New Mexico Clean Fuel Standard – Take Two!
February 21, 2023
In the U.S., several programs aim to reduce greenhouse gas (GHG) emissions per unit of energy of fuels used in transportation. California, Oregon, and Washington all have low carbon fuel standard (LCF) style programs, one Canadian Province (British Columbia) also has a transport fuels GHG-reduction program, and Canada is in the process of rolling out its federal LCFS-style program. New Mexico, New York, and Illinois have introduced LCFS-style bills in the 2023 legislative session, and Minnesota is expected to follow suit.
In this memo, Stillwater examines the potential impacts of implementing an LCFS-style program in New Mexico on the cost of fuels to consumers. We begin by highlighting the differences between New Mexico’s Senate Bill 11 (referred to as the Clean Fuel Standard or CFS) as introduced in the state senate during the first session of 2021 and House Bill 426 (HB 426) which was introduced into the New Mexico House of Representatives on February 14, 2023. Finally, we discuss the potential impacts on the cost of fuel to consumers in New Mexico.
The New Mexico CFS has yet to be passed into law. For purposes of this report, it is assumed that the CFS as outlined in HB 426 is enacted by the New Mexico Legislature in its 2023 session, endorsed by the Governor, and enabling regulations are promulgated in a timely manner to allow program commencement on January 1, 2025. The program outlined by HB 426 largely mimics the California LCFS and the Oregon CFP with key differences being a different choice of baseline year and a different carbon intensity (CI) reduction schedule, both consistent with a later starting date than the California and Oregon programs. A significant difference between the current HB 426 and 2021’s SB11 is HB 426’s elimination of the SB 11 provision which allowed for credit generation from a list of industries outside of the transportation sector. This greatly simplifies the program and removes a key difference from similar programs in other states.
The cost to New Mexico consumers to achieve the 20% CI reduction by 2030 and the 30% CI reduction by 2040 as proposed in HB 426 will depend on key factors including the technical calculation methodologies adopted by the Department of Environment (DoE); the rate at which the NM vehicle fleet turns over to alternative technologies such as EVs, FCVs, and NGVs; and the number and size of additional states which may adopt similar programs in this timeframe. Read on to learn about Stillwater’s estimates of these costs, assuming adoption of a program similar to California’s and Oregon’s.
Overview of the 2021 proposed legislation
New Mexico has yet to pass legislation to establish an LCFS program. Stillwater Associates previously reviewed Senate Bill 11 (SB 11) as introduced to the state senate during the first session of 2021. SB 11 referred to this program as the Clean Fuel Standard (CFS).
Key provisions of SB 11 included:
- Amending the authority of the Environmental Improvement Board to include adding authority to regulate transportation fuels as provided by the CFS legislation and vesting management of the program with the Department of Environment (DoE).
- Charging the DoE with promulgating rules as required to place the CFS into effect within twenty-four months of the effective date of the legislation.
- Regulations to establish an annually decreasing carbon intensity (CI) standard for transportation fuels, measured in grams of carbon dioxide equivalents per megajoule of fuel energy (gCO2e/MJ) used in New Mexico with 2018 as the baseline year and a minimum 10% reduction from the baseline to be achieved by 2030 and a minimum 20% reduction from the baseline to be achieved by 2040. Further CI reductions beyond this 2040 target to be based on future assessment of technology feasibility.
- DoE to establish a process to determine the CI of all transportation fuels using a nationally or regionally recognized model including the full fuel lifecycle and indirect land use change (ILUC). The supply of fuels with a CI above the annual standard to accrue deficits, measured in metric tons (MT) of carbon dioxide equivalents (CO2e) while the supply of fuels with a CI below the annual standard to accrue credits, measured in MT of CO2
- Fuel pathway applications to be subject to third-party verification. Fuel transactions and CI data to be subject to annual third-party verification at the expense of the party providing fuel or generating credits. DoE to accredit third party verifiers and may accept accreditation of verifiers issued by other states with an LCFS-style program.
