A low carbon fuel standard (LCFS) is a market-based policy mechanism that aims to reduce the life-cycle greenhouse gas (GHG) emission intensity of transportation fuels/energy vectors.
The mechanism is grounded on the definition of progressively tightened regulatory thresholds/limits for the average life-cycle (i.e. including production, distribution and use) GHG emission intensity of transport fuels/energy vectors (typically gasoline, diesel oil and jet kerosene) distributed by regulated parties (typically fuel suppliers and/or other entities that produce, import, distribute or sell transportation fuels). Fuels with a carbon intensity that is lower than the regulated threshold generate credits; fuels with higher GHG emission intensity generate deficits. In any given year, regulated parties need to have enough credits to compensate for any deficits created by the sale of carbon intensive fuels. To ensure they meet the policy requirements in any given year, regulated entities can trade credits and use credits banked from previous years.
Given that the policy does not include mandates for any particular fuel, technology, or compliance strategy, the LCFS allows for the use of a broad range of solutions to comply with the regulation, remaining technology-neutral. Thanks to the progressively tightened limit values, a LCFS has the capacity to effectively incentivise solutions that offer the best performances in terms of GHG emission reduction, rewarding them with benefits that are drawn from the pool of all technologies contributing to the fulfilment of the energy demand of transport vehicles.
GHG emission reductions in an LCFS are achieved through three main compliance categories:
i) Improved energy efficiency, renewable energy integration and carbon capture, use and storage for production of the fuel/energy vector.
ii) Fuel/energy vector switching occurring without changes in powertrain technologies, displacing GHG emissions from fossil fuels thanks to the adoption of fuels/energy vectors produced from renewable carbon streams, such biogas, advanced biofuels and PIX fuels, taking into account of GHG emissions occurring during fuel/energy vector production and use.
iii) Fuel/energy vector switching occurring thanks to changes in powertrain technologies such as battery electric and hydrogen fuel cell vehicles, taking account of changes in GHG emissions due to higher energy conversion efficiency in the powertrain, differences in the carbon intensity of the production of the energy vector and, ideally, also taking into account the differences in GHG emissions due to the manufacturing of vehicles using different powertrains.
A key feature of a LCFS is that by design, it places greater certainty on the achievement of GHG emission reductions than on the implicit cost of achieving them. A LCFS can be designed to include cost-containment mechanism providing an additional route to compliance by capping to the cost of the credits. This reduces the certainty on the achievement of emission reductions, limits the maximum subsidy that the LCFS can give to credit generators and ensures that the overall impact on fuel prices of the policy instrument is subject to an upper threshold.
A key requirement for the development of a LCFS is the development of a methodology allowing the definition of the characteristics of different fuels/energy vectors with respect to their average life-cycle carbon intensity. In particular, emissions associated with direct and indirect land use changes, principally relevant for biofuel feedstocks, add a significant degree of additional complexity to the determination of carbon intensities of fuels/energy vectors. To ease the implementation of the policy, the development of this methodology can be accompanied by the development of a set of default values.
Given the wide range of technology pathways that can contribute to the reduction of the average life-cycle carbon intensity of transportation fuels, as well as the complexity of life-cycle assessment, this requirement is an important implementation barrier for the development of a LCFS.
Another key requirement is the development of accounting methodologies and instruments allowing the determination of the average life-cycle carbon intensity of transportation fuels/energy vectors, based on the combination of the volumes of the fuels/energy vectors sold, their carbon intensity and the efficiency with which a vehicle converts the fuel/energy vector into useable energy. Accounting systems that allow meeting the regulatory limits with credits and deficits can serve effectively as facilitating elements in the practical implementation of the policy. Technologies facilitating the traceability of fuels/energy vectors and the automation of the process allowing for the determination of the average life-cycle carbon intensity of transportation fuels/energy vectors are also important facilitators of the policy implementation.
Regulatory authorities also need to establish systems capable of allowing credit trading and banking. These systems need to record information on credit transactions between regulated parties (including price and volume of these transactions). To provide transparent signals to potential credit generators, regulatory authorities need to regularly publish information on the price of these transactions.
Once the policy is implemented, these systems offer the possibility to track the values of the GHG emission reduction credits. In California, the jurisdiction that started the implementation of the LCFS, has the longest transaction cost record available to date and the most ambitious requirements in terms of carbon intensity reductions (20% against the 2010 baseline) by 2030, the value of credit transactions in 2019 was close to USD 200/t CO₂. In Oregon, where the ambition currently set in the legislation is for a 10% reduction in carbon intensity by 2025 vs. a 2015 baseline, credits increased from roughly USD 100/t CO₂ in late 2018/early 2019 to roughly USD 160/t CO₂ in late 2019. Credits in British Columbia were traded for values close to USD 140/t CO₂ in 2019.
One of the main co-benefits of LCFS (beyond the achievement of net reductions in terms of GHG emissions) is their capacity to contribute effectively to the development of innovative approaches to the decarbonisation of transportation fuels/energy vectors. This is consistent with the fact that the promotion of innovation, technological development, and deployment of low-emission fuels/energy vectors and the enabling of vehicle technologies are key objectives of a LCFS.
A key mechanism allowing for the materialisation of this co-benefit is the capacity of an LCFS to implicitly tax emissions and transfer the resources raised from this implicit taxation towards the subsidization of fuel/energy vehicles and (indirectly) vehicle technologies, prioritizing those that come with a high capacity to deliver long-lasting GHG emission reduction (and therefore being subject to long-lasting policy support).
The market-based and technology neutral facets of the LCFS give the policy the capacity to provide these incentives to innovations while also guaranteeing effective and sizable GHG emission reductions overall, avoiding picking winners and therefore promoting the minimisation of the overall cost of reducing GHG emissions.
The main potentially adverse/negative effects of low carbon fuel standards relate to two main aspects.
The first has to do with cost and economic development. Given the strong relationship between energy demand and economic growth, and taking into account the demand elasticities due to price changes, increases in overall energy costs due to renewable and/or low-carbon fuels/energy vectors may be detrimental for economic growth. In the case of LCFS, this can be managed by policy design based on progressive changes, as these allow for a timely response in increased energy efficiency, even in the absence of significant cost reductions for low-carbon fuels. Fuel price impacts of LCFS are also smaller compared with an equivalent carbon tax because the LCFS is designed to cross-subsidise low-carbon fuels, supporting the achievement of cost reductions.
The second relates with the competition for land use with other economic activities (e.g. food production), potential increases in the costs of food production, and potential negative impacts related to land use change (e.g. induced deforestation, which would nullify GHG emission saving benefits from lower direct well-to-wheel emissions). Managing potentially adverse impacts on costs is closely related to the speed of the transition and the level of policy ambition. To maximise benefits and minimize adverse effects, it is important to monitor the extent to which cost reductions can be achieved thanks to the scale up of low-carbon fuel production. Mechanisms allowing the capping of costs are also helpful to avoid unintended negative impacts. The development of accounting frameworks allowing for the definition of the characteristics of different fuels/energy vectors with respect to their average life-cycle carbon intensity, including effects due to direct and indirect land-use change, are important to manage potential negative impacts related to land use change and impacts on food prices.
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