Suggested Citation:
Lade, Gabriel E. and C.-Y. Cynthia Lin Lawell (2013) A Report on the Economics of California's Low Carbon Fuel Standard and Cost Containment Mechanisms. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-13-23

California's Low Carbon Fuel Standard was created by Executive Order S-01-07 in 2007 by former Governor Arnold Schwarzenegger. The program is a key complimentary measure in meeting statewide reductions in greenhouse gas emissions required by California's Assembly Bill 32, the Global Warming Solutions Act of 2006. The program calls for large reductions in the carbon intensity of fuel sold in California over the next decade.

As with similar policies whose success depends on the development of new technologies in order for the policy's goals to be met, there is significant uncertainty as to how compliance may be achieved in coming years. Given the unpredictable nature of new technologies and the scale at which alternative fuels will need to be produced in order to maintain compliance across all obligated parties, there is reasonable concern regarding the potential for high and volatile costs of the program in coming years.

In this report, we study multiple issues related to the costs of the LCFS in the near future, and discuss provisions designed to contain compliance costs at reasonable levels. In addition, we discuss a number of other important issues such as concerns over market power in the state's fuel and credit markets, the role of dynamics and uncertainty on market outcomes, and incentives to innovate and invest in renewable fuels and their potential interactions with cost containment mechanisms.