- In addition to the supply of low-CI fuels, credits may also be earned for measures reducing CO2 emissions in agriculture, aviation, chemicals, dairy, energy, film, forestry, manufacturing, mining, oil and gas, waste management, and wastewater treatment.
- DoE to establish a mechanism for fuel providers (a producer or importer of transportation fuels) to comply by securing credits to offset accrued deficits. Providers are required to balance credits and deficits on an annual basis and submit data required for program administration to the DoE.
- Establish a credit market mechanism with rules for transaction fees, a credit price cap, mechanisms for credits to be traded or banked for future compliance, and procedures for verifying the validity of credits and deficits generated under the program.
- Require annual registration of fuel providers and credit generators with registration fees assessed to cover the cost of program administration.
In summary, the program outlined by SB 11 largely mimicked the California LCFS and the Oregon CFP with key differences being a different choice of baseline year and a different CI reduction schedule, both consistent with a later starting date than the California and Oregon programs. A potentially important difference was the provision which allowed for credit generation from a list of industries outside of the transportation sector; the extent to which these other industries were permitted, and elected to, generate CFS credits in New Mexico could have been a significant factor in the supply for credits in the program.
Overview of the 2023 proposed legislation
House Bill 426 (HB 426) was introduced into the 2023 session of the New Mexico legislature by Representative Kristina Ortez, Senator Mimi Stewart, and Representative Christine Chandler on February 14, 2023. As of this writing, it has been referred to the House Energy, Environment and Natural Resources Committee and the House Government, Elections, and Indian Affairs Committee.
Key provisions include:
- Prior to issuing a draft rule implementing this legislation, the Department of Environment is required to convene an advisory committee including representation from disproportionately impacted communities; industry sectors; government; Indian nations, tribes, and pueblos; environmental groups; and other individuals with relevant expertise. This committee is charged with advising on program design.
- The program is to be a statewide technology-neutral standard;
- The program is to reduce the carbon intensity of transportation fuels used in the state by at least 20% below 2018 levels by 2030 and at least 30% below 2018 levels by 2040;
- The program is to allow for credit trading between regulated entities and producers, suppliers, and other relevant entities and may include mechanisms to monitor and stabilize the credit market, enforce compliance and limit costs to consumers;
- The program is to consider equivalent programs in other jurisdictions and coordinate as appropriate.
- Investor-owned utilities are required to invest all net credit revenue in transportation electrification infrastructure and projects, with at least 50% of that revenue invested in transportation electrification that primarily benefits disproportionately impacted communities;
- Consider additional mechanisms to reduce air pollution from high-carbon fuels in disproportionately impacted communities, including the use of aggregators to use the proceeds from otherwise unclaimed credits.
- No discrimination against fuels solely based on origination in another state or jurisdiction;
- Establish permits and fees for regulated entities and credit generators, including fees on credit transactions, to pay for administration and enforcement of these regulations.
Key Differences Between the Two Proposals
There are a number of important differences between the two proposals. These changes appear to be reflective of some of the key concerns raised in opposition to the CFS in the last two legislative sessions.
- HB 426 is structured as an amendment to the existing Environmental Improvement Act whereas SB 11 was structured as an entirely new measure, the “Clean Fuels Standard Act.” Stillwater is not in a position to comment on the significance, if any, of this structural change.
- HB 426 eliminates provisions enabling credit generation by industries outside of transportation fuels.
- HB 426 requires the formation of an advisory committee.
- HB 426 places a priority on protecting and assuring benefits to disadvantaged communities as defined in the bill.
- HB 426 increases the required 2030 CI reduction from 10% to 20% and the required 2040 CI reduction from 20% to 30%.
- HB 426 is generally less detailed in the structure of the program, presumably expecting the advisory committee to provide input on these provisions;
- HB 426 adds provisions requiring investor-owned utilities to use credit proceeds to support transportation electrification, with 50% of that investment to assist disadvantaged communities.
- HB 426 specifically requires technology-neutrality and non-discrimination against fuels supplied from out of state.
