Revving Up: Eight States in Gear with Low-Carbon Fuel Standard Legislation

Now the legislators of a suite of eight states—Hawaii, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York and Vermont—are all considering passing low-carbon fuels programs that could provide a much-needed boost for the demand of low-carbon fuels. While legislation is unlikely to pass in all eight states, it is likely that at least one or more of these states could pass and eventually implement a low-carbon fuel program. The passage of any such program would come at a time when credit prices for low-carbon fuels under the federal Renewable Fuel Standard (RFS) and California LCFS are languishing and the market for certain types of renewable fuels are reaching saturation. As a result, renewable fuel and low-carbon fuel trade groups are pushing for the passage of additional state low-carbon fuel programs.

The passage and eventual implementation of additional state low-carbon fuel programs would present opportunities for market participants that plan in advance and obtain first mover advantage in their investments in renewable fuel production—particularly in states where it may be difficult to ship low-carbon fuels from out of state, including Hawaii, Massachusetts, New York and Vermont.

Pillsbury attorneys have decades of experience assisting investors and market participants in planning their investments and complying with low-carbon fuel programs so as to maximize the advantages provided under these programs.

Background
In 2007, California enacted the first of its kind LCFS program that requires producers and importers of transportation fuel in California to ensure annual reductions in the carbon intensity (CI) of transportation fuel sold in the state. Under this program, producers and importers of transportation fuel with CIs below an annual benchmark (these fuels are general renewable fuel, particularly those from waste products) generate credits that they may sell to producers or importers of transportation fuel with carbon CIs above the benchmark (these fuels are typical fossil fuels, such as gasoline and diesel). In other words, for every gallon of gasoline or diesel a refiner or importer sells in a state, they must purchase and retire credits generated on low-carbon fuel, such as RNG, biomass-based diesel, renewable diesel, SAF and other low-carbon fuels.

From a GHG emission reduction perspective, the California LCFS program has been wildly successful in transforming the state’s transportation fuel landscape. Fourteen years ago, almost no renewable diesel and RNG was sold as transportation fuel in California. Now, because of the California LCFS, renewable diesel now comprises approximately 50% of diesel fuel sold in California and renewable natural gas sold as transportation fuel comprises approximately 80% to 90% of natural gas sold as transportation fuel.

The success of the California LCFS in driving the use of low CI fuels led to a surplus of credits under the program, driving down the price of credits. This has led the California Air Resources Board (CARB), the state agency that regulates the California LCFS, to propose a suite of changes to boost the price of credits, including stricter CI standards, restrictions on the generation of credits and additional transportation fuels that will incur a deficit. These changes are expected to be finalized this year. While these changes may have the net effect of boosting California LCFS credit prices, producers of low-carbon fuels may be somewhat limited in the additional fuel they can sell into California given the present substantial use of low-carbon fuels in the state.

The success of the California LCFS in driving low CI fuels into the transportation fuel markets, however, has extended beyond California’s borders, and support in other states for similar programs has gained traction. In 2009, Oregon passed its Clean Fuel Program (Oregon CFP), which has operated continuously since that time, and in 2021, Washington passed its Clean Fuel Standard (Washington CFS). These programs operate similarly to the California LCFS.

This trickle of momentum for LCFS programs, however, now stands to become a flood. In March 2024, New Mexico became the fourth state to pass a clean fuel program. Additionally, eight states currently have pending low-carbon fuel standard legislation or regulations. If each of the eight states enacts these programs, it would subject an additional 28 billion gallons of gasoline and diesel to low-carbon fuel standards (16% of gasoline and 14% diesel sold as transportation fuel in the United States). When taken cumulatively with the California, New Mexico, Oregon and Washington programs, 30% of gasoline and 25% of diesel sold as transportation fuel in the United States would be subject to a state clean fuel standard.

