Uncertainty, Innovation, and Infrastructure Credits: Outlook for the Low Carbon Fuel Standard Through 2030

Research Team: Aaron Smith (lead), James Bushnell, Daniel Mazzone, and Julie Witcover

UC Campus(es): UC Davis

Problem Statement: The Low Carbon Fuel Standard (LCFS), operated by the California Air Resources Board (CARB), is one of the cornerstone policies directed at reducing greenhouse gas (GHG) emissions from transportation fuels. The LCFS requires producers of petroleum-based fuels to reduce the carbon intensity of their products. Petroleum importers, refiners and wholesalers can either use low-carbon fuel in their own products, or buy LCFS credits from other companies that sell low-carbon alternative fuels. One distinguishing characteristic of the LCFS is the fact that the marginal incentive (e.g., carbon price) provided to fuel producers is diluted as it is transmitted through to end-use customers. This dilution effect has drawn criticism from economists who have focused on the prospect that the LCFS can subsidize the use of fuels that are relatively cleaner but still produce GHGs. Proposals have been implemented to allow credit for low carbon fuel (such as hydrogen and electricity) beyond levels of actual fuel use. The prospect of LCFS credits being applied to or generated from fixed expenditures, rather than implicit subsidies of marginal fuel costs, changes the theoretical and practical impact of such policies on consumer prices for both conventional and alternative fuels.

Project Description: This project assesses if and how California is likely to achieve the standard, and the likely impact of infrastructure credits on this compliance outlook. The researchers begin by projecting a distribution of fuel and vehicle miles demand under business-as-usual economic and policy variation, and transform those projections into a distribution of LCFS net deficits for the entire period from 2019 through 2030. They then construct a variety of scenarios characterizing LCFS credit supply that consider different assumptions regarding input markets, technological adoption over the compliance period, and the efficacy of complementary policies. In our baseline scenario for credit generation, LCFS compliance would require that between 60% and 80% of the diesel pool be produced from biomass. Our baseline projections have the number of electric vehicles reaching 1.3 million by 2030, but if the number of electric vehicles reaches Governor Jerry Brown’s goal of 5 million by 2030, then LCFS compliance would require substantially less biomass-based diesel. Outside of rapid zero emission vehicle penetration, compliance in 2030 with the $200 credit price may be much more difficult. New mechanisms to allow firms to generate credits by building electric vehicle charging stations or hydrogen fueling stations have minor implications for overall compliance because the total quantity of infrastructure credits is restricted to be relatively small.

Status: Completed

Budget: $25,010