Stillwater LCFS 101

LCFS Program & Credit Market Overview
The Low Carbon Fuel Standard (LCFS) is one of a suite of programs that falls under AB32, the California Global Warming Solutions Act of 2006, set up to reduce greenhouse gas (GHG) emissions in the state. AB32 was the first program in the U.S. to take a comprehensive, long-term approach to addressing GHG emissions statewide and economy wide and has been subject to numerous modifications since implemented in 2011. The program is administered by the California Air Resources Board (CARB), and biofuels (e.g., ethanol, biodiesel, renewable diesel, renewable natural gas) used to comply with the LCFS can also earn credits under the U.S. Renewable Fuel Standard (RFS).

The purpose of California’s LCFS program is to reduce vehicle emissions of GHGs by reducing the average carbon intensity (CI) of transportation fuels used in California. CI is a measure of the lifecycle GHG emissions for a given unit of energy; it is expressed in grams of carbon-dioxide-equivalent (CO₂e) emissions per megajoule of energy – gCO2e/MJ or simply g/MJ.

Program compliance is generally achieved by substituting alternative, low-CI fuels for conventional gasoline and diesel fuels, and by providing low-CI fuel-vehicle combinations that reduce petroleum gasoline and petroleum diesel fuel use. Generally, entities that supply low-CI fuels (e.g., ethanol, biodiesel (BD), renewable diesel (RD), electricity, renewable natural gas (RNG)) into California for use as vehicle fuel generate credits that can be purchased by entities that generate deficits by producing or supplying high-CI fuels for sale as a vehicle fuel in the state. LCFS credits, measured in metric tons (MT) of carbon-dioxide-equivalent (CO2e) emissions, are the currency and compliance instruments used among regulated parties[1] with prices generally fluctuating with supply and demand.

The LCFS regulation establishes annual CI benchmarks (standards or targets) that decrease each year based on the percent reduction from a 2010 baseline CI. The difference between a particular fuel’s CI and the benchmark CI establishes the number of credits or deficits the fuel will generate. Under the LCFS, CARB assigns each fuel, by production facility or source, a CI which accounts for feedstock, manufacturing, transport, and use of the fuel (i.e., a lifecycle assessment). On November 8, 2024, the CARB Board approved amendments to update and extend the CI reduction schedule as shown in the “2024 Amendments” line in Figure 1 below. The amendments, intended to become effective January 1, 2025 but likely delayed until at least July 1, 2025[2], set targets to reduce the CI of the transportation fuel pool in California by 30% in 2030 and 90% by 2045. This adjusted CI-reduction schedule kicks off with a 9% additional step-down in 2025[3] bringing the 2025 CI reduction target to 22.75%.

Figure 1. LCFS Declining Carbon Intensity Reduction Schedule

Due to the annually decreasing CI benchmarks, LCFS compliance becomes increasingly difficult as, each year, credit-generating fuels earn fewer credits per gallon and deficit-generating fuels accrue more deficits per gallon. Given existing market and technology realities, future program compliance through 2035 will likely depend upon substantial increases in the use of RD, BD, and RNG, decreases in petroleum gasoline and diesel, and, to a lesser extent, increases in the zero emissions vehicle (ZEV) fleets and the resulting use of electricity and hydrogen as transportation fuel[4].

Generally, to maintain liquidity in the LCFS credit market, a viable LCFS program requires annual accumulated credits to equal or exceed accumulated deficits over time, thus ensuring that parties needing to purchase credits will consistently be able to acquire the credits necessary for compliance. Conversely, to successfully achieve the CI reductions sought by the program, accumulated credits must not exceed accumulated deficits by so much as to drive credit prices below the level required to incentivize the production of low-carbon fuels for use in California.

Figure 2 illustrates the LCFS program’s historical quarterly net credits/deficits and accumulated credits in the “credit bank” through 2023. As shown, the accumulated credits grew rapidly through 2016, saw a volatile but generally downward trend from 2017-2021, and have been on a strong upward trajectory since the end of 2021. At the close of the third quarter of 2024 (the most recent quarter for which CARB has published data as of this writing), the credit bank stood at 33.06 million MT, equivalent to nearly 6 quarters of deficits at the 3Q2024 rate of deficit generation.

Figure 2. Net LCFS Credits Quarterly and CumulativeSource: Stillwater analysis of CARB LRT data

Figure 3, below, displays the LCFS credit pricing trend line since late 2012 when a credit market began to form. As shown, the program has experienced significant price volatility. The volatility is due to numerous factors including, but not limited to, supply and demand for credits, regulatory uncertainty due to legal challenges, pandemic-related fuel demand impacts, and program announcements. For more detailed analysis of the factors impacting the credit bank and credit price trends, subscribe to our Carbon Market Outlooks Dashboard!

Figure 3. Historic LCFS Credit Pricing (August 2012-November 2024)Source: OPIS

In 2016, CARB established a Credit Clearance Market (CCM) as a limited compliance provision with a CCM price cap based on a maximum credit price of $200/MT in 2016 adjusted each year for inflation.[5] [6] The historical values for the CCM price cap (or maximum price, as it is described in the regulation) are presented in Table 1. With the adoption of the 2018 amendments, the CCM maximum price became the maximum transaction price applicable to the selling or transferring of all credits not just those transacted in a CARB-sponsored CCM. As such, it now functions as an overall cost-containment provision for the program. The maximum price is published by CARB by the first Monday in April, and the new maximum credit price goes into effect on June 1^st of that year.

