Comparing LCFS Credit Trades and Pricing Between LCFS Programs
June 14, 2021
By Jim Mladenik
Stillwater’s Low Carbon Fuel Standard (LCFS) team has closely monitored the trends in the LCFS market in California from its inception a decade ago. As other LCFS-style programs are proposed and implemented in additional jurisdictions, we track trends in these nascent markets as well. After browsing recent data released by British Columbia (BC) concerning that province’s LCFS program, a Stillwater colleague commented on how little trading is reported in BC’s program. This observation led to a team discussion of how the number of trades, volume credits, and price per credit traded differ between the BC, Oregon and California programs. Today, we share our observations with you, our loyal readers!
This article will explore the differences and similarities between the reported credit trading in California, Oregon, and BC. To kick us off, Table 1 below lists the number of trades, credits traded, and deal prices for all three programs during each of the three most recent months reported.
Incredibly, the tiny number of trades (just three!) and volume of credits reported to exchange hands (3,900 MT) in BC last month were actually increases from April but are far below transactions recorded in BC in March and Oregon over the same three-month timeframe (March-May). This is a bit surprising since Oregon’s fuel market is similar in size to BC’s, and the BC program is more mature than Oregon’s with a much higher carbon intensity (CI) reduction standard in 2021 (11% versus Oregon’s current 3.5%). Although the BC program’s credit market data is less transparent than either Oregon or California’s programs, it is apparent that a) there is little trading in BC, and b) most of the credits are either being generated by the obligated fuel producers/suppliers or the credits are being included in their purchases from low-carbon fuel suppliers.
While the number of trades and volume of credits transacted may be markedly lower in BC than in other jurisdictions, the reported prices in BC are significantly higher. This high price point makes sense as BC’s CI reduction standard of 11% is much more stringent than both Oregon (3.5%) and California (8.75%), and BC does not have a price cap provision. That said, the lack of trading (and therefore liquidity) makes it difficult to assess the actual cost of compliance in BC.
For their part, Oregon and California show fairly consistent number of trades and volume of credits traded each month, although we observe a decline in May compared to prior months, as shown in Table 1 above. Oregon and California also have similarly stable credit prices over the three months covered here. Note: California has about ten times as many trades and 25 to 50 times the number of credits traded as Oregon which indicates much more credits being sold per trade.
How do the trading trends observed in these recent months compare to the longer-term history demonstrated for these programs? Table 2 below lists credit market data for each program at similar windows of time over the past three years.
From the table above, we observe a few general trends:
- The number of transfers in BC was similar to Oregon in 2018 but steadily declined afterwards even as the CI reduction standard increased.
- Transfer prices in BC were overall similar to those in California over this time frame which makes sense given that both programs are relatively mature and have similar CI reduction requirements even with California being a much larger market.
- Oregon and California both experienced a growth in credits traded over this time frame, which is consistent with their growth in deficit generation due to the increasing CI reduction requirements. Meanwhile, the credit market in BC saw the opposite trend – a declining number of trades and credits transferred. As shown in Table 1, this curious trend has continued into 2021.
- The percent of credits generated that are then traded is much higher in California than in Oregon and much higher in Oregon than in British Columbia.
- In fact, the number of credits traded in California (and therefore their aggregate value) exceed the number generated in 2018 and 2020. This means that traders are buying and selling credits with counterparties other than obligated parties who would typically be inclined to hold onto credits to assure future compliance.
- The value of credits traded in California in 2020 exceed the value of credits generated in 2020 by $1.3 billion.
Overall, California is a larger market that has more liquidity than both Oregon and BC. Traders have clearly made their presence felt in California in a much more substantial way than in the other two markets. Oregon has much more trading liquidity than BC which seems to have almost no active trading activity as indicated by the relatively tiny number of transactions recorded.
Stillwater’s LCFS team also offers Bespoke LCFS Credit Balance and Credit Price Outlooks!
Stillwater’s LCFS credit price outlook includes historical LCFS credit balances and prices as a foundation for understanding forward-looking curves. We also present three credit balance and credit price curves through 2031 – our “most likely” curves for both credit balances and credit prices in addition to high and low curves which serve to bound the outlook. Our price projections are based on our analysis of the supply of low-CI fuels in California, the demand for fossil gasoline and diesel, our outlook on carbon intensities of each fuel pool, the evolution of the vehicle fleet, and the ongoing development of the LCFS regulation. Overlaying the numerical analysis is Stillwater’s deep understanding of regulatory actions and the evolution in California, the commercial fuels market, fuels logistics, market structure and players.
Stillwater’s Bespoke, Ten-Year LCFS Credit Balance and Credit Price Outlook includes:
- A table of our annual projected values for LCFS credits.
- Graphs of the supply, demand, and carbon intensity trends that inform our view of the LCFS credit price curve.
- Commentary around CARB’s historic and expected actions to regulate LCFS credit pricing.
- Qualitative descriptions of all key variables and how the data and factors mentioned above influence the forecast.
Stillwater can also run additional scenario investigations utilizing the above-described proprietary model. In this way, Stillwater can evaluate your assumptions and produce unique credit balance and price curves based on these assumptions.
Contact us to learn more about Stillwater’s Bespoke LCFS Outlook!