s plan for meeting sweeping carbon reductions goal.

Kevin Hamilton, a committee member and co-director of the Central California Asthma Collaborative, voiced concern that the state was unwilling to go further to cut emissions. “There is this sort of inherent need to support as much of this existing infrastructure as can survive without dramatically impacting it in ways that could in fact disrupt it and maybe even eliminate it in California,” Hamilton said in a recent committee meeting.

Rejecting alternative liquid fuels risks leaving the state short of tools to meet its low carbon goals, regulators warn. Biofuels cut the state’s emissions by 17mn metric tonnes in 2019, according to the board. California’s aggressive pursuit of light-duty electric vehicle infrastructure has not kept pace with state targets. And the heavy-duty vehicle fleet faces more significant obstacles to conversion. The state anticipates heavy vehicles will need liquid fuels into the 2040s.

“We can set ambitious targets,” ARB deputy executive officer for climate change and research Rajinder Sahota said during a summer workshop. “But if, during implementation, we are putting up hurdles through permitting processes or other kinds of processes that need to happen before you can break ground and actually have that production happen, then we are not actually going to realize those reductions and benefits that we anticipate.”

There are other, local reasons to favor transition, supervisor Gioida said. Gioida’s district includes Richmond, where Chevron operates a 250,000 b/d petroleum refinery. Gioida served on the ARB board from 2013-2020 and has served on the Bay Area Air Quality Management District Board since 2006.

Last year’s shutdown of Marathon’s Martinez refinery ended hundreds of union jobs. Losing the refineries mean reducing the local tax base. And in-state production must meet California’s tough in-state standards. Planners must take care to ensure communities that have shouldered the greatest pollution burden see greater benefits from carbon reduction, Gioida said.

“There clearly is sentiment in the community to shift production elsewhere,” Gioida said. “But I think also there is sentiment in communities to benefit from any new projects.”

Refiners must prove the benefits of not cutting straight to zero.