California’s Low Carbon Fuel Standard Accelerating Transportation Electrification

Source: By Jeremy Martin, Union of Concerned Scientists • Posted: Sunday, December 6, 2020

Earlier this month California utilities launched the California Clean Fuel Rewards Program, a statewide point-of-sale electric vehicle rebate program worth up to $1,500 per vehicle (depending upon battery size). This program is funded by credits from California’s Low Carbon Fuel Standard (LCFS), which are quickly becoming a major source of support for transportation electrification, complementing other state climate and clean air programs. Incentives are good way to accelerate the electric vehicle (EV) market, especially rebates available at the time of purchase. These incentives are different than past state and local efforts because they are funded by producers of carbon-intensive fuels.


Clean fuel standards are a large and stable source of support for electrification

In 2019, LCFS credits earned by electric cars, trucks, buses, trains and even forklifts had a market value of more than half a billion dollars. These credits result from the low lifecycle carbon intensity of electricity compared to gasoline and diesel (see our new factsheet for more details on how this all works). This makes the LCFS one of the largest sources of support for EVs in California, matching the low carbon transportation investments funded by the cap and trade program[i].  Moreover, funding support from the LCFS does not come from taxpayers and is not subject to an annual appropriation or allocation process, which will likely be constrained by tight state budgets over the next couple years as the economy recovers from the coronavirus pandemic. The government regulator’s role is to determine how clean or polluting each fuel is, and the value comes from private market transactions with require producers of more polluting fuels like gasoline and diesel to support the increased use of cleaner fuels like electricity.

LCFS EV credits fund the Clean Fuel Rewards rebates and targeted programs for disadvantaged communities and support transit fleets, electric trucks and EV charging

Under the LCFS electric utilities handle credits for residential charging of EVs (commercial fleets and EV charging operators generate credits directly). Prior to the Clean Fuel Rewards program, utilities each ran separate programs using the LCFS credit value to support transportation electrification within their service territories, often through rebates that would be delivered only after a buyer purchased an EV.  These programs were streamlined by the 2018 amendments to the LCFS, which directed electric utilities to use a portion of their credits to fund a single statewide point-of-sale rebate program[ii]. California Air Resources Board vice-chair Sandra Berg was key to working with all the relevant stakeholders to pull this program together.

The new $1,500 Clean Fuel Rewards rebate is available to all California residents that buy or lease new electric vehicles with a battery capacity greater than 5 kWh. Because all residents are eligible for the rebate, car dealers can deduct the rebate from the sale price of the vehicle. This point-of-sale incentive can help pull new car buyers towards EVs, which CA will rapidly need to do to meet its air quality and climate targets and hit the Governor’s EV sales target of 100 percent by 2035.

The remainder of LCFS credit proceeds is used by utilities to support other transportation electrification programs, and over time the majority of these programs must be targeted to disadvantaged communities[iii]. Targeted programs include rebates for used cars, transit and school bus electrification, and programs to help cover the cost of charging equipment at home or away from home for people in multi-unit dwellings (apartments or condo).

And while clean cars are important, the LCFS can have an even bigger impact on other larger vehicles that use more fuel and produce more pollution. While utilities handle LCFS credits on behalf of EV drivers, EV fleets can generate and sell their own credits. For example, a single transit bus can earn credits worth more than $10,000 each year, ensuring that electric buses are both cleaner and lower cost to operate than diesel. As electric delivery vans and electric trucks come to market, LCFS credits will make sure the environmental benefits they offer the broader world are reflected in a lower operating costs for the fleets that adopt them. LCFS credits are also earned by EV charging stations, which helps speed the deployment of charging infrastructure, addressing another barrier to greater EV deployment.

LCFS funded support for transportation electrification complements other programs with separate funding sources

The Clean Fuel Rewards and other LCFS funded support for transportation electrification complements a broader set of programs funded from a variety of sources. Lower and moderate-income households face greater barriers to accessing EVs and need more support. Additional rebate programs that offer higher levels of support in a more targeted manner are important for ensuring more households in California are participating in, and benefiting from, the transition to electric transportation[iv]. For example, the Clean Vehicle Rewards Program (funded by the cap and trade program) provides an additional $2,000 for eligible vehicles, but excludes the most expensive EVs and the highest income EV buyers. Low- and moderate-income people are also eligible for an additional $2,500, which brings the total purchase incentive to $6,000 total (including both Clean Vehicles Rewards and the Clean Fuel Rewards programs). Programs like Clean Cars for All adds additional support for used or new EVs when purchased in conjunction with scrapping an older more polluting vehicle and also offers transit vouchers as an alternative to car ownership. The Clean Mobility Options program is supporting a wider range of mobility options from zero emission car-sharing to bike sharing and on-demand rides.

Clean fuel standards are a key tool in the transportation electrification toolkit

Clean fuel standards like the California LCFS are helping to accelerate transportation electrification and are a model other states and the federal government should consider as part of their own efforts to decarbonize transportation. By requiring sellers of more polluting fuels to buy credits from users of cleaner alternative fuels like electricity, a clean fuel standard holds polluters accountable to help clean up the problems they have created. A clean fuel standard complements requirements for vehicle manufacturers to improve efficiency and increase the sale of EVs and policies requiring electric utilities to cut pollution and increase the use of renewable power. Taken together these policies make sure all of these industries are pulling in the same direction, sharing the load and accelerating progress to a cleaner, lower carbon future.

[i] 70 percent of the LCFS electricity credits were for on-road EVs, with the largest share issued to electric utilities for residential EV charging. Utilities in turn must use these funds to support transportation electrification, including the CCRP.

[ii] The minimum share of credit proceeds utilities must contribute varies by category of electric distribution utility, with investor owned utilities contributing two thirds, and publicly-owned utilities (POUs) contribute on a sliding sale from zero for small POUs, 20 percent for medium POUs and 35% for large POUs.  In 2023 this increases to 2, 25 and 45 percent respectively.

[iii] Based on 2019 LCFS amendments, by 2024 at least 50 percent of holdback credits must be used to support transportation electrification for the primary benefit of or primarily serving disadvantaged communities and/or low-income communities and/or rural areas. More information, including a list of eligible projects is on page 15 of final regulation.

[iv] California EV buyers are also eligible for a $2,000 rebate for an eligible battery EV (and $4,500 for a fuel cell EV) and low- and moderate-income buyers are eligible for another $2,500 increase to the rebate. The different programs cover different cars and have different eligibility criteria so that a wealthy person buying a luxury EV would qualify only for the CCFR $1,500 credit, a person with taxable income of $100K and shopping for an EV around $50K would be eligible for a total of $3,500 of rebates (from CCFR and CVRP) while a low or moderate income buyer would be eligible for $6,000 of rebates.  Utilities also run other programs some funded by LCFS credits held back from CCFR and other sources.