Understanding Low Carbon Fuel Standard Credits (LCFS): A Path to a Sustainable Future

Krisha Chheda
Aug 15, 2024
7 min read

Updated: Dec 3, 2024

The transportation sector has been among the largest contributors of Greenhouse gas (GHG) emissions (approximately 30% [1] ) in the United States, and the fastest-growing emissions source globally. Several federal and state policies aim to reduce GHG emissions from transportation. In 2006, CA passed AB32 creating the first Low-Carbon Fuel Standard (LCFS) program, which is one such program analyzed below.

Total U.S. Greenhouse Gas Emissions by Economic Sector and Electricity End-Use [1]

What is the Low Carbon Fuel Standard?

[2]

A Low-Carbon Fuel Standard (LCFS) is an emissions trading rule aimed at reducing the average carbon intensity and greenhouse gases (GHG) of transportation fuels in comparison to conventional petroleum fuels. The term "low-carbon" in "low-carbon fuel" doesn't refer to the actual chemical makeup of the fuel. Instead, it pertains to the overall climate impact of producing and using the fuel, as measured by the Low-Carbon Fuel Standard (LCFS). This impact is compared to the effects of using other fuel options.

In general, an LCFS is predicated on three ideas:

There are multiple energy sources (fuels) for accomplishing the same goal (transportation),
The production and use of different transportation fuels will result in different climate forcing effects, driven by greenhouse gas (GHG) emissions and other climate forcers, and
There is a mechanism for increasing the use of fuels with reduced contributions to climate change (referred to as low-carbon fuels) over others by regulating and incentivizing individual fuels based on their estimated ability to reduce GHG emissions and other climate forcing effects relative to an assumed baseline fuel. [3]

The LCFS is a market-based approach to achieving emission reductions that:

helps reduce the environmental impact of transportation fuels;
contributes to a new, low-carbon economy;
diversifies transportation fuel supply;
decreases greenhouse gas emissions by establishing a sustainable market for low-carbon and renewable fuels; and
spurs market transformation of transportation fuel supply toward renewable and lower-carbon fuels.

What is the purpose of the LCFS in reducing greenhouse gas emissions and promoting cleaner fuels?

The primary objectives of an LCFS, sometimes referred to as a Clean Fuel Standard, are to:
- reduce greenhouse gas (GHG) emissions from the transportation sector
- incentivize innovation, technological development, and deployment of low-emission alternative fuels and alternative fuel vehicles
- provide a framework for regulating transportation sector GHG emissions within a broader portfolio of climate policies (Farrell and Sperling, 2007) [4]
How did the LCFS originate, and what are the key milestones and regulatory bodies involved?

The Low Carbon Fuel Standard (LCFS) is one of several programs established under AB32, the California Global Warming Solutions Act of 2006, to reduce greenhouse gas (GHG) emissions in the state. AB32 was the inaugural program in the U.S. to adopt a thorough, long-term strategy for tackling GHG emissions across the entire state and economy. Since its implementation in 2011, it has undergone numerous revisions. The program is administered by the California Air Resources Board (CARB). CARB is responsible for setting the annual CI reduction targets, certifying the CI of different fuels, and monitoring compliance through the issuance and trading of LCFS credits.
California and Oregon implemented LCFS policies in 2011 and 2016 respectively, and Washington state joined them by passing its Clean Fuel Standard in 2023 and implementing it in 2024. These successes have led many more states to introduce legislation to enact an LCFS (NM, MN, IL, MI, NY, VT, MA) or to explore the idea of passing one (NE, OH, PA, NJ, HI, CO). [5]

[5]

How do LCFS credits reduce carbon emissions and promote renewable energy sources?

The primary strategies for lowering transportation carbon emissions include providing electricity for electric vehicles, supplying hydrogen fuel for fuel cell vehicles, and blending biofuels like ethanol, biodiesel, renewable diesel, and renewable natural gas with fossil fuels. The main objective of a low-carbon fuel standard is to reduce carbon dioxide emissions from vehicles with internal combustion engines by considering the entire life cycle ("well to wheels") to minimize the transportation sector's carbon footprint.

The LCFS sets annual carbon intensity (CI) standards, or benchmarks, which reduce over time, for gasoline, diesel, and the fuels that replace them. [6] Carbon intensity is expressed in grams of carbon dioxide equivalent per megajoule of energy provided by that fuel.

What are the LCFS credit generation pathways?

LCFS credits can be generated through three primary methods: fuel pathways, project-based crediting, and capacity-based crediting.

1. Fuel Pathways

Overview: Providers of low-carbon transportation fuels can generate LCFS credits by certifying the carbon intensity (CI) of their fuels and reporting the volume supplied to the market.
Mechanism: Credits are generated when the CI of a fuel, determined through a lifecycle analysis of emissions from production, transport, and use, is lower than the benchmark set by the LCFS program. The difference in CI and the volume of fuel supplied determine the number of credits.
Examples: Ethanol, biodiesel, renewable diesel, electricity for electric vehicles, and renewable natural gas.

2. Project-Based Crediting

Overview: Credits can be generated through projects that reduce carbon intensity by implementing carbon capture and storage (CCS) or direct air capture, particularly in the petroleum supply chain.
Mechanism: CCS projects capture CO2 emissions that would otherwise be released into the atmosphere and either store them underground or utilize them in ways that prevent them from contributing to greenhouse gas levels. This lowers the CI of the fuels produced, enabling credit generation.
Examples: CCS initiatives at oil refineries or biofuel production plants.

