A Low Carbon Fuel Standard (LCFS) is a market-based incentive program intended to reduce the carbon intensity of transportation fuels within the state. A LCFS market sets carbon-intensity goals for the transportation sector, which decrease with each respective year. To meet compliance requirements, importers and refiners of carbon-intensive fuels, such as gasoline and diesel, accrue deficits which they need to offset with credits. These entities are required to either blend cleaner fuels or purchase LCFS credits from generators of lower carbon-intensity fuels (i.e. electricity, biofuel, renewable diesel, etc.) to offset their deficits. Each LCFS credit represents one metric ton (MT) of CO2 reduced.
The value of an LCFS credit is determined by supply and demand dynamics within the market. Typically, the market has an auction or credit clearance market in place to set an effective cap on the market and contain costs. In these markets, compliance buyers can carry forward their obligations, accruing interest on their obligations each successive year. As such, these markets do not typically have an alternative compliance penalty (ACP) as in some other environmental commodity markets.