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CARB court ruling leads to reignited market confidence

The California Court of Appeals found the California Air Resources Board (CARB) responsible Tuesday for failing to take corrective actions to reduce biodiesel NOx emissions under the LCFS program. The improper movements failed to satisfy a writ issued by the Court in 2013, which stated that CARB was in violation of California Environmental Quality Act (CEQA) when the LCFS program was initially adopted in 2009.

The superior court decided that ARB’s use of 2014 NOX emissions as the baseline was improper and generated flawed results when that baseline was being used to calculate environmental changes. Following the ruling, the court ordered that CARB shall freeze the target CI level for the portion of biodiesel and diesel at the 2017 level until CARB adjusts the baseline used for analyzing each period’s NOx emissions, demonstrating its compliance to CEQA standards.

Market participants viewed this action to be presumably neutral to slightly bullish for LCFS credits in the short term, while longer term impact was viewed to be bullish for the stability and viability of the program.

Near term impact on LCFS prices following the freezing of the CI level would be small, as the freeze of CI in biodiesel portion still ensured the biodiesel’s ability of generating credits and maintain the current sources of credit supply. Historically, biodiesel has supplied nearly 22pc of the entire LCFS market share. The appellate court’s CI level freeze, as opposed to a late March tentative ruling suspending credit generation altogether, has temporarily relieved stress from biodiesel physical players who found the earlier credit generation suspension ruling threatening to ongoing biodiesel business. Moreover, the potential small upward impact on LCFS credit price would likely to shut down the hope of further Brazilian ethanol arbitrage opportunities, as the small increment in prices may not bring enough help if D5 and D6 spreads remain consistent.

The impact on LCFS prices going forward is largely speculated to be positive according to market participants, as the decision re-instates the safety of the LCFS program which has long been considered bullish due to the tough mandates to comply with. Beyond 2018 however, the impact brought by the case may move back to zero sum status as the market continues to digest it. “Hypothetically if CEQA issues were remedied by December 31, 2017, the net effect on program would be neutral” a market participant said.

Current LCFS prices however have reportedly begun to trade at $78 following the appellate court’s ruling, with players gradually reentering the market, leaving value straddled between $78-80, in line with the Index value assessed by PRIMA on Monday. Another $80 trade talk was circulated, however more details are needed to be confirmed.

While the court of appeals decided to continue the status quo relating to conventional diesel fuel and its substitutes by continuing to adhere to 2017 standards until the corrective action is completed, the court also decided to continue current Alternative Diesel Fuel (ADF) regulations, while Air Resources Board need not suspend its consideration or approval of additional fuel pathways for diesel fuel and its substitutes.

As of now, POET has yet to announce further movements of appeal, however the decision of the court seems not fulfill the goal of POET’s original lawsuit, which sought the pursuit of better CI values or the abolition of the LCFS program altogether. “CARB won by losing,” a trader said.

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Written by Heather Zhang. Edited by Erik Papke. April 11, 2017


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