LCFS Program & Credit Market Overview
The Low Carbon Fuel Standard (LCFS) is one of several programs created under AB32, the California Global Warming Solutions Act of 2006, to reduce greenhouse gas (GHG) emissions across the state. AB32 was the first U.S. legislation to take a comprehensive, long-term approach to reducing anthropogenic GHG emissions across California’s entire economy, and it has been amended multiple times since implementation began in 2011. The LCFS is administered by the California Air Resources Board (CARB), and biomass-based renewable fuels such as ethanol, biodiesel, renewable diesel, and renewable natural gas that generate LCFS credits typically also generate renewable identification number (RIN) under the U.S. Renewable Fuel Standard (RFS).
The purpose of California’s LCFS program is to reduce vehicle GHG emissions by lowering the average carbon intensity (CI)[1] of transportation fuels used in the state. Program compliance is generally achieved by replacing petroleum gasoline and diesel with low-CI fuels and pairing low-CI fuels such as electricity with vehicle technology to reduce reliance on traditional internal combustion engine (ICE), petroleum-based transport. Suppliers of low-CI fuels – such as ethanol, biodiesel (BD), renewable diesel (RD), electricity, and renewable natural gas (RNG) – earn credits when they provide these fuels for use in California vehicles. These credits can then be purchased and used by entities that produce or supply high-CI fuels for vehicle use in the state to offset their deficits, as required under the LCFS.
LCFS credits, denominated in metric tons (MT) of carbon-dioxide-equivalent (CO2e) emissions, serve as the compliance instruments used among regulated parties[2] with prices typically fluctuating with supply and demand. Each year, deficit-generating entities must retire a quantity of credits matching their deficits for the year. These credits can be generated by the entity or purchased; once acquired, credits have no expiration date and can be banked for future use.
The LCFS regulation sets annual CI benchmarks (standards or targets) that decline over time relative to the 2010 baseline CI. The difference between a fuel’s CI and the benchmark determines the number of credits or deficits it generates per unit of energy. CARB assigns each fuel (by production facility or source) a CI score accounting for the carbon intensity of feedstock, manufacturing, transport, and use (i.e., a lifecycle assessment).
On November 8, 2024, the CARB Board approved amendments[3] that update and extend the CI reduction schedule as shown in the “2024 Amendments” line in Figure 1 below. Implementation of these amendments, initially slated for January 1, 2025, was delayed until July 1, 2025, while CARB addressed concerns raised by California’s Office of Administrative Law (OAL). As a result, the CI reduction target was 13.75% for the first six months of 2025, increasing to 22.75% on July 1 with implementation of all the provisions of the 2024 amendments.
Figure 1. LCFS Declining Carbon Intensity Reduction Schedule
As the CI benchmarks tighten annually, each gallon of low-CI fuel generates fewer credits and each gallon of higher-CI fuel accrues more deficits, making compliance progressively harder. Given existing market and technology realities, program compliance – at least through 2040 – will likely depend upon:
- Substantial increases in the use of RD, BD, ethanol, and RNG;
- Decreases in petroleum gasoline and diesel usage; and
- Continued growth in the zero-emissions vehicle (ZEV) fleets using low-carbon electricity and hydrogen.[4] Growth in this sector is essential if the CI reduction benchmarks beyond 2030 are to be achieved.
For the LCFS credit market to remain liquid, total accumulated credits must keep pace with or exceed accumulated deficits over time so that obligated parties can reliably acquire the credits necessary for compliance. At the same time, to achieve the intended CI reductions, the credit bank cannot grow so large as to drive credit prices below the level needed to incentivize ongoing investment in low-carbon fuel production for use in California and implementation of low-CI vehicle infrastructure.
Figure 2 shows quarterly net credits/deficits and accumulated credits in the LCFS “credit bank” through the third quarter of 2025. Accumulated credits grew rapidly through 2016, trended downward from 2017 to 2021, and climbed sharply again from the end of 2021 through the second quarter of 2025. The third quarter of 2025, however, saw a dramatic shift into net deficit territory as the 2024 Amendments – including a 9% step change in CI reduction schedule – took effect at the start of the quarter. At the close of the third quarter of 2025 (the most recent quarter for which CARB has published data as of this writing), the credit bank stood at 41.54 million MT, equivalent to 4.1 quarters of deficits at the 3Q2025 rate of deficit generation.