Low-Carbon Fuel Market at the National Level
Historically, both LCFS credits and credits generated under the federal RFS, known as Renewable Identification Numbers (RINs), have supported the production of renewable and low-carbon fuel. The recent developments in state renewable fuel programs, however, have emerged against a backdrop of a decline in biomass-based diesel and renewable diesel RIN prices by over 70% since January 2023. These declines are largely attributed to the surge in renewable diesel production. Notably, in January 2024, renewable diesel RINs dropped to 51.50 cents per RIN, hitting their lowest level since May 2020. Additionally, at the end of 2023, the United States exceeded the Renewable Volume Obligation (RVO) mandate under the RFS for biomass-based diesel by over 2 billion gallons, reaching nearly 5 billion gallons for 2023. The sustained high rates of biodiesel and renewable diesel production have further exacerbated the supply-demand imbalance and are placing additional pressure on the already suppressed renewable diesel and biodiesel RIN market.

Amidst these market dynamics, the expansion of state renewable fuel standard programs emerge as a prospective means of boosting demand for renewable fuels. As entities navigate these evolving regulatory landscapes, careful attention to market trends and policy developments will be essential to understanding the shifting dynamics and potential impacts on renewable fuel markets.

Legislative Landscape of Low-Carbon Fuel Standard Legislation
The clean fuel standard programs currently being contemplated by eight states have different names, GHG emission reduction targets and slightly different structures. For example, SAF is not expressly exempt in the Massachusetts and Vermont programs and expressly exempt from the Hawaii, Illinois, Michigan, Minnesota, New Jersey and New York proposed programs, but SAF producers remain eligible to receive credits on an opt-in basis that may apply to future obligations or traded to providers not meeting the state clean fuels program obligations. Nonetheless, all proposed state renewable fuel programs generally possess the same purpose as the California LCFS, which is to reduce the CI in transportation fuel.

Below is a brief overview of each of the eight pending state clean fuel standard proposals:

• Hawaii: Both chambers of the Hawaii State Legislature introduced legislation that would require the state energy office to phase-in the implementation of the Hawaii Clean Fuel Standard (Hawaii CFS) for alternative fuels in a manner that would reduce the average CI by at least 10% below 2019 levels by 2035 and at least 50% below 2019 levels by 2045 and establishing annual CI standards for alternative fuels.
• Illinois: Within 12 months of becoming law, the Illinois Environmental Protection Agency would be required to establish the Illinois Clean Transportation Standard (Illinois CTS) to reduce the life cycle CI of fuels for the on-road transportation sector by 20% by 2030, with further reductions implemented at the discretion of the Agency.
• Massachusetts: The Massachusetts Clean Fuel Standard (Massachusetts CFS) would authorize the Massachusetts Department of Transportation to promulgate regulations to reduce the CI of transportation fuel providers by 80% from 1990 levels by 2050.
• Michigan: The Michigan Clean Fuel Standard (Michigan CFS) would require the CI of all transportation fuel produced or imported for use in Michigan to be reduced by at least 25% below the 2019 baseline level by December 31, 2035. The Michigan Department of Environment, Great Lakes, and Energy would be required to develop a mechanism that automatically increases the stringency of the schedule of annual clean fuel standards if there is a sustained oversupply of credits for two years.
• Minnesota: Both chambers of the Minnesota State Legislature introduced bills that would establish the Minnesota Clean Transportation Fuels Standard (Minnesota CTFS) that would require the aggregate CI or transportation fuels supplied to Minnesota to be reduced by at least 25% below the 2018 baseline level by the end of 2030, 75% by the end of 2040, and by 100% by the end of 2050.
• New Jersey: The New Jersey Low-Carbon Fuel Standard (New Jersey LCFS) would require reductions in GHG emissions associated with the diesel and gasoline used in New Jersey by 10% below 2019 levels by the year 2030 and require electric public utilities, state agencies and state authorities to direct at least 40% of that participants’ overall credit value to electrified transportation projects.
• New York: The New York Clean Fuel Standard (New York CFS) would reduce the CI of the on-road transportation sector by at least 30% by 2032 and by 100% by 2050. In advance of 2032, and every five years afterwards, the New York Department of Environmental Protection would be required to promulgate regulations determining the minimum CI reduction achievable over the following five years based upon advances in technology and to support achieving the goals of the climate action plan. The New York CFS would apply to all providers of transportation fuels, including electricity.
• Vermont: The Vermont Clean Fuel Standard (Vermont CFS) would require the Vermont Department of Environmental Conservation to implement a protocol that would reduce the amount of GHG emissions per unit of fuel energy by 10% below 2018 levels by 2030, or by a later date if the Commissioner determines that an extension is appropriate to implement the program.

