Clean Fuel Standards: How States Can Cut Transportation Emissions at Minimal Expense
In the stark absence of federal leadership on tackling climate change, there is a clear need – now more than ever – for states to play a leadership role. States have far fewer resources than the federal government and budgets that are often already strained. But the good news is that states can adopt a market-driven solution that delivers major climate benefits at minimal expense: a Clean Fuel Standard (CFS). California, Oregon, New Mexico and the State of Washington already have adopted such a standard, and Canada has adopted one at the federal level.
A Clean Fuel Standard is a program in which the state sets a standard rating for the carbon intensity of every transportation fuel. If producers selling transportation fuel in that state want to market high carbon fuels, they must buy “credits” from producers that are marketing low carbon fuels and/or reduce the carbon intensity of their own fuels. And each year, the state sets more stringent overall decarbonization targets, so that it is continually driving the increased production of the clean fuels that generate the most credits. (Credits are based on additional tons of CO2 equivalent avoided as part of the overall decarbonization of the transportation sector.)
Given the success of California’s program, the first to be put in place in 2011, at least 11 other states have introduced legislation to follow suit, including New York, New Jersey, Vermont, Massachusetts, Pennsylvania, Ohio, Michigan, Illinois, Minnesota, Nebraska, and Hawaii.
States customize their fuel carbon rating systems based on Argonne National Lab’s GREET Model, the gold standard in lifecycle carbon accounting in the U.S. Specific decarbonization targets, eligibility criteria, and other programmatic features also vary from state to state, such as price caps on credits and rules regarding in-state versus out-of-state production.
However, the bottom line is the same: CFS policies mainly incentivize zero-emission technologies (battery-electric and fuel cell vehicles) and low-carbon biofuels (primarily renewable natural gas and renewable diesel) while disincentivizing fossil fuels. Clean Fuel Standards are a proven strategy to expand the availability of these important low- and zero-carbon non-petroleum fuels and make fleet/fuel transitions more economically competitive.
Furthermore, unlike other schemes that rely heavily on taxpayer dollars and associated subsidies, a CFS requires minimal state funding, as it instead makes the polluters pay. Once a CFS is designed and operational, all that’s left for state officials to do is manage the program, including monitoring, enforcing compliance, tweaking aspects to improve efficiency, and in some cases adopting deeper or extended decarbonization targets.
Meanwhile, the market goes to work in achieving the desired outcomes based on the technologies and fuels that can most cost-effectively displace fossil gasoline and diesel. The high carbon fuel producers in effect pay other producers to expand their use of clean fuels. Depending on the particular rules governing how it operates, a CFS can also direct a portion of revenue toward specific projects or objectives. For example, these funds may be earmarked for investment in priority areas such as electric charging infrastructure, public transportation, and/or low-carbon investments in underserved communities.
California’s trailblazing program, called the Low Carbon Fuel Standard (LCFS), has made major progress in meeting its greenhouse gas reduction goals. Notably, since commencing in 2011, the LCFS has led to the replacement of more than 31 billion gallons of liquid petroleum fuel consumed in the California transportation market. The program has long exceeded its goals of reducing the overall carbon intensity of the state’s transportation sector, for example meeting its 2026 goal three years early and being on track for even faster progress (see chart below).
2011-2023 Performance of California’s Low Carbon Fuel Standard (LCFS) in the Transportation Sector
The program’s better-than-expected results prompted the California Air Resources Board to approve amendments in November 2024 to deepen the carbon intensity reduction targets to 30% by 2030 (up from 20%) and 90% (up from 85%) by 2045, relative to the 2010 baseline. (These amendments have been temporarily paused by the state’s Office of Administrative Law for technical reasons regarding clarity in some clauses, but CARB is working to quickly remedy the matter.)
California’s program has inspired other states to follow suit. And while these other states have lower targets, they are still effective in decreasing the carbon intensity of their transportation sectors, such as Washington State’s goal of 20% reduction from 2017 levels by 2034 (which may be extended/expanded this year), and Oregon’s targets of 10% reduction by 2025, 20% reduction by 2030, and 37% reduction by 2035 relative to 2016 levels. New Mexico is still designing its CFS so the targets may yet change, but it has proposed a 20% reduction by 2030 and 30% reduction by 2040 relative to 2018 levels.
The LCFS provides a sizable new revenue stream to renewable natural gas (RNG), renewable diesel and battery electric projects, which generate credits for selling their very low-carbon fuel or electricity into the state’s transportation market. In November 2024, CARB noted that the LCFS generates $4 billion annually to support low-carbon investments in the state and that it has cumulatively generated $341 million for public transit.
A CFS with deepening annual decarbonization targets published well in advance provides fuel producers the long-term outlook they need to make decisions about how many credits fuels will earn and for how long. For example, since the outset of California’s LCFS, the carbon intensity targets have allowed renewable diesel (RD) to earn significant credits. It took over a decade to really ramp up RD production. And the LCFS carbon intensity targets for the next few years will allow RD to keep earning credits, albeit on a diminishing basis. The program is therefore driving the total switch – already 75% complete as of 2024 – of fossil diesel to renewable diesel (and to a far lesser extent biodiesel) in California (see chart below). That’s a huge accomplishment in the most populous state in the country in a relatively short amount of time.
California Diesel Pool (2011-2024)
The technology neutral approach to ratcheting down the “carbon intensity” of California’s on-road fuel supply has also paved the way for significant increases in the production and use of RNG (aka “biomethane”), as evidenced by the chart below. Because RNG is often “net-carbon-negative” – when made via anaerobic digestion of landfill diverted food waste or livestock manure – it is eligible to generate a large number of LCFS credits. For the past several years now, essentially all (~99%) natural gas vehicles in California have been powered by RNG.
In the case of renewable diesel, as the carbon intensity reduction targets continue to get deeper, most RD will eventually fall on the other side of the threshold, starting to incur deficits that must be made up for by purchasing credits from less carbon-intensive fuels (like RNG or battery electric). So the volumes of RD production should then decline rapidly, whereas the production of cleaner fuels – especially electricity – will rise. By around 2040, electricity will likely generate 80% of the LCFS credits, with net carbon-negative RNG generating most of the rest (see chart below). This likely corresponds to electricity covering most of the light- and medium-duty sectors and a modest portion of the heavy-duty sector, with RNG and RD covering much of the heavy-duty sector.
California Share of LCFS Fuel Volumes and Credit Generation
One key takeaway is that a Clean Fuel Standard helps at all stages of a transportation sector transition, not just at a projected end point where electric vehicles are assumed to be far more prevalent than now.
Were a state like New York to adopt a CFS, it would immediately signal to fuel producers that fossil fuels will soon be on their way out. It would provide the needed economic foundation for producers of RD, RNG, and electricity for vehicle usage to ramp up output. Carbon emissions from the transportation sector would start coming down meaningfully. And it wouldn’t cost the state much to administer.
By order of Governor Kathy Hochul last year, New York State is currently evaluating the feasibility of a CFS. No potential programmatic details have been divulged so far. But the empirical track record speaks for itself: Clean Fuel Standards deliver major climate benefits at minimal expense. This is a proven strategy that states can adopt now, without having to rely on federal support in any way. And if New York passes a CFS, it would be a major breakthrough, adding momentum to other states considering it. It’s time to act.