Racing Car
Source: Image by Schuger from Pixabay

Low-Carbon Fuels Retake the Lead in California's LCFS Race

On Tuesday, the California Air Resources Board (CARB) released a draft of its scoping plan update, which aims to make the state carbon neutral by 2045. This ambitious plan "aims to shatter the carbon status quo and take action to achieve a vision of California with a cleaner, more sustainable environment and thriving economy for our children." 

The Low Carbon Fuel Standard (LCFS) is a crucial part of the plan. It currently requires a 20% reduction in the carbon intensity (CI) of transportation fuels below 2010 levels by 2030. The draft scoping plan seeks to "evaluate and propose accelerated carbon intensity targets pre-2030" and "further declines in LCFS post-2030 carbon intensity targets," which suggests that the LCFS is going to become more stringent. 

The plot below illustrates how the LCFS works. For every gallon of a high-CI fuel such as gasoline or diesel, we need to use enough of low-CI fuels such as ethanol, biomass-based diesel, electricity, or biogas to get the state average CI down to the required level. Selling petroleum gasoline and diesel generates deficits against the policy. Low-CI fuels generate credits to offset the deficits.

Source: Our LCFS data app


The LCFS is a race between credits and deficits---accumulated credits must exceed accumulated deficits at the end of 2030. The program paused during 2013-2015 while the courts resolved legal challenges. This gave the credits a head start. After the regulation was re-adopted in 2016, , deficits moved ahead and the credit bank declined steadily until 2019. It leveled off in 2020 and started increasing again in 2021, indicating that the race has moved back in favor of credits.

LCFS bank
Source: Our LCFS data app


The fluctuations in the credit bank are mirrored by the prices of LCFS credits. Deficit-generating firms such as oil refiners must purchase credits to offset their deficits. When credits are scarce, the price is high; when they are plentiful, the price is low.

Credit prices were around $200 during the period when the bank balance was declining. Prices declined precipitously after this chart ends, and were $120 today

LCFS credit prices
Source: Our LCFS data app


Why have credits pulled ahead of deficits in the LCFS race?   Short answer: gasoline and diesel generated 2.8 million more deficits in 2021 than in 2019, whereas electricity, biogas, and biomass-based diesel generated about 6 million more credits between them.

Data Source: Our LCFS data app; Image created in Excel.


The increasing credit bank balance has little to do with ethanol, which makes up a steady 10% of California gasoline, as it does throughout the US. Fuel suppliers are not adjusting their ethanol blending rate to achieve LCFS compliance. This is a big reason that a recent Biden Administration move to allow higher ethanol percentages in summer gasoline will have little effect. For more on that topic, see my recent article in The Conversation.

Most of the credits generated by electricity come from cars (light duty), but there is also a non-trivial amount from forklifts. 

LCFS electricity
Source: Our LCFS data app


The increase in credits from biogas come mostly from biogas captured from dairy cow manure. I wrote about the boom in dairy biogas in a previous Ag Data News article.

LCFS biogas
Source: Our LCFS data app


Biomass-based diesel now makes up 39% of the diesel used in California. Most of it is renewable diesel made from tallow or used cooking oil. I wrote about the boom in renewable diesel in a previous Ag Data News article. 

The growth in renewable diesel is likely to continue. Several major oil companies such as ExxonValero have announced plans to build out significant renewable diesel capacity, most of which is expected to begin operation in the next 3 years.

Moreover, renewable diesel is the easiest for fuel suppliers to adjust. As long as credit prices are high enough to compensate for the extra cost, they can add more renewable diesel into the diesel pool. Increasing electricity credits requires getting people to buy different vehicles and increasing biogas will require more natural-gas powered vehicles. 

LCFS bbd
Source: Our LCFS data app


Growth in biogas, electricity, and renewable diesel as transportation fuel has propelled credits into the lead in the LCFS race. However, this may change. By design, the required CI in the LCFS will continue to decline, meaning that it will take more gallons of credit-generating fuels each year to offset a gallon of gasoline of diesel. Based on the draft scoping plan, CARB may lower the required CI even more than its current trajectory, which may leave credit-generating fuels needing to catch up.   

I will be watching LCFS credit prices to assess how fuel market participants view the possibilities.


All the data shown here can easily be viewed or downloaded at our LCFS data app. All you need is a web browser. Huge kudos to recent UC Davis ARE PhD graduate Dan Mazzone for his great work creating and maintaining this app.