3. Capacity-Based Crediting

Overview: Providers of hydrogen fueling stations and electric vehicle (EV) charging infrastructure can generate credits based on their fueling capacity, even when actual fuel dispensing is below capacity.
Mechanism: This crediting supports Zero Emission Vehicle (ZEV) infrastructure providers by allowing them to generate credits based on unused fueling capacity. It’s particularly beneficial during the early stages of ZEV adoption when utilization rates are low, helping to ensure infrastructure development keeps pace with future demand.

How are LCFS credits calculated?

One LCFS credit is equal to 1 metric ton CO2-equivalent (MTCO2e), as determined on a life-cycle basis which takes into account the emissions during raw material extraction or recovery, feedstock cultivation, fuel production, transport, processing and use of the fuel. [7]

LCFS credits are calculated based on the difference in CI between the baseline fuel (e.g., gasoline or diesel) and the alternative low-carbon fuel; and the volume of baseline fuel displaced.

The CI difference and volume are further refined by considering the Energy Density, Volume of Alternative Fuel, and the Energy Efficiency Ratio (EER).

Download the Excel Credit Value Calculator:

https://ww2.arb.ca.gov/sites/default/files/2022-03/creditvaluecalculator.xlsx

[8]

As the CI benchmarks decrease annually, complying with the LCFS becomes progressively more challenging. Each year, credit-generating fuels earn fewer credits per gallon, while deficit-generating fuels accumulate more deficits per gallon.

How is the LCFS credit price set?

The LCFS credit price is set by the market and is influenced by supply and demand dynamics. Credits are traded in a marketplace where regulated entities with a deficit (due to high carbon intensity fuels) purchase credits from entities with a surplus (due to low carbon intensity fuels or projects). The price fluctuates based on factors such as policy changes, fuel availability, and compliance requirements. The California Air Resources Board (CARB) does not set a fixed price but monitors the market to ensure it functions efficiently.

[9]

Who generates credits, and how do they do it?

The LCFS Program allows producers and importers to generate, acquire, transfer, bank, borrow, and trade credits. Fuel producers and importers regulated under the LCFS must meet quarterly and annual reporting requirements. [10]

Credits are generated by entities that produce or import low-carbon fuels with a carbon intensity (CI) lower than the established benchmarks. These entities include:

1. Fuel Producers:

- Biofuel Producers: Companies that produce biofuels such as ethanol, biodiesel, renewable diesel, and renewable natural gas can generate LCFS credits if their fuels have a CI below the set benchmark.

- Electricity Providers: Utilities and other entities that supply electricity for electric vehicles (EVs) can generate credits based on the CI of the electricity used to charge the vehicles.

2. Fuel Importers:

- Importers who bring low-carbon fuels into the state also generate credits if the imported fuels meet the LCFS CI requirements.

3. Producers of Innovative Fuels:

- Companies developing new low-carbon fuel technologies, such as hydrogen fuel or advanced biofuels, can earn credits by demonstrating that their products have a lower CI compared to traditional fossil fuels.

Credits are generated based on the difference between the CI of the produced or imported fuel and the annual CI benchmark set.

Assess Carbon Intensity: The CI of the fuel is calculated using a life cycle analysis, which considers all emissions from production to use ("well to wheels").
Compared to Benchmark: The CI of the fuel is compared to the annual benchmark. If the CI is lower than the benchmark, the difference translates into credits.
Earn Credits: The number of credits earned is proportional to the amount of fuel produced or imported and the CI reduction achieved.

What are some examples of regions that have effectively implemented LCFS credits?

California

As the pioneer of the LCFS program, California has seen significant success. The program has driven substantial investment in low-carbon technologies and fuels. Since its inception, California's LCFS has reduced greenhouse gas emissions by millions of metric tons. The state has achieved its intended goal and seen an increase in the use of renewable diesel, biodiesel, and electricity for transportation.

Outcomes:

12.6% reduction in the carbon intensity of California’s transportation fuels [11]
Over 25 billion gallons of petroleum fuels displaced by low-carbon fuels [11]
60% of fossil diesel displaced by biomass-based diesel in 2023, resulting in PM and NOx benefits [11]
$4B annually to support low-carbon investments and $341M cumulative for public transit [11]

Oregon

Oregon implemented its Clean Fuels Program, modeled after California's LCFS, in 2016. The program aims to reduce the carbon intensity of transportation fuels used in the state. Oregon's program has successfully decreased the carbon intensity of fuels, with significant contributions from electric vehicles and biofuels.

Outcomes:

Greenhouse gases reduced by the Clean Fuels Program in 2022: 2 million metric tons of greenhouse gases [12]
Total greenhouse gases reduced by the Clean Fuels Program from 2016-2022: approximately 8 million metric tons of greenhouse gases [12]

British Columbia

British Columbia’s Renewable & Low Carbon Fuel Requirements Regulation has similar goals to California's LCFS. The program has driven reductions in the carbon intensity of fuels, with an emphasis on renewable natural gas and other low-carbon fuels. From 2010 to 2020, actions taken to comply with the LCFS have resulted in a reduction of more than 12 million tonnes of greenhouse gas emissions. [13] In 2022 and 2023, the credit market traded over 400 million dollars in credit value. [14]

References:

Understanding Low Carbon Fuel Standard Credits (LCFS): A Path to a Sustainable Future

Recent Posts

Commenti

Monthly Newsletter