Linked here is a summary of the status of each proposed LCFS program.

These proposed pieces of legislation have not just been introduced into legislatures; they are receiving active consideration. For example, the Illinois Senate Committee on State Energy and Public Utilities convened on March 22, 2024, to deliberate upon the pending Illinois CTS Program bill. However, it was apparent that opponents exerted considerable influence during the hearing, with both members of the public and legislators evincing skepticism regarding the delegation of substantial rulemaking authority to Illinois environmental regulators. This development suggests that additional time is likely required to comprehensively address legislative apprehensions through further refinement of the draft language.

Businesses operating within the renewable fuels sector or considering entry should closely monitor legislative developments for these pending state fuels programs to capitalize on future opportunities.

Regional Concerns: Implementing Low-Carbon Fuel Standards
If enacted, programs in Hawaii, Massachusetts, New York and Vermont could face significant compliance challenges due to already constrained fuel supply infrastructure. These states have historically relied on imports of transportation fuel due to limited access to the Gulf Coast refining complex. Moreover, these states have limited renewable fuel production facilities and limited access to significant quantities of low-carbon feedstocks. Permitting challenges in these states make it significantly more difficult to construct large-scale new renewable fuel production facilities.

Hawaii faces unique challenges due to its geographical isolation and lack of physical connection to the mainland, making obtaining renewable fuel burdensome. Indeed, under the Merchant Marine Act of 1920—commonly known as the Jones Act—all cargo traveling by sea between two U.S. ports must sail on an American-owned vessel, built domestically and operated by a crew consisting of majority American citizens. Such vessels are costly and in short supply. Thus, Hawaiian obligated entities will incur high transportation costs associated with importing renewable fuel from the mainland, exasperating their logistical complexities. To overcome these obstacles, Hawaiian policymakers may need to explore innovative solutions, such as incentivizing local renewable fuel production or exploring alternative transportation methods, to facilitate compliance with clean fuel standard programs while mitigating the logistical barriers posed by the state’s geographic isolation.

Massachusetts, Vermont and many parts of New York have limited access to fuel supplies from large portions of the rest of the country due to the termination of the Colonial Pipeline system near New York Harbor and the limited amount of other pipeline infrastructure in the region. The lack of such pipeline infrastructure, as well as constraints placed by the Jones Act on shipping fuel to the region from elsewhere in the United States by vessel, restricts the availability and accessibility of renewable fuels within these states, leading to logistical hurdles for supplying the region with large volumes of renewable diesel and other liquid low-carbon fuels.

In these states, RNG may emerge as a viable alternative to meet clean fuel mandates because RNG is completely fungible with natural gas, particularly if state programs allow for an accounting method of shipping RNG known as “book-and-claim.” Book-and-claim systems enable obligated entities to purchase RNG generated from renewable fuel production facilities elsewhere, even if physical transportation of the fuel is not feasible due to infrastructure limitations. By leveraging book-and-claim mechanisms, obligated entities can fulfill compliance obligations without requiring direct access to renewable fuel sources within the state. This flexibility encourages investment in RNG production facilities, which can serve as an effective means of meeting clean fuel mandates while addressing logistical constraints associated with state transportation infrastructure.

Conclusion
Regional and short-term challenges aside, continued regulatory support for renewable fuel production, blending and use at the state level could provide an important boon for a technology and an industry that is critical to reducing emissions. Additionally, state-level support could foster new technological developments, critical to advancing new uses for renewable fuels, such as RNG, renewable diesel and SAF. Pillsbury will continue to monitor and provide updates regarding state-level renewable fuel legislative and regulatory developments.