Updates throughout with detail from CARB, fuel market context.
Tough new California low-carbon road fuel standards that stoked fears of price hikes will apply to the second half of this year, state regulators said today.
The California Air Resources Board (CARB) will require a 9pc reduction in gasoline and diesel carbon intensity for fuels supplied beginning 1 July following today's approval of long-awaited revisions to the state's Low Carbon Fuel Standard (LCFS).
Approval by the state Office of Administrative Law (OAL) advanced program changes unexpectedly delayed for six months by regulatory review. The rule now takes effect under heightened political scrutiny on how California drivers will shoulder its costs and where future supplies will come from.
"Our efforts to deploy more zero-emission vehicles and reduce fossil fuel use is working to cut demand and create more competition in the fuels market, and the LCFS is a big part of that effort," CARB chairwoman Liane Randolph said.
Third-quarter 2025 credits traded higher by 11pc during Friday's session before falling back as participants processed the news. The implied cost passed through to drivers remained at less than 10¢/USG.
LCFS programs require yearly reductions of road fuel carbon intensity. Higher-carbon fuels that exceed annual limits incur deficits that suppliers must offset with credits generated from the distribution to the market of approved, lower-carbon alternatives.
CARB in November approved changes including a 30pc reduction target by 2030, down from 20pc. The rule limits credit generation from biofuels made from crop-based feedstocks, automates advancing to tougher targets when new credits greatly exceed deficits and imposes other changes that take effect over the next 15 years.
Long-sought approval
CARB's changes followed years of workshops and other discussion to address surging credit generation blunting incentives to supply lower-carbon alternatives.
New credit generation from the supply of alternative fuels has exceeded new deficits for at least 15 consecutive quarters, amassing an inventory of credits available for future compliance totalling more than 1.6 times the number of new deficits generated in all of 2024. Spot LCFS credit prices have fallen from $200/t in early 2021 to roughly $70/t at the start of the rulemaking process and as low as $40/t earlier this month.
The imbalance focused attention on the when, rather than the what, of the new rule's enforcement. Each additional quarter of the status quo was assumed to add to the towering volume of unused credits looming over the market until a party used them for compliance. The old benchmarks will now apply to credit and deficit generation for fuels supplied in the first half of the year. The new standards will apply to fuels delivered beginning 1 July and beyond.
OAL surprised the market by disapproving the rulemaking in February. Uncertainty over the program's obligations and opportunities chilled the LCFS credit market this year. Credits plunged lower by 17pc after the disapproval. They sank again following CARB's 16 May submittal of revisions to the rule, falling earlier this month to their lowest traded levels in nearly a year, as traders digested a slower pace of implementation.
Political focus
The aggressive new targets and other changes approved by the board last year lifted trader confidence of higher future prices. But that outlook also caught the attention of political leaders wary of complaints about California's cost of living.
The state's Republican lawmakers have repeatedly touted estimates of a 65¢/USG increase in fuel prices based on an assumption credits immediately would rocket toward the highest possible prices. Pass-through costs for gasoline were closer to 7-10¢/USG so far this year. Democratic state senators earlier this week proposed capping LCFS credit prices at roughly $75/t and working with other states to develop a new, regional gasoline specification to alleviate growing supply concerns.
Much of CARB's announcement of the new measures focused on how drivers would experience the changes. Governor Gavin Newsom (D) earlier this week issued a statement rebutting arguments that the change would spark a large run up in gasoline prices.
Both the legislative proposal and court cases against the rulemaking remain pending as the long-awaited changes moved toward enforcement next week.
