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US carbon credit prices hit record highs

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Via Financial Times

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The prices of carbon credits on the US west coast have soared to new highs as states have toughened standards, driving investment in clean fuel producers and creating new opportunities to turn greasy animal fats into jet engine fuel.

California’s low-carbon fuel standard (LCFS) credit was at a record in September and October, the state said last week, at more than double the price two years ago. A credit in the neighbouring state of Oregon set a record in September that was close to four times the price two years ago.

While oil refining and importing businesses — companies that typically need to buy credits to comply with emissions regulations — had stockpiled credits in years past, they have had to buy more as rules have gradually tightened from year to year.

“If you are selling renewable fuels anywhere in the world, the best place to sell them for your return is in California and Oregon,” said Terry Kulesa, chief executive of Red Rock Biofuels, which converts tree branches, bark and other sawmill residues into renewable fuel that qualifies for the states’ carbon credits. 

The price rises come despite an expansion in the products that qualify for the credits, but look unlikely to be reversed until substantially higher quantities of the qualifying cleaner fuels are being produced.

Last year, California expanded the credit’s scope to sustainable aviation fuel, so businesses that refine greasy scraps of cooking oil or tallow into aviation fuel have been earning the credit this year. The international aviation market is responsible for about 2 per cent of the world’s greenhouse gas emissions, California has said.

World Energy, a Boston-based renewable fuel provider, is spending $350m to convert an oil refinery outside Los Angeles to make biofuel from agricultural waste, having won bigger orders from United Airlines for aviation biofuel for flights departing from LA.

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“By the time we are finished with this project, we will be approaching $1bn of investment in California by late 2021,” said Gene Gebolys, World Energy chief executive. “Not one penny of that would be spent if it were not for the LCFS.”

Started in 2011, the California LCFS scheme imposes a carbon cost on conventional transport fuels such as gasoline that have carbon intensity scores above the state’s requirements. Oil companies must buy credits to comply with the LCFS. Businesses that offer low-carbon fuel alternatives generate the credits. Oregon’s credit, which started trading in late 2016, was modelled after the California programme.

California carbon credit transactions totalled more than $2bn in 2018, the state has estimated. With the price at a record high, the market could hit $3bn this year, said Graham Noyes, executive director of the Low Carbon Fuels Coalition, a trade association.

The LCFS credits have been increasingly valuable to biofuels producers as prices for a US federal carbon credit have been in the doldrums. In part because of changes to ethanol policy by the Trump administration, the price for credits formally known as Renewable Identification Numbers, or Rins, have slumped in 2019. 

“As the Rin pricing has gone down, those low-carbon fuel credits become more important to renewable providers like us,” Mr Kulesa said. “The LCFS has a lot more surety around it than the Rins do.”

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