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Recent California LCFS case ruling unlikely to affect state's market: sources

A US district court ruling allows Midwest biofuel producers to challenge whether California's Low Carbon Fuel Standard favors in-state producers, but it is not likely to affect the state's market in the near term, sources familiar with the situation say.

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Ethanol producers in the Midwest, the largest producing region in the US, have argued the California Air Resources Board, or CARB, unfairly assigned lower carbon intensity, or CI, scores to California-produced ethanol.

Several Midwestern ethanol stakeholders, including leading trade groups Growth Energy and the Renewable Fuels Association, in 2009 sought an injunction against California's Low Carbon Fuel Standard, or LCFS. The case has since bounced around several courts, with resultant overturned rulings and delays. But the June 15 ruling by the US District Court for the Eastern District of California allows Midwest producers to pursue their claims against CARB, representing a step toward a conclusion.

"It's old case that has been going on," said a source. "It should be supportive," he added.



California's LCFS assigns CIs to biofuels imported into or produced in the state. In the petition for an injunction, the plaintiffs argued the CI scores assigned to Midwest ethanol were higher because the regulations assumed the fuel had to be shipped to California and was created using electricity created by burning coal.

The June 15 district court ruling stated that while the rules and CI scores were not intended to harm out-of-state producers, those in the Midwest could proceed to challenge the rules as discriminatory.

"At worst, all [the CARB] would have to do is adjust CI scores to comply," said a second source. "That's the worst possible outcome."

If this case goes against the CARB, they could have to adjust the CI assigned to certain biofuels.

"If anything it would result in all CIs going up," the second source said. "CARB doesn't adjust down below what they know, they raise up to a worse level."

Though nothing will change in the near-term, updated CIs could affect the LCFS carbon credit market. S&P Global Platts assessed the credits at $77.50/mt Wednesday.

LCFS credits are generated as obligated parties produce fuels below the annual carbon intensity requirement.

The LCFS aims to reduce the carbon intensity of transportation fuels by 10% of 2010 levels by 2020. The initial years of the program required a 1% reduction, while 2017 requires a 3.5% cut and the targets will accelerate in coming years.

"[The ruling] could be bullish for prices," the second source said. "Its impact would be much smaller if they increased California's [CI scores] and left the Midwest unchanged. Vice versa would have a bigger impact and be worse for total greenhouse gas emissions, which CARB is staunchly against."

--Josh Pedrick, joshua.pedrick@spglobal.com

--Wes Swift, wesley.swift@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com