Figure 2. Net LCFS Credits Quarterly and Cumulative
Source: Stillwater analysis of CARB LRT data
Figure 3 shows the trend in LCFS credit prices beginning in late 2012, when a distinct credit market first emerged, and highlights that prices have been volatile over time. This volatility is due to numerous factors, including fluctuations in credit supply and demand, uncertainty linked to regulatory delays and legal challenges, shifts in fuel demand during the pandemic, market rumors, and program-related announcements. In particular, the persistently low credit prices observed since 2022 largely reflect rapid growth in credit supply from RD, RNG, and a growing EV population. As seen in Figure 2, the July 1, 2025 implementation of the 2024 amendments significantly tightened credit supply, and the 3Q2025 net deficit – made known publicly with the release of quarterly data on January 31, 2026 – provided support for LCFS prices in February 2026. For more in-depth analysis of the dynamics affecting the LCFS credit bank and credit price trends, subscribe to Stillwater’s Carbon Market Outlooks Dashboard!
Figure 3. Historic LCFS Credit Pricing (August 2012-February 2026)
Source: OPIS
In 2016, CARB created a Credit Clearance Market (CCM) as a limited cost-containment and compliance provision, setting a maximum credit price of $200/MT in 2016 dollars indexed annually to inflation.[5],[6] The maximum price is published by CARB by the first Monday in April, and the new maximum credit price goes into effect on June 1st of that year.[7] Table 1 displays the historical values for this CCM maximum price. With the adoption of the 2018 amendments, the CCM maximum price became the ceiling transaction price for all credit transfers, not just those transacted in a CARB-sponsored CCM.
Table 1. LCFS Regulatory Maximum Price History (Effective June 1 of Year)
Note: The maximum price effective June 1, 2026 will be announced April 6, 2026.
To comply with the LCFS each year, fuel producers and importers that generate LCFS deficits must retire LCFS credits sufficient to cover their annual deficits. They can acquire credits by purchasing low-CI fuels that include the credits; importing, producing, blending, or selling credit-generating low-CI fuels; buying credits from other LCFS entities; or obtaining credits via the CCM. Credits do not expire; thus, entities can carry a bank of credits for future compliance or sale.
Stillwater expects that as LCFS credit supply-demand conditions evolve, the program will continue to be updated through periodic amendments. Growth in the number of jurisdictions with LCF programs will likely increase competition for low-carbon fuels, adding support to credit prices.
The Future of the LCFS
Past legal and legislative challenges have ultimately strengthened the LCFS, giving stakeholders regulatory certainty, but concerns about fuel affordability are now front and center as California retail gasoline prices in 2025 were, on average, more than $1.30 per gallon higher than the national average, per the U.S. Energy Information Administration. Refiners such as Phillips 66 and Valero have cited LCFS compliance costs among the reasons for decisions to shut or convert California refineries, drawing the attention of the Governor and Legislature, while consumers are increasingly sensitive to the effect of climate policies on fuel prices. In response to these political and price concerns, regulators will need to keep fuel price impacts in mind when crafting future program changes.
Affordability aside, long-term compliance and market stability depends heavily on reduction of petroleum gasoline and diesel primarily through the conversion of the ICE vehicle fleet to ZEVs (FCVs and EVs), increases in the use of RD and BD in the existing diesel vehicle fleet, and maintaining RNG saturation of the natural gas vehicle (NGV) fleet to balance deficit generation and keep the credit bank from being depleted. If credit sources fail to materialize at the required scale and displace sufficient petroleum fuel usage, CARB will likely need to further adjust the program – by modifying CI-reduction targets or expanding credit-generation options – to preserve program viability, maintain a functioning credit market, and keep LCFS credit prices and associated fuel-cost impacts within a politically acceptable range.
Exactly what price would that be?
Visit Stillwater’s Carbon Market Outlooks Dashboard to find out!
