Dr.  Scott Gerlt • ASA Chief Economist

California is the land of redwoods, Hollywood, and renewable diesel. The state accounted for 10% of gasoline consumption and 7% of diesel consumption in the U.S. in 2021.[i] Only Texas consumed more gasoline and diesel than the Golden State. California dominates renewable utilization with 97% of all renewable diesel consumption in the United States in 2022 occurring in the state.[ii] The state’s Low Carbon Fuel Program provides incentives to energy sources that lower greenhouse gas emissions. This has encouraged the booming renewable diesel sector to send their product to California for consumption. The growth in renewable diesel is helping spur soybean crush expansion in the United States. As a result, California’s fuel policies affect soybean farmers. The California Air Resources Board released a proposal in December that has the potential to affect soybean-based biofuels in the state in multiple ways.

A bit of background on the LCFS program helps to understand the proposal. The LCFS was approved by CARB in 2009 to lower the greenhouse gas emissions from transportation fuels in the state. Starting in 2011, the target for the GHG emissions of transportation fuels on a per-gallon basis declines annually according to a schedule set by CARB. Fuel providers are responsible for complying with the targeted emissions. If providers exceed the target, they generate credits that can be sold to fuel providers who did not achieve the reduction. The LCFS is a cap-and-trade program with a declining cap. Each fuel has a carbon intensity score in the program whether it is a petroleum fuel or biofuel. Biofuel providers apply for a pathway that gives them an individual score for their fuel based on the factors necessary to produce the fuel. However, the feedstocks to produce the biofuel are all given the same carbon intensity score. In other words, soybean oil has one score regardless of farm practices or the crush plant technology.

CARB staff released a proposal Dec. 19 for changes to the LCFS program. Several of these will have a direct effect on soy-based biofuels consumed in the state under the program. The proposal most directly tied to agriculture is the establishment of crop-based biofuels sustainability criteria. Specifically, to ensure that land is not deforested or otherwise brought into production for biofuel production, CARB staff is proposing that crop and forestry-based feedstocks are traceable to their point of origination. Specifically, the traceability would need to be certified by a third party to show the land was not forested after Jan. 1, 2008. CARB’s proposed date for the change is Jan. 1, 2028.

The federal Renewable Fuel Standard has a similar provision that requires feedstocks used for biofuels to come from land that has been in cultivation since at least Dec. 19, 2007. Both CARB’s and Congress’s intent was that new land would not be cultivated to produce biofuels. EPA tracks total U.S. cropland acreage, and if it rises above the level at the 2007 date, EPA will require records from biofuel producers that their feedstock came from land compliant with the RFS. As cropland acreage in the U.S. has decreased, this has not been necessary for domestic crop feedstocks. EPA’s approach recognizes that the U.S. is cultivating less land, not more, and thereby reduces the compliance cost of tracking crop products through the supply chain. Crops are treated as bulk commodities in the supply chains and blended together. CARB’s approach proposes having third parties develop the certification programs, so the details of what that could look like are uncertain. However, it will likely add cost to supplying agricultural-based feedstocks to California[iii] . Nevertheless, CARB had been considering a cap on crop-based feedstocks, but the proposal did not include this idea—which will allow soybean oil to continue to be used based on market conditions and potential traceability requirements.

The second area of the CARB proposal that would affect soybeans is the ramp-up in GHG reduction requirements. The success of renewable diesel has led to credit generation exceeding compliance needs in the LCFS program. This has pushed down the price of the credits from near their allowed maximum of $200 per metric ton of CO2e to around $70 recently. Legislation was signed by the California governor in 2022 requiring an 85% reduction in human-caused GHG emissions. The combination of these factors has led CARB to propose a longer but more aggressive timeframe for emission reductions for fuels, including diesel (Figure 1).

