Commodity / Low Carbon Fuel Standard

Exploring the LCFS Program

A closer look into the program encouraging the use of cleaner fuels in the transportation sector. 

How it Works      Market Impact      Future Trends

A closer look into the program encouraging the use of cleaner fuels in the transportation sector. 
 

Overview

The Low Carbon Fuel Standard (LCFS) is a regulatory program aimed at reducing greenhouse gas (GHG) emissions by promoting the use of cleaner, lower-carbon fuels in the transportation sector. California’s LCFS, established under the Global Warming Solutions Act (AB 32), is the oldest and most rigorous program in the United States.

The regulation requires fuel providers to gradually lower the carbon intensity (CI) of transportation fuels over time. Fuels with a CI below the annual benchmark generate LCFS credits, while those above generate deficits. Providers must balance their deficits with credits, either by producing or purchasing them. This creates a market-based incentive to invest in and adopt innovative low-carbon technologies and alternative fuels.

The LCFS is a cornerstone of California’s broader climate strategy and continues to evolve as a model for other jurisdictions aiming to decarbonize their transportation sectors.

Since the LCFS was first introduced in California in 2007, Oregon, Washington, and British Columbia have adopted similar programs. 

California’s LCFS requires a 20% reduction in GHG emissions by 2030 compared to a 2010 baseline. The state is currently considering a 30% reduction for 2030. 

Oregon’s Clean Fuels Program (OCFP) requires a 20% reduction by 2030 and 37% reduction by 2035 compared to a 2015 baseline. 

Washington’s Clean Fuel Standard (WCFS) requires a 45% reduction by 2030 compared to 1990 levels. 

British Columbia’s Low Carbon Fuel Standard (LCFS) requires a 20% reduction by 2030 compared to a 2010 baseline.

 

How LCFS Works

LCFS programs operate through a credit and deficit system. Fuel providers must balance their deficits with credits, either by producing low-carbon fuels themselves or purchasing credits from others. This market-based mechanism allows for flexibility and incentivizes the adoption of cleaner fuels. 

Companies and governments use LCFS credits to meet regulatory requirements. The trading of credits also provides a financial incentive for companies to exceed their carbon reduction targets, fostering a competitive market for low-carbon solutions. The overall result is a gradual decarbonization of the transportation sector, with measurable reductions in GHG emissions. 

Carbon Intensity Benchmarks & Credit/Deficit Generation 

State regulators set benchmark CI targets for each year, representing the maximum allowable carbon intensity for fuels. This benchmark decreases annually, gradually tightening the standards and requiring continual improvement in fuel carbon efficiency. 

Suppose the CI benchmark for a particular year is set at 95 grams of CO2 equivalent per megajoule (gCO2e/MJ). 

A company producing bioethanol with a CI of 60 gCO2e/MJ would generate credits because its CI is below the benchmark of 95 gCO2e/MJ. 

However, a company refining petroleum diesel with a CI of 105 gCO2e/MJ would generate deficits, as it exceeds the benchmark. 

LCFS credits can be traded between companies, providing flexibility in how they meet their CI reduction obligations. Companies that produce low-CI fuels can sell excess credits to those that generate deficits, creating a financial incentive for innovation and the adoption of cleaner technologies. 

Credit Banking and Carrying Over Deficits 

Unlike other environmental credit programs, LCFS credits do not expire.  

Companies can bank excess credits for future use, providing a cushion against years where they might struggle to meet CI targets. Conversely, if a company cannot purchase enough credits to offset its deficits each year, it may carry over the deficit to the next year. However, repeated deficits can lead to penalties. 

A company that generates more credits than needed in 2024 may bank those credits to offset potential deficits in 2025, especially if they anticipate challenges in meeting the more stringent CI benchmarks of the future. 

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Eligible for Credits

A wide range of low-carbon fuels and technologies are eligible to generate LCFS credits. These include: 

Biofuels

Ethanol, biodiesel, renewable diesel, and biogas, especially when produced from waste products or other low-CI feedstocks. 

Hydrogen

Produced using renewable energy sources through processes like electrolysis. 

Natural Gas

Compressed natural gas (CNG) or liquefied natural gas (LNG), particularly if derived from renewable sources like landfill gas. 

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Impact on the Market

The LCFS program creates a dynamic market where the supply and demand for credits can lead to price fluctuations. Companies with innovative low-carbon technologies can profit from selling credits, while those reliant on high-carbon fuels face increasing costs. 

If a new technology significantly lowers the CI of a fuel, the market could see a surge in credit supply, potentially lowering credit prices. Conversely, a shortage of low-carbon fuel production could drive prices up, increasing costs for deficit-generating companies.

Future Trends & Innovations

The Renewable Diesel Revolution and swift adoption of low-CI CNG have seen California’s LCFS program become a victim of its success as the state’s additional incentives serve as a magnet for the planet’s lowest CI fuels, in turn driving down LCFS credit prices. The increased adoption of renewable diesel has driven a record surplus of 26 MM unused credits since 2021, driving LCFS credit prices to the lowest in nearly a decade. Renewable fuels now account for a record 73% of the total diesel pool. 

State Regulator California Air Resources Board (CARB) is in the process of reforming the California LCFS program to balance credit supply and provide the correct signals to the marketplace to drive the lowest CI fuels to the state. CARB has proposed a 30% reduction in GHG emissions by 2030, with a 9% step-down in 2025, alongside additional sustainability guardrails such as a 20% cap on soybean oil and canola oil feedstocks, which would see the California program realigned with current market conditions. 

The future of both U.S. and Canadian LCFS programs will be shaped a great deal by the outcome of California’s reform process, as well as other states’ programs’ ability to align their targets with California.  As more regions adopt LCFS-like standards, the market for low-carbon fuels and credits will expand, leading to greater integration and possibly a more unified national or international market.  

Net LCFS Credits and Cumulative Bank Quarterly Chart

Starting in 2025, LCFS states will see competition from the GHG-based Clean Fuels Production Credit established under the Inflation Reduction Act, which effectively serves as a federal LCFS credit. 

 

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