Washington Clean Fuel Standard (CFS) 101

The Washington State Clean Fuel Standard (CFS), signed into law in May 2021 via HB 1091, was modeled after California and Oregon’s low carbon fuel (LCF) programs. Like California’s Low Carbon Fuel Standard (LCFS) and Oregon’s Clean Fuels Program (CFP), the Washington CFS aims to reduce vehicle emissions of greenhouse gases (GHGs) by reducing the average carbon intensity (CI)[1] of transportation fuels used in Washington state. Specifically, the CFS targets CI reductions of 20 percent below 2017 levels by 2038.

Rather than specifying intermediate, annual CI reduction targets, however, the enabling legislation outlines maximum allowable incremental changes in annual reductions. The CFS CI reduction schedule specified in the current regulation is displayed in the figure below. Importantly, to proceed beyond a 10% reduction, three conditions must be met:

• A minimum 15 percent net increase in in-state liquid biofuel production and usage of feedstocks grown or produced in-state;
• Granting of all necessary permits for at least one new or expanded biofuel production facility with at least 60 million gallons of liquid biofuel production or production capacity per year (at least one new facility producing at least 10 million gallons of biofuel production or production capacity must be part of achieving this threshold); and
• A Joint Legislature Audit and Review Committee report on the first five years of program operations and adjournment of the 2033 regular legislative session. These built-in caveats give the legislature an opportunity to review the program and potentially require modifications to the CFS in the early 2030s.

These provisions result in a somewhat ambiguous CI reduction schedule beyond 2030.

Figure 1. CFS Carbon Intensity Reduction Schedule
Source: Washington Department of Ecology

Note: This graph shows the most rapid, maximum CI reduction schedule within the existing regulation. The legislature may modify the legislation in the future. In fact, the pause in annual CI reductions in 2032 and 2033 is intended to give the legislature time to review the program and consider amendments prior to the scheduled increase in CI reduction in 2034.

The CFS became effective January 1, 2023 – thirteen years after the California LCFS – and is managed by the Washington Department of Ecology (hereafter Ecology). The first compliance period for obligated parties was 2023-2024.

Primary Sources of Credit and Deficit Generation

The CFS is a market-based system in which there is a demand for credits (generated by fuels with CIs below the annual standard) to offset deficits (generated by fuels with CIs greater than the annual standard). Currently, the deficit-generating fuels are the petroleum portions of gasoline and diesel. Other fuels may become deficit-generating in future years as the CFS standards are reduced below those fuels’ CIs.

Like California’s LCFS, the underlying rationale of the CFS is that, by providing a structure which allows the market to pick the mix of fuels used to comply with the regulations, the mandated CI reduction targets can be achieved at the lowest cost. As shown in Figure 2, the near-term is dominated by the mix of fuels which can be utilized by vehicles already in service in Washington. The longer term allows time for the fleet to turn over to vehicles capable of utilizing a different, lower-CI mix of fuels.

Figure 2. Credit Generation by Fuel as a Percentage of Total Low-Carbon Fuel Credits (First Half 2024)
Source: Washington Department of Ecology, Stillwater analysis

In 2023, the contributions of credit-generating fuels include a mix of electricity (38.8%), ethanol (36.9%), renewable diesel (17.4%), biodiesel (4.6%), natural gas (1.2%), and renewable propane (0.2%).

Figure 3 below shows the steady growth in the percent of energy supplied by renewable and alternate sources over the first six quarters of the CFS which has increased from 10.4% to 13.5% since the CFS was implemented. The greatest growth is from RD, but electricity, BD, and CNG have also contributed.

Figure 3. CFS Alternative and Renewable Fuel as % of Transportation Fuel Energy
Source: Washington Department of Ecology, Stillwater analysis

Historic Credit and Deficit Balance Trends

Figure 4 illustrates the CFS program’s historical quarterly and accumulated credits. As can be seen, Washington’s credit bank has grown steadily throughout the first six quarters of the program.

Figure 4. Net CFS Credits Quarterly and Cumulative
Source: Washington Department of Ecology, Stillwater analysis

Stillwater anticipates that as the supply and demand balances for CFS credits continue to evolve, the regulation will continue to advance through periodic amendments. Importantly, any changes in the CI reduction schedule in Washington require approval from the legislature. Furthermore, as additional states adopt LCF programs – as did New Mexico in 2024 with an effective date in 2026 – the interactions among programs may require program adjustments.

Historic Credit Price Trends

As the Washington fuels market is about one-fourth the size of the California market and the program is just completing its second year of operation, there are fewer participants in the credit markets, resulting in less liquidity and lower transparency in market prices. Additionally, unlike California and Oregon, Washington charges an annual fee to market participants to cover the costs of administering the program. Figure 5 shows the CFS average credit prices as reported in Ecology’s monthly credit transfer activity reports. As can be seen, prices started fairly high when the program launched but have generally trended downward since inception.

Figure 5. Historic CFS Credit Pricing (August 2023-December 2024)
Source: Washington Department of Ecology

Looking Ahead

Washington’s CFS is still in its infancy, and we expect there to be ongoing changes to both scope and reduction schedule as the program matures.

Washington was the second state to “clone” California’s LCFS, after Oregon, and the West Coast LCF programs are soon to be joined by New Mexico’s Clean Transportation Fuel Standard (CTFS). Additional state programs are also under consideration but have yet to be passed into law. Although these other state programs are small compared to California’s, understanding the history of and interplay between low-carbon fuels and carbon credits in all LCF markets is critical for market participants, especially those that have optionality to supply multiple markets.

The key question for many market participants is: How will the multi-state market interplay impact CFS credit prices? Stillwater has an expert view on that! Visit Stillwater’s Carbon Market Outlooks Dashboard to learn more about the likely future of Washington CFS credit prices!