- HB 426 authorizes collection of credit transaction fees in addition to registration fees. Fees collected under HB 426 flow into the state’s existing air quality permit fund rather than a new clean fuels standard fund.
Overall, the more rapid CI reduction schedule mandated by HB 426 is expected to increase program costs relative to what would occur if SB 11 were to be implemented. The requirement that investor-owned utilities use credit revenues to support transportation electrification under HB 426 may mitigate some of these costs; however, since the current penetration of EVs in New Mexico is low, the differences may be small in the early years of the program. HB 426’s requirement to convene and consult with a broad-based advisory committee rather than the more prescriptive requirements of SB 11 may help to structure a program which more fully considers the specific needs of New Mexico and fuel suppliers, resulting in a program which should be less disruptive to fuel markets in the short term.
Impacts of a New Mexico LCFS – Availability and cost of transport fuel to consumers
The cost to New Mexico consumers to achieve the 20% CI reduction by 2030 as proposed in HB 426 will depend on key factors including:
- The technical calculation methodologies adopted by the DoE; this report assumes that the methodologies will be substantially similar to those in place for the California LCFS.
- The rate at which the NM vehicle fleet turns over to alternative technologies such as EVs, FCVs, and NGVs. This may be influenced by mandates and incentives other than the CFS. The addition of a requirement for investor-owned utilities to invest CFS credit revenues in transportation electrification may accelerate the transition to EVs over the long term; short-term impacts are expected to be more sensitive to implementation of federal EV incentives.
- The number and size of additional states which may adopt similar programs in this timeframe. Further growth in the number of LCFS states will drive competition for potentially limited low-CI fuels.
Since our 2021 review of SB 11, the value of California LCFS credits has fallen from around $200/MT to recent values of $64/MT. This has occurred largely due to rapid growth in the supply of renewable diesel (RD), very low CI renewable natural gas (RNG), and growth in the EV share of the light-duty vehicle fleet even as the CI benchmark has ratcheted from an 8.75% reduction in 2021 to an 11.25% reduction in 2023. As of February 20, 2023, Stillwater estimates the cost of the LCFS to be around 10 cpg of petroleum gasoline and diesel.
Importantly, The California Air Resources Board (CARB) is currently in the process of developing LCFS amendments expected to significantly accelerate the required CI reductions in future years and extend the CI reduction schedule beyond 2030; a CARB workshop scheduled for February 22, 2023 is expected to release more information on the expected direction. Stillwater expects that market prices for LCFS credits will firm as more details become known.
The CI reduction standards proposed in HB 426 (20% in 2030, 30% in 2040) are significantly more stringent than what was proposed in 2021’s SB 11 (10% in 2030, 20% in 2040); all else being equal, this means that more CFS credits will be required for every gallon of petroleum gasoline and diesel sold in the state. The price of those credits will be driven by demand for the same low-carbon fuels as those being used in California. Factors which may cause the NM CFS to be more costly than the current cost of the California LCFS program include:
- Each increment of reduction becomes increasingly costly as it requires bigger changes in the fuel mix. Conservatively assuming that the increased CI standards and growing demand for low-carbon fuels does not increase credit prices above currently observed levels results in a minimum estimate of 15 cpg for gasoline blendstock for oxygenate blending (BOB) and 17 cpg for ULSD for the proposed 20% CI reduction standard in 2030. These would, conservatively, increase to a minimum of 23 cpg of gasoline BOB and 26 cpg of ULSD for the 30% CI reduction standard in 2040.
- More realistically, the price of credits is expected to increase as demand for low-carbon fuels and credits in all LCFS markets increases and the standards in NM become more stringent. Using a proprietary Stillwater correlation based on the historical relationship between California LCFS and Oregon CFP prices, we expect NM CFP credits to cost approximately $113/MT in 2030 with the proposed 20% CI reduction requirement and $187/MT in 2040 with the proposed 30% CI reduction requirement. These credit prices would amount to 27 cpg of petroleum gasoline and 31 cpg of petroleum diesel in 2030, increasing to 68 cpg of petroleum gasoline and 76 cpg of petroleum diesel in 2040.
