Updates with detail throughout
Slumping renewable diesel consumption in the third quarter of 2025 helped new California's Low Carbon Fuel Standard (LCFS) deficits exceed credits for the first time in more than four years and by the largest volume in program history, the state said today.
New deficits outpaced new credits by 1.7mn metric tonnes (t) during the quarter, a swing that sent cash and futures trade prices for compliance credits immediately higher. Fuels supplied to the state during the quarter, the first one subject to new, tougher rules, generated 16pc fewer credits than the same period of 2024 and nearly 71pc more deficits.
Renewable diesel consumption fell by 17pc from the same period of 2024 to 141,000 b/d, its lowest share of the state liquid diesel pool in roughly two years. New targets meant the rising petroleum diesel and gasoline use for the quarter sharply increased the volume of deficits that suppliers must offset by 30 April. Deficits generated from gasoline during the quarter rose by 77pc while physical fuel demand rose by 2.3pc from the third quarter of 2024. Petroleum diesel consumption rose by 9pc over the same period as it replaced renewable diesel and biodiesel. Deficits generated from the fuel more than doubled from the third quarter of 2024.
The LCFS requires yearly reductions of road fuel carbon intensity. Suppliers must offset deficits incurred by higher-carbon fuels with credits generated from the distribution to the market of approved, lower-carbon alternatives.
California's inventory of credits available for future compliance shrank by 4pc to 41.5mn t, snapping 17 consecutive quarters of growing supplies.
LCFS credits do not expire, and so the swollen volume has weighed on credit prices. The program could sustain the same draw down in credits as the third quarter another 24 times before zeroing out the inventory of previously generated credits.
The LCFS spot price sank as low as $40/t last year on fears that unexpected delays to rulemaking work would allow credits to continue their unchecked growth. Credits rose by 13pc this month ahead of today's report, returning to price levels last traded when participants expected the state to begin enforcing changes generating more deficits and fewer new credits.
Spot credits were heard traded as high as $66.50/t after the data release, after trading at $63/t earlier in the session. December 2026 futures on the Intercontinental Exchange traded as high as $72/t, $5/t higher from activity earlier in the day.
Several years of California rulemaking culminated in tougher LCFS standards the state imposed in July. The new regulations imposed carbon intensity limits effectively 11pc lower for gasoline and 6pc lower for diesel than those in place during the first half of the year. Targets fell by another 2pc at the start of 2026 and will drop by the end of the decade to a 30pc reduction from the carbon intensity of fuels in 2010.
Ratcheting down the targets generates more deficits and fewer credits from the same fuels supplied to the state. Regulators deepened those cuts after new credits overwhelmed new deficits for three years. Renewable diesel has led new credit generation since 2020.
Domestic production of renewable diesel supplied to the US shrank by 13pc in July and August from the same months of 2024, and was flat in September, according to federal data. Renewable diesel imports effectively vanished over the same period. California, with its still-massive fuel market and combination of LCFS and cap-and-trade incentives, claims most US renewable diesel use.
The dour conditions began to improve in the fourth quarter, according to producers. US independent refiner Valero, a joint venture partner in the largest US renewable diesel producer, Diamond Green Diesel, was bullish this week about the fuel's prospects in 2026.
Feedstock selection also sapped renewable diesel credit generation during the quarter. Lower-carbon diesel brewed from used cooking oil shrank by more than half from the same quarter of 2024. Fuel made from distiller's corn oil and from tallow also shrank, while soy-based renewable diesel deliveries increased by 14pc.
The new California regulations will limit credit generation for crop-based feedstocks and require detailed location data on where they were grown. The mandate that left some growers wary of continued participation and snarled supply decisions as participants processed the rules in the third quarter.
