Low Carbon Fuel Standard (LCFS)

Background

Under the AB 32 Scoping Plan, the California Air Resource Board (CARB) identified the Low Carbon Fuel Standard (LCFS) as one of the nine discrete early action measures to reduce California’s greenhouse gas emissions that potentially contribute to climate change. The LCFS is designed to decrease the carbon intensity (CI) of California’s transportation fuel pool by 10% by 2020 and provide an increasing range of low-carbon and renewable alternatives.

The Board approved the LCFS regulation in 2009 and began implementation on January 1, 2011. In ordinance with the California Appellate Court the original CI reduction schedule was remained at 2013 levels due to deficiencies in the original LCFS adoption process. The LCFS was re-adopted in 2015 and became effective on January 1, 2016. In 2018, the Board approved amendments to the regulation. These amendments worked on strengthening and smoothing the carbon intensity benchmarks through 2030 in-line with California’s 2030 GHG emissions reduction target, adding new crediting opportunities to promote zero emission vehicle adoption, alternative jet fuel, carbon capture and sequestration, and advanced technologies to achieve deep decarbonization in the transportation sector. CARB has been routinely working with other jurisdictions (Pacific Coast Collaborative), and over time, these LCFS programs will build an integrated West Coast market for low-carbon fuels that will create greater market pull, increased confidence for investors of low carbon alternative fuels, and synergistic implementation and enforcement programs. CARB also coordinates with representatives from Canada and Brazil as they are developing similar clean fuels programs.

How LCFS Works

The LCFS standards are expressed in terms of the “carbon intensity” (CI) of gasoline and diesel fuel and their respective substitutes. The program operates on the principle that each fuel has “life cycle” greenhouse gas emissions that include CO2, CH4, N2O, and other greenhouse gas contributors. This life cycle assessment takes into account the greenhouse gas emissions associated with the production, transportation, and use of a given fuel, along with any other direct and indirect emissions from these sources. The carbon intensity scores assessed for each fuel are compared to a declining CI benchmark for each year. Low carbon fuels that are less than the benchmark generate credits, while fuels above the CI benchmark generate deficits. Credits and deficits are measured in metric tons of GHG emissions. Petroleum importers, refiners, and wholesalers are Regulated Parties (RPs) under the LCFS. A CARB approved alternative fuels producers can opt-in to the program and also be referred to as RPs. During each annual compliance period, RPs must demonstrate that the mix of fuels that are being used in California meet the LCFS carbon intensity standards, or benchmarks. When transportation fuels are imported, refined, or sold in California, RPs enter the transaction level information into CARB’s central data system for the standard, the LCFS Reporting Tool (LRT). The LRT tracks each transaction of fuel with its corresponding credit or deficit position, and sums for each RP. The LRT data can be used to create graphs such as Figure 1, which showcases the net LCFS credits on a quarterly basis along with the cumulative bank. Credits are retired when used to cover deficits per annual compliance report. LCFS credits do not have a vintage and do not expire. Credit transactions are reported to the LRT, including the transaction price in units of million tonnes (MT) of LCFS credits. Credit owners can only sell or trade their credits with other RP deficit holders. Parties outside the 230 RPs are not allowed to hold LCFS credits. Someone who wishes to generate a deficit must meet compliance by ensuring that the amount of credits their earn or acquire from another party is equal to, or greater than, the deficits they have incurred.

Generating Credits

Fuels with a low CI that generate credits include ethanol, biodiesel, renewable diesel, compressed natural gas and biogas (CNG), liquefied natural gas and biogas (LNG), hydrogen, and electricity for electric vehicles (EVs). Ethanol has been the greatest contributor to the alternative transportation fuel pool, however, since most vehicles are limited to a 10% ethanol/gasoline blend there’s a constraint to how much ethanol can contribute to the transportation fuel pool. This is described as the ethanol blendwall. Flex fuel vehicles (FFVs) can run on up to 85% ethanol, but the demand for higher blends of ethanol just hasn’t materialized and CARB has not encouraged the use of E85. After ethanol, biodiesel and renewable diesel, combined, make up the next largest contributor to the alternative transportation fuel pool. Their combined contribution has been increasing as the program continues. In Q3 2016 biodiesel and renewable diesel made up a combined 47% of the total. The constraints on biodiesel are from blending limits with conventional diesel, infrastructure constraints, and high feedstock prices.