Program credit prices have historically been influenced by several forces, including market demand and ratcheting down of CI benchmarks, resulting in varying credit values over the years. Currently, credit prices in California, Oregon, British Columbia and Washington are being traded for $70, $97, $367 and $95, respectively (all in USD). Adding new markets will drive higher demand for low carbon fuels as these new markets will compete with existing demand. On top of that, the need for low carbon fuels will grow as each market is continually requiring greater reductions to CI. If adequate supply of low carbon fuels to support these markets cannot be maintained, it could inflate credit prices in either the existing markets, the new emerging markets, or both.
What does this mean for fuel producers?
With more locations joining this compliance scheme, low carbon fuel producers will have increased outlets for their products, allowing them to choose their target market or diversify their distribution to multiple markets. It should be noted that selling to various markets does come with additional complexities, as each market can have different compliance requirements and processes to maintain. Receiving help from a CFP expert, such as South Pole, can help alleviate such challenges.
New low-carbon fuel production facilities can also benefit from additional markets by helping to de-risk project development. New suppliers require a purchaser of their fuels to unlock credit generation potential and these added markets offer new opportunities to secure offtake agreements for their supply. This can help producers secure investment capital, which in turn, helps accelerate commercialization of their supply.
Geographically, CFPs are currently limited to the West Coast of the US or in Canada, making it challenging for liquid fuel producers in the Midwest and East Coast to join these markets without transporting their fuels over long distances. Not only does this increase the complexity of their fuel supply chains, but also affects the final carbon intensity score of the fuel - potentially reducing credit generation potential. Creating closer markets for them to join will increase supply chain efficiency, lower carbon intensity scores and allow for fuel diversity more broadly across North America.
CFPs offer a market based solution to transportation emissions. Given the success and popularity of these programs, we anticipate that additional states will adopt such regulations in the coming years, creating more opportunities for low carbon fuel producers to ramp up production and/or develop new supply. In addition, regulations such as the recently enacted Inflation Reduction Act can help bolster clean fuels in the US, providing production and investment tax credits to strengthen revenue generation potential and long term viability of these operations.