Low Carbon Fuel Standards: What States Can Learn From the Early Adopters
On-road transportation remains one of the hardest sectors to decarbonize, requiring sustained investment in cleaner vehicles, fuels and infrastructure. To fund that investment, more states are turning to low carbon fuel standards rather than through state budgets or utility rates.
These standards create a market in which producers of higher-carbon fuels generate compliance obligations and producers of lower-carbon fuels generate credits that can be sold, shifting money toward cleaner solutions.
We explore how these standards work and propose three recommendations for states considering them to finance clean transportation programs.
How low carbon fuel standards work
A low carbon fuel standard requires the transportation fuel mix to become less carbon-intensive over time. Each fuel is scored based on its emissions across its life cycle, from production through use. Electricity used to charge EVs, hydrogen and other qualifying fuels that perform better than the standard generate credits. Higher-carbon fuels such as gasoline and diesel can generate deficits.
Refiners, producers and importers whose fuels generate more deficits than credits must reduce the carbon intensity of what they supply or buy credits from lower-carbon fuel providers to comply.
In California, some EV charging and hydrogen projects can earn additional credits for making fueling capacity available, helping support infrastructure deployment before utilization is high enough to cover costs.
More states are adopting low carbon fuel standards
California has operated the nation’s longest-running Low Carbon Fuel Standard (LCFS) since 2011. Oregon, Washington and New Mexico have adopted similar programs, while Hawaii is developing one.
California’s experience shows the scale these markets can reach. By the end of 2023, the LCFS had generated more than $22 billion in credit value for lower-carbon fuels and technologies.
California used some of that funding this year to open a revamped Clean Fuel Reward program, which provides incentives for medium- and heavy-duty electric trucks. According to Governor Gavin Newsom’s office, the program is expected to become the largest utility-administered rebate program for electric trucks in the country, with $250 million available this year and over $1 billion in total rebate funding through 2030.
Although low carbon fuel standards differ in their details, they share the same structure: carbon-intensity requirements become more stringent over time. California’s updated LCFS, for example, calls for a 90% reduction in the carbon intensity of its transportation fuel pool by 2045.
As more states gain experience with this funding tool, the policy discussion is shifting from whether low carbon fuel standards can work to how they should be designed.
States have tools to manage costs and other concerns
One criticism of low carbon fuel standards is that fuel suppliers can pass compliance costs to consumers through gasoline and diesel prices.
In California, self-reported data from fuel producers put the LCFS compliance cost at about 8 to 10 cents per gallon of gasoline. Gas prices, however, are influenced by many factors beyond LCFS compliance costs, including crude oil prices, refinery disruptions, seasonal fuel requirements, taxes and fuel producers’ pricing strategies. The California Air Resources Board has also pointed to research finding no direct relationship between LCFS credit prices and retail gasoline prices.
California and Hawaii have established limits on credit prices to help prevent sharp increases in compliance costs when demand for credits is high and give regulated companies greater certainty about maximum costs.
Another debate is whether credits generated outside a state deliver sufficient benefits within the state. California, for example, has faced criticism over credits for biomethane produced outside California. The state has responded by tightening requirements governing which biomethane can qualify for LCFS credits and how its delivery to California must be demonstrated.
These debates illustrate why the details of a low carbon fuel standard matter. States considering similar programs can draw on the experience of early adopters to determine how credits are generated, contain compliance costs, and ensure program investments support their policy goals.
Three lessons for states considering a low carbon fuel standard
1. Direct benefits to communities that need them most
States can require that a portion of credit revenue support projects that benefit lower-income and overburdened communities, with that portion increasing over time or tying it to state equity goals.
LCFS credit revenue can be used to expand access to clean transportation by supporting used EV incentives, residential charging, electrical panel upgrades, public and multifamily charging, and medium- and heavy-duty electrification.
Investments in electric trucks, buses and drayage vehicles can also reduce transportation pollution near ports, warehouses and freight corridors, where surrounding communities often bear a disproportionate share of transportation pollution.
For example, Southern California Edison’s Drayage Truck Rebate program provides incentives for electric drayage trucks, which transport shipping containers to ports and warehouses. By requiring electric drayage trucks to be registered at the ports of Los Angeles and Long Beach, the program helps improve air quality for the communities near these ports and freight corridors.
2. Use credits to accelerate infrastructure deployment
Infrastructure often must be built before demand is fully developed. Capacity-based credits can provide revenue during that early period, helping make higher-capacity projects more financially viable and encouraging infrastructure to be available as vehicle adoption grows. This approach can be particularly valuable for heavy-duty charging and hydrogen projects with high upfront costs.
California’s infrastructure credits show how a low carbon fuel standard can support charging and hydrogen projects directly. Eligible projects can generate credits based on fuel dispensed and, in some cases, the nameplate capacity of the infrastructure. California has also established a capacity-credit pathway for heavy-duty EV infrastructure, creating an additional revenue stream for fleet operators and charging developers.
As of August 2026, California has approved capacity credits for over 8,500 fast chargers, including 615 heavy-duty chargers, as well as over 80 hydrogen stations, including eight heavy-duty stations.
3. Build strong administration into the program
A low carbon fuel standard may be market-based, but it still requires careful administration. Credits must be tracked, fuel pathways verified, reports reviewed and customer-facing programs managed.
Third-party administrators and nonprofit aggregators can perform or support those functions and direct revenue toward intended beneficiaries. In California, third-party administrators help implement some LCFS-funded programs, while community-based organizations (CBOs) help engage communities and connect residents with program resources. For example, CSE implements San Diego Gas & Electric’s Pre-Owned Electric Vehicle Program, which provides incentives for used EVs. The CBO MAAC serves as the community partner for the program, providing EV education, outreach and application assistance for SDG&E customers.
Oregon and Washington use nonprofit backstop aggregators to collect certain EV-charging credits that might otherwise go unclaimed and reinvest the proceeds in transportation electrification.
As more states adopt low carbon fuel standards, common verification requirements can also support an independent verification industry that works across programs. These requirements would strengthen program integrity and reduce the burden on state agencies. States should consider these administrative functions and responsibilities from the outset rather than treating them as an implementation detail.
Lessons from early adopters of low carbon fuel standards
Low carbon fuel standards do more than set requirements for the carbon intensity of transportation fuels. By creating a market for lower-carbon alternatives, they can generate ongoing investment in cleaner vehicles, fuels and infrastructure.
But the early programs show that details matter. How states direct credit revenue, support infrastructure and administer the program shapes what the program achieves.
States considering a low carbon fuel standard don’t need to start from scratch. They can draw on more than a decade of experience from multiple states to design programs around their own transportation needs and policy goals.
Kinshuk Chatterjee
Senior Transportation Policy Analyst
Kinshuk Chatterjee is a Senior Transportation Policy Analyst with eight years of experience in the clean energy sector. Kinshuk coordinates CSE’s regulatory engagement on key transportation electrification initiatives regarding electric vehicles, EV infrastructure and fleet electrification. Prior…
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