Figure 1

If this proposal is approved, this will begin helping pull up credit prices. Note that actual reductions beyond current levels would not start until 2025, though. The higher credit prices help soy-based biofuel profitability. However, the concern is that, in the long run, the benchmark actually falls below the carbon intensity score for soy renewable diesel. At this point, the renewable diesel would no longer be generating credits but would instead create an obligation for the fuel distributor. That doesn’t prohibit soy renewable diesel in the state, as it could still be the lowest marginal CI score product that could be used in diesel engines. It would mean that less would be used in the state. However, the timeline in Figure 1 is a maximum, as CARB is also proposing a mechanism that can accelerate the timeline if certain goals are met.

The soy renewable diesel scores consider many factors used to produce the fuel. The most controversial and important is the indirect land use change factor of 29.1 gCO2e/MJ assigned to soybean oil. This represents almost half of the carbon intensity of the resulting renewable diesel. Notably, CARB is updating some of the underlying CI modeling but not the ILUC scores, which were last assessed during the 2013 to 2015 period using data from 2004. Updated results from the model used to calculate ILUC scores indicate a value of between 9 and 10 gCO2e/MJ for soybeans.[iv] Using updated results drops the carbon intensity of soy-based renewable diesel by about a third and pushes the timeline for credit generation from the biofuel out to 2037. Other updates to modeling could extend the timeline even further and generate more credits for biofuels in the interim.

The last proposed change in the LCFS program that significantly affects soy is the increase in GHG emission reductions for aviation fuel. Given that California is the highest jet fuel-consuming state at 15% of the national total in 2022, this will be impactful if implemented. Currently, CARB exempts jet fuel from the LCFS programs but is proposing to add intrastate flights to the LCFS programs. In other words, if a flight takes off and lands inside the state, it would have a GHG emission reduction obligation in the program. CARB estimates that 10% of California jet fuel consumption is for intrastate flights.[v] This requirement would take effect starting in 2028. Not only is CARB proposing to increase the amount of obligated jet fuel in the program, it is also proposing to accelerate and extend the GHG reduction baseline used to generate credits for sustainable jet fuel. The schedule would be identical to the diesel schedule. This would also increase the demand for credits from airlines that would now potentially have obligations, and airlines could help meet those obligations with sustainable aviation fuel. The same caveats about CI scores and long-run eligibility of soy-based fuels with renewable diesel applies to aviation fuel.

LCFS deficits by fuel suppliers can be supplied with any credit regardless of the type of fuel that was used to generate it. In other words, airlines could meet their requirements by purchasing credits generated by fuels other than aviation jet fuel. However, there is reason to believe that this proposal, if finalized, will increase the production and consumption of sustainable aviation fuel, as it might be less expensive than purchasing credits and would reduce credit price volatility risk for the airlines.

California’s vast consumption of energy translates into its LCFS program having an impact on national markets. Other states and territories such as Oregon, Washington and British Columbia are mirroring California’s actions, which further multiply its impact. Importantly, CARB’s proposal did not include agricultural feedstock caps but seeks to require agricultural feedstock traceability that adds extra reporting costs at a minimum and costly identity preservation at a maximum. The step up in GHG reductions will add extra demand for feedstocks including soy, but it also means soy-based feedstocks will be getting phased out over the next decade or so unless the modeling is updated. Lastly, the removal of the interstate exemption for jet fuel is a major change in policy that should increase demand for sustainable aviation fuel. Currently, jet fuel has faced few requirements for blending biofuels to reduce emissions at the federal or state level. This change could help incentivize SAF production. CARB is entering into a comment period and public review during the first quarter of the year, after which the final rule will be made.

[i] Author calculation based on EIA data

[ii] Author calculation based on CARB and EIA data

[iii] Used cooking oil currently has traceability requirements in the LCFS.

[iv] Taheripour, F., Karmai, O., and Sajedinia, E. (2023). Biodiesel Induced Land Use Changes: An Assessment Using GTAP-BIO 2014 Data Base. Purdue University

[v] https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2024/lcfs2024/isor.pdf