European biodiesel producers have latched onto California’s late September revision of its low carbon road transport fuel programme (LCFS) to trumpet biodiesel’s carbon saving potential. CARB reconfirmed the LCFS programme last month, which will require increasingly sizeable cuts to carbon emissions from fuel to achieve a 10% greenhouse gas cut by 2020. The revised carbon pathway methodologies adopted under the reconfirmed California system reward biodiesel with much lower carbon intensity ratings than rival corn and sugar cane ethanol. These are equivalent to greenhouse gas emissions reductions of between 50-81% depending on feedstock, EU producers’ association EBB said this week. With LCFS credits pushing to record highs since the summer, breaching $80 for the first time on 12 October according to PRIMA’s California LCFS Index, arbitrage economics for biodiesel into California are offering an exponential improvement in production incentives for low carbon producers.
While California’s LCFS makes the headlines, European producers have been quietly demonstrating their own response to market incentives for carbon reduction since Germany switched to its GHG-reduction mandate at the start of this year. While the default RED emissions reduction requirement for 2016 languishes at 35%, swaps will price off a 57% GHG carbon saving requirement from the start of next year after steady gains in producers’ advertised GHG savings this year. EU producers are pricing differentials for higher headline GHG savings into their offers. Incremental GHG savings between 50-65% are currently pricing at over $1 per increase in carbon saving points. The seemingly linear relationship between price and GHG saving breaks down for high GHG saving material, reflecting the “hockey stick” market structure recently made familiar to California fuel blenders as they grapple with a near quadrupling in LCFS prices since June.