New Mexico Enacts Low Carbon Fuel Standard

Last week, the Governor of New Mexico signed House Bill 41 (“HB 41”) into law, establishing the Clean Fuel Standard (“CFS”), which, similar to programs in California, Oregon, and Washington, focuses on reducing the carbon intensity of transportation fuels. After four years of hard work, the state now has the task of crafting rules to incentivize low carbon fuel production in the hopes that it can replicate the magic of California’s program. California’s Low Carbon Fuel Standard (“LCFS”) has been a powerful driver to support the development of low carbon fuels such as renewable natural gas (“RNG”). The law requires New Mexico to finalize rules for the implementation of the program by July 1, 2026.

Key Takeaways from the New Mexico CFS

Universal traits of all low carbon/clean fuel standards include establishing annually decreasing carbon intensity (“CI”) targets for certain covered transportation fuels against a set baseline coupled with a credit market. Fuels generated within the state with a CI below the applicable target generate credits, while those with a CI above the applicable target generate a deficit. With respect to the New Mexico CFS, however, HB 41 is incredibly light on details. The scant significant guideposts provided by the text of the law include:

• Imposition of a technology-neutral mandate to reduce the carbon intensity (“CI”) of transportation fuels used in the state to achieve a 20% reduction in lifecycle greenhouse gas (“GHG”) emissions against a 2018 baseline CI by 2030 and a 30% reduction by 2040.¹
• Coverage of fuels including “electricity or any liquid, gaseous or blended fuel, including gasoline, diesel, liquefied petroleum gas, natural gas, hydrogen and electricity sold, supplied, used or offered for sale to power vehicles or equipment for the purposes of transportation.”
• Eligibility of fuels produced out of state to generate credits.²
• Banking of credits, subject to yet-to-be determined holding limits.
• Direction of “participating utilities” to use revenues from credit sale to invest in electrification infrastructure development.

Oregon’s clean fuels statute contains significantly more detail, as does Washington’s law. The New Mexico legislature has delegated near total authority to design the New Mexico CFS to the New Mexico Environmental Improvement Board (NMIB).

What’s Next

HB 41 directs the NMIB to establish an advisory committee to advise on the development of rules related to the CFS and periodically review them. The advisory committee must consist of transportation fuel producers and distributors, utilities, tribal groups, environmental groups, local governments and others. HB 41 is unlikely to have any significant immediate impact on demand for renewable fuels given that we may not ultimately see a market established until 2027. Still, even smaller states with similar programs, such as Oregon, have seen credit prices range into the mid hundreds of dollars, so there remains significant potential for future gains as New Mexico seeks to build out its low carbon fuel infrastructure.

What Does the Future Hold for Low Carbon Fuels Markets?

New Mexico’s demand for transportation fuels pales in comparison to California given the disparity in population size and economies. However, the creation of this additional state low carbon fuel market is all the more important given the restrictive approach California appears poised to take with respect to the LCFS and phasing out crediting for RNG. Additionally, the hope is other states may soon follow in New Mexico’s footsteps. For example, Hawaii, Illinois, New Jersey and New York currently have active bills under consideration in their state legislatures, though it remains too early to predict their ultimate fate with any certainty.

¹ These CI targets are generally consistent with those found in the California, Oregon, and Washington programs.

² However, book and claim accounting is not expressly authorized under the law.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.