Why Have Low-Carbon Fuel Standard (LCFS) Prices Been Falling?

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The Low Carbon Fuel Standard (LCFS) price data shows a fluctuating trend with an overall downward trajectory over the past few years. In late 2019 and early 2020, the LCFS price ranged from around $193 to $211, indicating relative stability in the market. However, from mid-2020 onwards, the price began to decrease, falling to all time level lows and currently settling at about $71.

Why are LCFS Credit Prices Dropping?

The macro decline of LCFS credit pricing can be attributed to an increase in the supply of credits relative to the demand for them. This is due to the fact that there are more credits being generated on a quarter by quarter basis than there are deficits being generated. Deficits are generated when a fuel's carbon intensity exceeds the standard set by the LCFS program, while credits are generated when a fuel's carbon intensity is below the standard.

As more low-carbon fuels like renewable diesel are used and displace conventional fuels, the overall volume of fuel subject to the LCFS program increases. This means that the compliance curve, or the standard that fuels must meet, gets steeper. However, the increase in supply of credits from the use of low-carbon fuels is outpacing the increase in demand for credits from the steeper compliance curve, resulting in a decline in pricing.

Will the Negative Price Trend Reverse?

We can definitely see some recent strength rebounding around $70 and there are some indications that California regulators may attempt to reverse the trend of decreasing LCFS credit prices. Concerns are rising over low prices not being a strong enough incentive to invest into alternative, low carbon fuels. One possible strategy is to increase credit prices by steepening and lengthening the carbon-intensity (CI) compliance targets more quickly than the current revisions set in 2030. This may be coupled with potential caps on certain feedstock types, such as soy-based feedstocks for renewable diesel, as well as greater scrutiny on CI applications, and other measures to limit credit supply and increase demand. By implementing such measures, the state could effectively tighten the LCFS credit market, potentially leading to an increase in credit prices. However, it remains to be seen whether such regulatory actions will be enough to reverse the trend of declining LCFS credit prices.

What Factors are Affecting the LCFS Credit Price?

The LCFS price appears to be affected by a variety of factors, including supply and demand, government policies, and market trends. Although it's challenging to identify a single dominant factor, the surge in renewable diesel and bio-CNG production and reduced demand for high-carbon fuels due to travel restrictions and supply chain challenges have had a significant impact on credit prices. In 2021, renewable diesel production had risen by 35%, and bio-CNG has achieved exceptionally low carbon intensity scores, resulting in 45% of recent credit generation. Conversely, decreased consumption of high-carbon fuels, resulting from ongoing COVID-related restrictions and other socio-economic factors, has led to reduced deficits and demand for credits, contributing to their decreasing market value.

Is the Low-Carbon Fuel Standard Efficient?

The implementation of a low-carbon fuel standard (LCFS) policy can make a significant contribution to a sustainable policy mix. The effectiveness of the LCFS in reducing greenhouse gas (GHG) emissions has been demonstrated by several studies. Existing LCFS policies have helped to cut emissions to date, and modeling studies indicate that a stronger LCFS can play an additive mitigation role in a well-designed policy mix over the long-term. This policy can also be cost-effective, although this aspect is more uncertain. Some studies suggest that while an LCFS is not likely to be as efficient as a carbon price, a well-designed LCFS could be an efficient complement to a mix that includes carbon pricing.

The LCFS also enjoys strong political and social acceptability, as numerous studies have shown. The LCFS receives substantial citizen support, more so than any pricing mechanism. This acceptance is likely due to the fact that the LCFS targets the supply side of the fuel market, which reduces the burden on consumers.

In addition to its effectiveness and acceptability, the LCFS can also send a transformative signal to the market, which can contribute to long-term sustainability. The LCFS is associated with increased investment in low-carbon fuels and supportive infrastructure, and a stronger version could induce even more innovation in the long-term. Despite the potential benefits of the LCFS, there are still research gaps that need to be addressed. For example, the impacts of biofuels on indirect land-use and other sustainability measures need to be better understood. There is also a need for improved simulation of longer-term technological change under a more stringent LCFS, including policy mix interactions.

LCFS During and After COVID-19

In early 2020, the LCFS price increased as the COVID-19 pandemic led to decreased supply and increased demand for low-carbon fuels. In contrast, in mid-2020, the LCFS price began to decline as the market adjusted to decreased demand and increased supply of low-carbon fuels.

During the COVID-19 pandemic, there was a decrease in the supply of low-carbon fuels due to disruptions in supply chains and reduced production capacity. For instance, the closure of some biofuel plants and the slowdown of production of electric vehicles led to a reduced supply of low-carbon fuels. This reduction in supply led to an increase in LCFS credit prices as suppliers scrambled to meet their compliance obligations.

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