California Low Carbon Fuel Standard Primer
A Simple Guide to how the California Based LCFS Market Works
What is a Low Carbon Fuel Standard?
The Low Carbon Fuel Standard (LCFS) is a market-based program, part of the package of programs created to satisfy California’s AB 32, and designed to reduce the carbon intensity (CI) of transportation fuels while promoting cleaner alternatives. Fuel producers must lower their fuels' CI over time, measured in grams of CO₂ equivalent per mega joule (gCO₂e/MJ), with annual reduction targets. The program operates through a credit and deficit system, where high-carbon fuels (mostly gasoline and diesel) generate deficits, while low-carbon fuels (e.g., electricity, hydrogen, renewable diesel, and other biofuels) generate credits. Companies can trade these credits to comply with the standard, creating financial incentives for clean energy adoption.
History of the LCFS
The California Low Carbon Fuel Standard (LCFS) was established in 2007 by Governor Arnold Schwarzenegger’s (Yes, the Governator) Executive Order S-01-07, directing the California Air Resources Board (CARB) to develop regulations to reduce the carbon intensity (CI) of transportation fuels. Officially adopted in 2009 as part of AB 32 (the Global Warming Solutions Act of 2006), the LCFS aimed to cut fuel CI by 10% by 2020. The program faced legal challenges, with industry groups arguing it violated the Commerce Clause amongst other things, but it was upheld by the Ninth Circuit Court of Appeals in 2013. In 2015, CARB re-adopted and strengthened the LCFS with updated CI benchmarks and compliance mechanisms. A 2018 expansion extended the target to a 20% reduction by 2030 and introduced credits for carbon capture, ZEV infrastructure, and renewable fuels. Since 2019, the LCFS has driven EV adoption, renewable fuel use, and rising credit values, incentivizing cleaner technologies. In 2022–2023, CARB initiated a new rule making process to further align the LCFS with California’s 2045 carbon neutrality goal, ensuring its continued role in decarbonizing transportation. A very telling image on its impact can be found on the ARB website and can be seen below. The expectation for the carbon intensity reduction by 2023 was a reduction of 11.25 percent. 2023 saw a 15.34 percent reduction because of the success of the LCFS program.
To further outline how remarkable this decrease is in fuel CI you can look at the image below. During this time in CI reduction, the population of California increased by around 7 percent! That’s an increase in the number of fuel users.
How does the LCFS work?
The LCFS Regulation Sets out yearly CI target/benchmark. Parties that supply fuel into California are obligated to participate in the program. Any fuel that has a CI above that target generates a deficit (generally speaking this is gasoline and diesel fuel). Any fuel that has a CI below that target generates a credit (generally speaking this is renewable fuels, electricity for EVs, etc). The standard CI for gasoline and diesel is always higher than the CI target/benchmark because the benchmarks are a discount based on the conventional gasoline and diesel CI. The table below shows how the benchmark for CI decreases every year for fuels (This is the gasoline alternatives benchmark, there is a separate table for diesel alternatives). March of the following year, all fuel suppliers who have deficits, have to submit credits so that the net balance is zero or greater.
In order to do this, gasoline and diesel fuel suppliers have to go to market and purchase credits from clean fuel suppliers like EV charger owners and renewable diesel suppliers. The result is a mechanism where gasoline and diesel suppliers have to pay clean fuel suppliers and as a result gasoline and diesel suppliers are looking to lower their CO2 emissions per gallon to pay less, while clean fuel suppliers are looking to do the same thing (lower their CO2 per gallon equivalent) in order to get paid more. For the full regulation you can click here.
How are deficit and credits calculated?
ARB uses what is called the CA-GREET model. The model is often referred to as a “well to wheel” model. Here every fuel supplier has to submit a report and dataset that shows all emissions from the point of origin to the wheel. In the case of gasoline, it would be from the point the oil was taken out of the ground, transported to the refinery, refined, and transported and used in the vehicles. Once this is submitted, ARB decides on what the CI is for that fuel. This is the case with every fuel used. The details of the CA-GREET model, as well as pathways, how the ARB goes about approving them, and the explanations for each fuel category that ARB has is outside the scope of this primer.
In the below illustration you can see that the same fuel can have multiple CI scores and you can see where it ranks against the CI target/benchmark. A hypthotical comparison would be of a renewable diesel producer using used cooking oil that originates from California processed in a renewable diesel facility in California that will have a lower CI than, say, a renewable diesel producer who produces it in Asia and ships it to California.
LCFS Credit Price
The excess credits after all deficits are accounted for is called the credit bank. The bank is either in a state where it is increasing or in a state where it is decreasing. There is an inverse relationship between the increase/decrease of the LCFS credit bank (how many credits are in circulation) and the increase/decrease of the price. In cases where the bank is projected to decrease, credit prices will drop, and in cases where the credit bank is projected to decrease, the price will rise. The chart provides details on credit bank increases and decreases as well as how many credits currently exist. We are just above 30 million credits currently in the bank, and we note that in Q3 2024 we produced around 5 million deficits alongside 10 million credits.
We can see that during the time the bank saw a decrease (Q1 2017 to about Q2 2021) prices for LCFS went from around 75 USD to 200 USD. This is because gasoline and diesel suppliers were all worried that they may not have enough credits to comply in the future (this makes sense in a market where credits are decreasing and market participants are uncertain about credit supply in the future). At the 200 USD level, it became lucrative for clean fuel producers to produce more in facilities and infrastructure for clean fuels. For example, California became a hotspot for renewable diesel and there were many incentives that utilities had in place for EV owners to charge their vehicles. As a response to the increase in credit supply because of the 200 USD price, the bank began to grow again and, as you can see, prices began to drop.
Participants in the LCFS Market
Participants consist mainly of large obligated parties (oil refiners typically, fuel distributors, biofuel producers and importers, as well as trade houses and some funds. They typically trade these markets through brokers if they have a physical account with the LRT (The account ARB uses to manage credit accounts). The ARB website has more information on how to set up an account and what the requirements look like. Alternatively participants like funds, fuel producers, traders, and other investors can use ICE futures and Nodal futures to access these markets.