On July 10, California lawmakers amended proposed bill SB 237 to strike a controversial provision that would have capped LCFS credit prices at their January 2025 average, estimated at around USD 70 to 75 per metric ton. Sponsored by moderate Democrats and backed by Senate leadership, the bill is broadly framed as a gasoline affordability measure. The removal of the price cap language eliminates the most contentious component, easing state legislative risks for the LCFS market.
This follows news in late June that the LCFS amendments to tighten the balances in the program, adopted in November 2024, were finally approved with a 1 July implementation date. The 1 July implementation date was disappointing for those market participants hoping the stricter Carbon Intensity standards would take effect earlier in 2025 and prevent the market from adding to the oversupply. Still, the program amendments and changes to SB 237, along with recent action at the federal level, point to tightening balances and higher LCFS credit prices.
Market reaction is expected to be bullish. LCFS credit prices, currently trading near USD 48 per tonne, are now expected to firm as participants reprice the reduced likelihood of a structural credit suppression. The proposed price cap had raised strong concerns across the clean fuels sector, particularly for emerging segments like sustainable aviation fuel and heavy-duty electrification. These segments already operate with weaker support from complementary policies such as the RFS and WCI and rely heavily on LCFS credit value to support project economics.
Structural Shift and Federal Incentives
Market attention is expected to drift to deeper federal structural shifts, including the potential impacts of the One Big Beautiful Bill on ZEV adoption, tightening biofuel availability from reduced imports, and proposed EPA rules that could lower RIN generation from fuels produced with imported feedstocks. As a result, tightening LCFS fundamentals and credit balances are expected, driven by reduced clean fuel volumes and a rise in the average carbon intensity of major biofuels such as biomass-based diesel and SAF over the medium to long term. These structural shifts are expected to be bullish for the market in the medium-to-long term.
Implications for Fuel Standards Markets in Neighboring States
With the legislative threat receding in California, market players are also monitoring the contango developing in Oregon’s clean fuels market, where credit prices have recently risen above USD 100 as the state grapples with credit undersupply and looks to draw in fuel from California and Washington. This dynamic could help absorb excess supply from California and soften the impact of the delayed implementation date of the California LCFS rulemaking from 2024.
Next Steps for SB 237
The rest of SB 237 remains largely intact, including a directive for CARB and the California Energy Commission to explore a coordinated regional gasoline specification in partnership with western states. This initiative, aimed at improving supply chain efficiency and reducing production costs, may help stabilize gasoline prices and encourage greater supply. While potentially constructive for gasoline demand, it remains secondary to the clean fuel market focus. SB 237 is scheduled for a hearing on 16 July in the Assembly Committee on Utilities and Energy.
The legislature is on recess from 18 July to 18 August and the session ends 12 September.