Market Reaction Determines Success of Low Carbon Fuel Standard Programs

A new Fuels Institute report provides regulators and market participants insights into successes and challenges of the California LCFS.

February 26, 2019

ALEXANDRIA, Va. – The Fuels Institute, founded by NACS in 2013, has released a new report, “Market Reactions of Low Carbon Fuel Standard Programs,” evaluating the history of the California Low Carbon Fuel Standard (LCFS) and its effect on the transportation market. The report provides valuable insight for those interested in programs of this nature. By learning from the California example, market participants and regulators might be able to mitigate challenges should such programs expand to other markets.

“In implementing the LCFS, California regulators have shown significant flexibility to amend the program in response to evolving market conditions,” said John Eichberger, Fuels Institute executive director. “The history of this program, as presented in our new report, demonstrates the challenges associated with anticipating how a market might respond to comply with fuels regulatory programs and the value for regulators to remain engaged with the regulated community throughout implementation.”

LCFS programs are intended to reduce emissions of greenhouse gases by lowering the average carbon intensity of transportation fuels used in a given geographical area. The new Fuels Institute report takes an in-depth look at the first of these programs—the California LCFS—to uncover lessons learned. As other jurisdictions consider low carbon fuels programs, it is vital for lawmakers, regulators and interested stakeholders to understand what has worked in California, what challenges remain, and what effects such programs have on consumers and other end users.

“The program to date has not presented significant compliance burdens to the market, according to our report, although it does have a greater effect on smaller operators,” Eichberger noted. “So far, most of the compliance costs have been passed through to consumers. But as the carbon reduction requirements increase over the next decade, the impacts could become more significant.”

The report notes that through 2018, credits to comply with the LCFS have typically remained below $100 and the impact on fuel prices has been less than 5 cpg. However, the authors project that through 2030, credit prices could eclipse $300 and the impact on gasoline and diesel prices could be 69 cents and 39 cents per gallon, respectively.

The most recent amendments proposed in 2018 put forth two different compliance scenarios—one anticipating low fuel demand and high growth in the population of zero emissions vehicles, and the other anticipating high fuel demand and low growth in zero emission vehicles. In addition, the proposal incorporates additional credit generating categories that are not fuel-related, such as credits for zero emission vehicle infrastructure. How the market responds to carbon reduction requirements over the next ten years will determine the ultimate impact on the market, as will be demonstrated through LCFS credit prices. If market conditions do not develop as expected, additional amendments to the program might be required.

“The California experience demonstrates that striking a balance in such a program is critical,” Eichberger said. “For example, stakeholders expressed a desire for more trading partners within the LCFS credit market, but at the same time were concerned that this would increase competition for low carbon fuels. And, while they were appreciative of the flexibility of the program, they said the frequent amendments also introduced a high degree of uncertainty. Finding a balance among such issues can mean the success or failure of regulatory programs.”

You can download the full report, “Market Reactions to Low Carbon Fuel Standard Programs,” from The Fuels Institute website.