The second quarter of 2024 has been a challenging period for the LCFS market, with prices falling as much as 32% ($20/MT) due primarily to a combination of three factors:
On April 30th, CARB published data for Q4 2023, showing a record build of almost 3 MM credits. Half of market respondents had actually anticipated a build of this magnitude or higher, as shown by the informal poll results in Chart 1.
Chart 1: X Poll of LCFS Market Participants, April 26, 2024
Source: Xco2trader.eth
However, the build took the bank to 23.6 MM credits, a volume sufficient to cover one whole year’s worth of deficits. Moreover, during 2024 the credit bank is likely to swell by an additional 12 MM or so credits (assuming similar 3 MM quarterly builds) which would cover 18 months of deficits.
This high “bank cover” raised concerns in the market about the willingness and capacity of obligated buyers to purchase and hold additional surplus credits. This concern appears to be somewhat borne out by the fact that, according to CARB data, from Q3 2023 through Q1 2024, the top five holders of credits have reduced the aggregate volume they hold by ~ 500,000, going from ~ 50% of the total bank in Q3 2023 to ~ 35% in Q1 2024.
This could be the result of reduced obligations for some parties as some facilities convert from producing fossil diesel to renewable diesel (e.g. Phillips 66 Rodeo refinery).
As in prior quarters credit supply was led by renewable diesel, electricity and renewable natural gas (in that order). Credits from ethanol also rebounded from last quarter, despite a drop in the overall ethanol blending rate, due to a decline in the average carbon-intensity of ethanol.
Chart 2: Renewable Diesel, Electricity and RNG credits boost bank to record levels