Table 1. LCFS Maximum Price History by Year

To meet annual LCFS compliance, deficit-generating fuel producers and importers in California must obtain and retire LCFS credits sufficient to cover their annual deficits. They can obtain credits by purchasing low-CI fuels that include the credits; importing, producing, blending and sale of credit-generating low-CI fuels; purchasing credits from other LCFS entities; and through participation in the CCM market. Credits do not expire, thus deficit-generating fuel producers and importers can carry a bank of credits for future compliance or sale.

Stillwater anticipates that as the supply and demand balances for LCFS credits continue to evolve, the program will also evolve through periodic amendments. Increases in the number of jurisdictions with LCF programs will likely tighten demand for low-carbon fuels, adding support to credit prices.

2024 Amendments
On November 8^th, the CARB Board voted 12-2 to pass the proposed LCFS amendments. At a very high level, CARB adopted the following:

1. Annual Carbon Intensity (CI) Benchmarks – An acceleration of reductions beginning with a 9% step-change in 2025 and an extension of the reduction schedule out to 2045 (see Figure 1).
2. Addition of an Automatic Acceleration Mechanism (AAM) – With this mechanism, the CI reduction schedule would automatically be pulled forward (i.e., accelerated faster than scheduled) if certain parameters are met. CARB will evaluate these parameters quarterly, based on the most recent four quarters of data, but the AAM may only be triggered once every four quarters. If triggered, the benchmark schedule will be updated the following January 1^st. This enables the LCFS regulation to adjust more quickly to over-supply of credits, supporting credit prices.
3. Revisions to Provisions Covering Biomethane – This amendment limits and sunsets crediting for certain RNG projects.
4. Biomethane Deliverability Requirements – This adjustment is intended to ensure that RNG earning credits under the LCFS could have been physically delivered to the state. Note that the term “biomethane” is used by CARB for LCFS instead of RNG (renewable natural gas) which is more frequently used by the industry and represents the same low CI fuel.
5. Expand ZEV Infrastructure Crediting to Medium- and Heavy-Duty Sectors – This provides incentives to install hydrogen refueling and fast charging infrastructure for medium- and heavy-duty zero emission vehicle (HD-ZEV) infrastructure crediting similar to existing light-duty ZEV infrastructure crediting.
6. Limits on biomass-based diesel (BBD) from soybean oil, canola oil, and sunflower oil – This provision limits annual production of BBD (i.e., BD and RD) to no more than 20% from soybean or canola oil on a per-company basis. Soy-, canola-, or sunflower-based BBD production greater than 20% would be assigned a CI equal to the diesel benchmark for the year of reporting or the certified CI of the associated fuel pathway, whichever is greater, and would therefore not generate LCFS credits. Importantly, this provision doesn’t take effect until January 1, 2028 for companies with existing BBD pathways.
7. No new BBD pathways will be granted after January 1, 2031 if California has met CARB’s goal of at least 132,000 Class 3-8 (i.e., heavy-duty) zero- or near-zero emission vehicles by December 31, 2029.
8. Other – Many additional amendments were included to simplify and streamline application reporting requirements, ensure alignment with program intent, encourage greater participation, and improve administrative efficiency. For an in-depth understanding of the amendments, check out Stillwater’s LCFS Newsletter and LCFS Credit Price Outlook.

Amendment Hiccups
On Tuesday, February 18^th the California Office of Administrative Law (OAL) – the administrator responsible for reviewing rules put forth by California state agencies prior to those rules becoming effective – disapproved the amendments to the LCFS which CARB had approved for adoption on November 8, 2024. The amendments cannot take effect until CARB addresses deficiencies identified by OAL and OAL approves the revised amendment text. The rule was rejected for issues of “clarity” as well as reasons of “incorrect procedure.” CARB understands “incorrect procedure” to mean it must make “non-substantive changes” to the regulatory text before resubmittal to OAL. CARB’s stated next steps are to:

1. Revise the amendments to address the issues identified by OAL,
2. Open a 15-day public comment period for any substantive changes,
3. Review comments received (best case, none of those comments require further substantive changes), and
4. Resubmit the amendments to OAL.

CARB has until June 25, 2025 (120 days after receipt of OAL’s written Decision) to address the issues raised and resubmit to OAL. In the meantime, the existing version of the LCFS Regulation, which became effective in July 2020, remains in effect.

The future of the LCFS
Past legal and legislative challenges have strengthened the LCFS, providing regulatory certainty for stakeholders, but currently cost sensitivity is front of mind in California and across the U.S. Consumers are recognizing the impact of climate programs on fuel prices and are pushing back on regulations that add to their cost of living. Regulators will have to place these concerns at the center of future program amendments. Late last year, in fact, CARB announced they would delay the start of the C&T rulemaking process by postponing the release of proposed amendments to early 2025. This decision came after the bruising LCFS amendment process, which included vocal criticism over its potential to exacerbate already high fuel prices. Through the LCFS amendment process and given the results of the federal elections in 2024, CARB has faced pushback from legislators concerned about the fuel price impact of the updated amendments.

Affordability aside, future compliance and program stability rely on increases in the ZEV fleet (FCVs and EVs) and the resulting use of electricity and hydrogen as transportation fuels to replace gasoline and diesel from petroleum, along with substantial increases in the use of RD, BD, and RNG to balance deficit generation and keep the credit bank from being depleted entirely. Absent these increases in credit generation, CARB will be required to further alter the program, adjusting the CI-reduction targets or increasing credit-generation options, to maintain viability. The LCFS program’s history of survival and successful achievement of CI reductions suggests that CARB will endeavor to do what it takes to keep the program viable, the credit market stable, and the credit price and cost to deficit generating fuels below the point at which the perceived impact on fuel prices becomes politically unacceptable.

Exactly what price would that be?
Visit Stillwater’s Carbon Market Outlooks Dashboard to find out!