Estimating pass through of the LCFS tax at the wholesale level will suggest that it isn’t passed through, when in fact it is being passed through downstream at the rack level. This finding also informs the analysis on LCFS subsidy pass through, as it suggests that blenders hold both credits and deficits, creating a net subsidy rather than a gross subsidy. Not accounting for the tax will overstate the amount of the actual subsidy realized by the blender. Pass through of the RIN tax is found to be complete in all major spot markets on average, except for San Francisco. Pass through of the RIN subsidy is complete in the Midwest, incomplete in the East Coast, West Coast, and Gulf Coast. The findings of incomplete RIN subsidy pass through in my sample, which includes data from the last six years, suggest that lack of salience may not be the explanation. Additionally, incomplete pass through of the RIN subsidy in the Gulf Coast differs from findings in the blended gasoline sector . In California, RIN taxes and LCFS taxes are fully passed through to wholesale prices and rack prices, respectively, with the exception of the tax in San Francisco. Pass through of both the RIN subsidy and LCFS subsidy is incomplete. I find that 68 percent of the combined subsidy is passed through to rack prices in California in the long-run on average. Pass through of LCFS subsidies is lower for higher bio-diesel blends, which is consistent with blenders having market power in higher blends. However, there are significantly more blending facilities in Los Angeles than San Francisco, yet pass through estimates of the RIN, LCFS, and combined subsidy for B100 in the two cities are nearly identical, which is surprising.I can rule out lack of salience as the cause of incomplete pass through of both subsidies in California because that would require that all costs be passed through at the same rate ,cannabis grow setup which is inconsistent with results from the unrestricted models discussed in Figure A-3.

CFP tax pass through is not studied here due to lack of data. Spot prices for diesel are especially volatile in the Pacific Northwest, which creates noisy margins in Oregon. At the same time, CFP bio-diesel subsidies lack variation, therefore estimates of pass through are very imprecise in Oregon. With that caveat, CFP pass through is incomplete on average and resembles similarities to the LCFS.Together, the results presented in this paper point to some inefficiencies in the RFS, LCFS, and CFP. The primary contribution of this paper was providing the first set of estimates of pass through of LCFS implicit taxes and subsidies. Explanations for their ability to capture rents from LCFS credits are unclear and requires further research and better data. However, some explanations are ruled out, such as salience. Accurate cost estimates of bio-diesel in California and Oregon would greatly assist researchers study pass through of the policies’ costs and incentives. Additionally, feedstock-specific costs would allow for more accurate calculations of implicit subsidies and for the study of pass-through using feedstocks with much larger market shares. Lastly, better cost data on renewable diesel would lead to a more valuable study of LCFS subsidy pass through as it has become much more widely used than bio-diesel in the state.State and local policy makers in the U.S. and beyond are looking to Low Carbon Fuel Standards as a policy instrument for reducing GHG emissions in the transportation sector. California implemented its LCFS in 2011, setting a target of a ten percent reduction in carbon intensity values for transport fuels used in the state by 2030 from 2011 levels, as part of its climate policy. The target has since been updated to a 20 percent reduction below 2011 levels by 2030. Oregon fully implemented its LCFS, the Clean Fuels Program , in 2016, seeking to reduce CI values of Oregon transportation fuels by ten percent from 2015 to 2025.24 25 Washington State failed in several legislative attempts to pass a LCFS that proposed a ten percent reduction over a ten-year period, most recently in 2019.

Also in Washington State, Puget Sound Air Quality Agency is considering a regional clean fuel standard to contribute to its 2030 GHG emissions goals.Other jurisdictions with, developing, or considering an LCFSlike program include British Columbia , Canada and Brazil , and Colorado .While the LCFS regulation is now moving forward, its history is not without controversy. There have been legal challenges linked to the way it differentiates fuels originating in different locations. There have also been extensive debates about the life cycle calculations used to establish the carbon intensities of different fuels used for compliance, particularly aspects linked to the indirect land use effects caused by biofuels. More recently, opponents have pointed to increasing costs of compliance and raised concerns about both the efficiency of the regulation and its potential impact on fuel prices. Such concerns contributed to the rejection of the LCFS mechanism in some states. Partly in response to concerns over compliance costs, and partly in an effort to spur more innovation, new dimensions have continued to be added to the LCFS. In California, regulators have allowed the expansion of “book-and-claim,” an accounting mechanism that allows certain specialized fuels, particularly bio-methane sourced from dairy digesters to be physically consumed in one state but still allowed to generate LCFS credits in another. In another departure from the original design, the LCFS will also now award credits for investment in infrastructure related to EV charging facilities and hydrogen fueling station. This decoupling of credit generation from fuel consumed within the state could affect both the long run credit price and its transmission through to various types of fuels. However, such effects will arise only if sufficient infrastructure credits are generated to alter the long-run marginal options for compliance. In this paper, we assess if and how California is likely to achieve the proposed 20 percent reduction in CI values by 2030, and the likely impact of infrastructure credits on this compliance outlook. We follow a general methodology similar to that used in Borenstein et al. 2019 for the California cap-and-trade program.

