With the California Low Carbon Fuel Standard (LCFS) program amendments adopted by the Board in November 2024, the final regulations were filed with the Office of Administrative Law (OAL) on Jan. 3, 2025. OAL had until Feb. 18, 2025, to make a final determination. The amendments were necessary to strengthen the LCFS market price signal and align the program with the 2022 California Scoping Plan. Similarly, as a result of the Scoping Plan, amendments to the WCI Cap-and-Trade program are also under consideration.
With OAL typically evaluating rules for clarity and completeness, the market had been expecting approval before the end of February, allowing the new rules to take effect by April 1, 2025, per the usual Secretary of State schedule. This would mean the regulatory carbon intensity step-change to materially tighten the LCFS supply-demand balances would apply beginning Jan. 1, 2025. Anticipation of these program amendments taking effect had pushed LCFS credit prices from lows near USD 40 per metric tonne to around USD 75.
Unless there is an early effective date requested, the effective date of proposed major regulations depends on when the final regulation is filed with the Secretary of State:
On Feb. 18, the California Air Resources Board (CARB) issued a notice informing stakeholders that OAL disapproved the LCFS amendments. The CARB market notice indicated that OAL found inconsistencies with the clarity standards outlined in Government Code Section 11349.3. OAL also released a notice outlining that a written decision detailing the reasons for disapproval will be provided within seven days.
ClearBlue received an email response from CARB stating: “OAL issued a routine disapproval of the LCFS amendments on technical grounds, not on the merits of the regulation. CARB will refine the language per OAL’s guidance and resubmit for approval. The LCFS remains in effect in its current form.”
The technical nature of the disapproval is reassuring. CARB now has 120 days from the time it receives OAL's written decision to address concerns and resubmit to OAL. Any substantive modifications will be released for public comment. Therefore, the implementation date for the 2025 step-change is uncertain. In an update to the market notice dated Feb. 20, CARB gave more details of the disapproval, suggesting it is non-substantive, which is good news for market participants looking for signs of a quick turnaround for resubmission and approval.
Unclear Timeline for Resubmission and Implementation
The key question for the market now is when the step-change will take effect. Each quarter it is delayed, the LCFS credit bank continues to grow, exerting bearish pricing pressure. In order to understand scenarios for supply and demand balances and credit price implications, it is important to look at the relationship between the effective date of the final rule and the implementation of the step-change. To this end, CARB provided language in August 2024:
“The proposed compliance target for 2025 will take effect for Quarter 1, 2025, reporting if the Proposed Amendments become effective prior to April 1, 2025, which marks the beginning of the Quarter 1 2025 reporting period.”
Assuming the stricter CI standards can be implemented for a partial year, this suggests the regulations must be effective at the start of a particular LCFS reporting period for the rule to apply. Reporting periods are available on the LCFS website. For example, related to the CARB language above, the reporting period for Q1 2025 LCFS data runs from April 2025 through June 2025 (it ends July 1, 2025). Similarly, reporting for Q2 2025 runs from July 2025 through September 2025, and so forth. Whether CARB has flexibility to implement the rule during a given reporting period if the effective date falls after the start of that period remains unclear. Market players are waiting for further regulatory clarification.
Key Scenarios for 2025 Step-Change Implementation
Given the 120 day limit for CARB to resubmit and the ability for CARB to request an early effective date for the rule once it is resubmitted, ClearBlue does not believe the implementation of the step-change will slip to Q4 2025. We find Q1 implementation of the step-change to be ambitious but still possible, should the language refinements be straightforward and CARB resubmits before the 120 days. If CARB takes the full 120 days to resubmit, Q2 could be more likely. However, if CARB changes its apparent stance that the effective date needs to be before the start of the reporting period, Q1 is still in play for implementation even with CARB taking the full 120 days. A more extended regulatory process could translate to Q3 implementation of the step-change.
The updated Feb. 20 market notice appears to confirm ClearBlue’s reasoning. Specifically, CARB references the 2022 Commercial Harbor Craft regulation disapproval as “an example of what CARB expects to see from OAL within the next few days.” The market notice asserts that rulemaking had an effective date less than four months after the disapproval. So that points to Q1 or Q2 implementation of the step-change.
With the news of the disapproval, prices for LCFS credits immediately plunged by almost 20% on Feb. 19, to around USD 60 for prompt delivery. Going forward, LCFS credit prices are expected to experience increased volatility and near term pricing will be driven by the regulatory process. Significant LCFS implementation delays could push credit prices back to the mid-USD 40 range, similar to recent lows, though other factors, such as the transition of the Blenders Tax Credit to the 45Z Clean Fuel Production Credit could moderate the decline. ClearBlue’s modeling of LCFS balances and pricing across different implementation dates is available to clients.
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