- The choice of 2018 as the baseline year under HB 426 is slightly more challenging than California’s use of 2010 as the baseline as California’s baseline has no BD or RD in the diesel pool and NM’s 2018 diesel pool had about 2.4% BD by volume.
- The NM vehicle fleet currently has a much smaller proportion of EVs, FCVs, and NGVs than does California’s. (As of December 31, 2021 the total population of EVs in NM is estimated at 4150. For reference, total vehicle registrations in New Mexico in 2018 is reported by U.S. Department of Transportation as over 1.8 million.) If the market share of those vehicles does not catch up with California levels, the NM program would not benefit from the zero- and negative-CI fuels which can be used to fuel those vehicles. In the third quarter of 2022, these fuels (RNG, electricity, and hydrogen) accounted for nearly 42% of LCFS credit generation in California, and this share has been steadily growing. If the NM vehicle fleet does not transition to a mix similar to that of CA, then NM would need to compensate by accelerating retail availability of E15 and blending a larger share of BD and RD into the diesel pool.
- While jet fuel does not generate deficits in the CA LCFS or the proposed NM CFS, CA allows renewable jet (RJ, also known as sustainable aviation fuel, SAF) to generate credits. To date, this has only been a minimal source of credits generated for the LCFS but is expected to grow in the coming years with the adoption of RJ/SAF incentives in the 2022 federal Inflation Reduction Act.While this could be a substantial credit generator in CA, due to the large jet fuel demand for trans-Pacific and coast-to-coast air travel out of Los Angeles and San Francisco, demand for jet fuel in NM is much smaller, as shown in the Figure below.
- Washington state has recently enacted an LCFS program scheduled to take effect in 2023. Other state legislatures, such as New York, Illinois, and Minnesota are also considering LCFS programs in their current sessions. The implementation of additional state programs increases competition for the lowest CI fuels, driving up compliance costs in all jurisdictions.
There are also factors which may serve to reduce the potential compliance costs of the proposed NM program relative to what has been observed in CA:
- NM has already approved the use of E15 (California has not). While current market share of E15 is very small, potential relaxation of EPA requirements for E15 have lowered the cost for retailers to expand availability and implementation of the proposed CFP would create a strong incentive for increasing market share. The use of E15 in place of E10 reduces the number of deficits generated while increasing credit generation, thus lowering compliance costs.
- As shown in Figure, NM has a much higher share of diesel fuel in its transportation fuel mix than does CA. Experience in CA has demonstrated that large shares of BD and RD can be readily incorporated in diesel fuel with minimal investment in terminalling and logistics infrastructure. Substantial investments in RD production capacity are already being made, including at the HF Sinclair Artesia refinery. The primary limitation to this potential compliance option is a potential scarcity of suitable, low-carbon feedstocks to enable continued growth in BD and RD production.
Transportation Fuel Demand 2018 (thousand barrels)
source: Stillwater analysis of EIA State Energy Demand System
In summary, the cost to New Mexico consumers to achieve the 20% CI reduction by 2030 and the 30% CI reduction by 2040 as proposed in HB 426 will depend on key factors including the calculation methodologies adopted by the Department of Environment (DoE); the rate at which the NM vehicle fleet turns over to alternative technologies such as EVs, FCVs, and NGVs; and the number and size of additional states which may adopt similar programs in this timeframe. Stillwater’s estimates of these costs, assuming adoption of a program similar to California’s and Oregon’s are presented in the Table below.
If you’re looking for additional insights into how the proliferation of LCFS programs across North America might impact your business, contact us!
 In 3Q2023, RNG in California generated 1.21 million credits, electricity 1.67 million credits, and hydrogen 0.02 million credits for a total of 2.89 million credits out of total credit generation of 6.94 million.
 The HF Sinclair Artesia RD facility is capable of producing 125 million gallons per year (3 million barrels per year) of RD, about 18.6% of NM’s 2018 diesel demand. Usage of all of the Artesia RD (30 CI) in New Mexico would drop the overall carbon intensity of the fuel pool in New Mexico by over 5%.