We apply time-series econometric methods to account for uncertainty in demand under business-as-usual as indicated by historical data on a range of key variables. We begin by projecting a distribution of demand for fuel and vehicle miles under BAU economic and policy uncertainty, which we define as continuation of the trends and correlations since 1987. We then transform those projections into a distribution of LCFS net deficits for the entire period from 2019 through 2030, assuming a steady draw down of the currently accumulated credit “bank.” The distribution of net deficits illustrates a range of possibilities of demand for LCFS credits based on historical trends. Next, we generate LCFS credit supply scenarios that consider a variety of assumptions about inputs, technology, and the efficacy of complementary policies. By interacting projections of demand and various supply scenarios for LCFS credits, we can characterize the equilibrium number of credits generated under varying policy conditions and, furthermore,vertical grow system illustrate the changes in the fuel mix that would be necessary to achieve compliance. For sources of credits generation not yet prevalent in the policy, we use ARB figures based on the modeling it used in its scoping plan. These sources include the potential role of a new category for credit generation, ZEV infrastructure capacity credits.Credit supply scenarios also cover certain state goals, showing sensitivity of results to, for example, meeting the Governor’s goals for battery electric vehicles in the light duty sector by 2030. State policies impacting the demand side such as vehicle efficiency standards and target reductions in vehicle miles traveled, are not explicitly modeled, although the modeled uncertainty in BAU takes account of past trends in these variables and allows for considerable variability. Targeted scenario modeling of demand side policies and additional supply side policies is a possible area for future research. The remainder of this paper is organized as follows. Section 2.1 describes the background of the California LCFS, discussing the history of the policy, recent trends, and the economic mechanisms through which CI standards influence markets. In Section 2.2, we describe our data and econometric model used to forecast BAU demand for LCFS credits and discuss the projected outcomes. In Section 2.3, we characterize a variety of scenarios regarding LCFS credit supply and assess annual compliance in each. Finally, in Section 2.4, we conclude by discussing the implications of our analysis and highlight opportunities for future research.The California Low Carbon Fuel Standard was initially implemented in 2011, amended in 2013, re-adopted in 2015, and extended in 2019 to set targets through 2030. The LCFS sets a carbon intensity standard percentage reduction from the petroleum-based reference fuel that decreases each year. Implementation involves classifying all fuel volumes into a fuel pool defined by the reference fuel used or displaced and setting a nominal CI standard for each fuel pool. The reference fuels are diesel, E10 gasoline, and, from 2019 forward, jet fuel.

The LCFS falls within a general regulatory framework known as intensity standards. It regulates the carbon intensity of transportation fuels, rather than the total amount of CO2 released through fuels. As with all intensity standard mechanisms, the LCFS implicitly subsidizes the sales of fuels that are cleaner – that is, lower in carbon intensity – than the standard, and pays for the subsidy through charges imposed on fuel that is ‘dirtier’ than the standard . Sales of individual fuels rated at a CI below the standard generate credits, and fuels rated at a CI above the standard generate deficits, in amounts proportionate to volumes. The LCFS requires annual compliance by regulated entities; all incurred deficits must be met by credits generated by production of low-carbon fuels or purchased from a credit market. The units of LCFS credits are dollars per metric ton of CO2e. LCFS credits can be banked without limit, allowing over compliance under less stringent standards to help cover increased obligations as the standard grows more stringent, and they are fungible – meaning credits generated in any fuel pool are treated equivalently. One of the attractions of policies like the LCFS to the policy community is that these subsidies and charges work to partially offset each other and dilute the pass-through of the implied carbon cost to retail fuel prices. This ‘feature’ of the LCFS has also been criticized by environmental economists, who note that the dilution of the carbon cost works to encourage more fuel consumption than would arise under alternative instruments such as a carbon tax.30 In an extreme case, the subsidy of ‘cleaner’ fuel could spur consumption growth to the point where the quantity of fuel that is consumed overwhelms the reduction in the carbon intensity of the fuel and carbon emissions can increase. This extreme case is unlikely as it would require extremely price-elastic fuel demand. However, the overall point that, relative to other regulations, the LCFS can encourage consumption of fuels has continued to raise concerns in some circles.CARB set annual standards for the CI of fuels in both the diesel and gasoline pools. These annual mandates are shown in the appendix in Table A-6. LCFS credits are awarded to fuels with a reported CI rating below the standard and deficits to those above the standard. The number of credits per unit of fuel depends on the CI rating of that fuel. The LCFS is energy based and thus the number of credits per unit of fuel also depends on factors regarding the energy output of the fuel.31Early policy development and academic research on the LCFS focused on its characteristic as an intensity standard targeting the marginal costs of fuels. As described above, per unit costs of cleaner fuels would be reduced through the subsidy effect and the costs of dirtier fuels would reflect the cost of acquiring credits. Recent revisions to the LCFS program have increased the role of alternative forms of compliance, in particular, the ability of firms to generate credits through the installation of infrastructure, rather than the production of fuel. Fueling infrastructure credits are limited to zero tailpipe emission vehicles , hydrogen fuel cell vehicles and battery electric vehicles. LCFS infrastructure credits can be generated based on potential fuel flow from unused operational capacity for publicly accessible hydrogen fueling stations and DC fast chargers.