Q: What is Low Carbon Fuel Standard?
A: Under the AB 32 Scoping Plan, the Board identified the Low Carbon Fuel Standard (LCFS) as one of the nine discrete early action measures to reduce California’s greenhouse gas (GHG) emissions that cause climate change. The LCFS is a key part of a comprehensive set of programs in California to cut GHG emissions and other smog-forming and toxic air pollutants by improving vehicle technology, reducing fuel consumption, and increasing transportation mobility options. The LCFS is designed to decrease the carbon intensity of California’s transportation fuel pool and provide an increasing range of low-carbon and renewable alternatives, which reduce petroleum dependency and achieve air quality benefits.
The Board approved the LCFS regulation in 2009 and began implementation on January 1, 2011. CARB approved some amendments to the LCFS in December 2011, which were implemented on January 1, 2013. In September 2015, the Board approved the re-adoption of the LCFS, which became effective on January 1, 2016, to address procedural deficiencies in the way the original regulation was adopted. In 2018, the Board approved amendments to the regulation, which included strengthening and smoothing the carbon intensity benchmarks through 2030 in-line with California’s 2030 GHG emission reduction target enacted through SB 32, 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.
The LCFS is designed to encourage the use of cleaner low-carbon transportation fuels in California, encourage the production of those fuels, and therefore, reduce GHG emissions and decrease petroleum dependence in the transportation sector. The LCFS standards are expressed in terms of the “carbon intensity” (CI) of gasoline and diesel fuel and their respective substitutes. The program is based on the principle that each fuel has “life cycle” greenhouse gas emissions that include CO2, CH4, N2O, and other GHG contributors. This life cycle assessment examines the GHG emissions associated with the production, transportation, and use of a given fuel. The life cycle assessment includes direct emissions associated with producing, transporting, and using the fuels, as well as significant indirect effects on GHG emissions, such as changes in land use for some biofuels. The carbon intensity scores assessed for each fuel are compared to a declining CI benchmark for each year. Low carbon fuels below the benchmark generate credits, while fuels above the CI benchmark generate deficits. Credits and deficits are denominated in metric tons of GHG emissions. Providers of transportation fuels must demonstrate that the mix of fuels they supply for use in California meets the LCFS carbon intensity standards, or benchmarks, for each annual compliance period. A deficit generator meets its compliance obligation by ensuring that the amount of credits it earns or otherwise acquires from another party is equal to, or greater than, the deficits it has incurred.
Other jurisdictions are joining California, which is evident in the Pacific Coast Collaborative, a regional agreement between California, Oregon, Washington, and British Columbia, to strategically align policies to reduce GHG and promote clean energy. CARB has been routinely working with these jurisdictions, 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 continues to engage with representatives from Canada and Brazil as they develop similar clean fuels program.
Q: What is California’s carbon cap-and-trade program?
A: The Cap-and-Trade Program is a key element of California’s strategy to reduce greenhouse gas (GHG) emissions. It complements other measures to ensure that California cost-effectively meets its goals for GHG emissions reductions.
The Cap-and-Trade Regulation establishes a declining limit on major sources of GHG emissions throughout California, and it creates a powerful economic incentive for significant investment in cleaner, more efficient technologies. The Program applies to emissions that cover approximately 80 percent of the State’s GHG emissions. CARB creates allowances equal to the total amount of permissible emissions (i.e., the “cap”). One allowance equals one metric ton of carbon dioxide equivalent emissions (using the 100-year global warming potential). Each year, fewer allowances are created and the annual cap declines. An increasing annual auction reserve (or floor) price for allowances and the reduction in annual allowances creates a steady and sustained carbon price signal to prompt action to reduce GHG emissions. All covered entities in the Cap-and-Trade Program are still subject to existing air quality permit limits for criteria and toxic air pollutants.
Q: How does the Cap-and-Trade Program work?
A: The Cap-and-Trade Program establishes, through Regulation, a declining limit on major sources of GHG emissions throughout California, and it creates a powerful economic incentive for significant investment in cleaner, more efficient technologies. The Program covers approximately 80 percent of the State’s GHG emissions. CARB creates allowances equal to the total amount of permissible emissions (i.e., the “cap”). One allowance equals one metric ton of carbon dioxide equivalent emissions (using the 100-year global warming potential). Each year, fewer allowances are created and the annual cap declines. Covered entities may acquire allowances through auction, limited free allocation (for eligible entities), and by trading with other entities in the Program (i.e., the “trade”). A majority of allowances are made available through quarterly allowance auctions. Regulated entities must surrender allowances, and a limited number of offset credits, to cover their emissions. The increasing annual auction reserve (or floor) price for allowances, along with the reduction in annual allowances creates a steady and sustained carbon price signal to prompt action to reduce GHG emissions.
Q: How are LCFS credits calculated?
Q: LCFS Credit Clearance Market
A: The LCFS includes a provision for holding a Credit Clearance Market (CCM) that provides additional compliance flexibility to regulated parties who have not met their previous year-end obligation. The CCM increases market certainty regarding maximum compliance costs, strengthens incentives to invest in and produce low-CI fuels, and reduces the probability of credit shortfalls and price spikes.
The LCFS regulation established the maximum price for credits acquired, purchased or transferred in CCM at $200 in 2016, and it requires that this price be adjusted by a Consumer Price Index (CPI) deflator in all years subsequent to 2016. The table below shows the maximum credit price determined for CCM in the past years and whether a CCM took place in each year.
|CCM Year||Maximum Credit Price*||CCM Held||Credits Purchased in CCM||Maximum Credit Price applies to all credit transfers executed in the LRT-CBTS|
|2020||$217.97||No||Not Applicable||Effective June 1, 2020|
|2021||$221.67||No||Not Applicable||Effective June 1, 202|
|2022||$239.18||TBD||TBD||ffective June 1, 2022|
For more information on relevant CCM dates, please refer to the Reporting, Verification & Annual Compliance Calendar.