Low Carbon Fuel Standard Credit Prices and Pass-Through at the Pump—A Preliminary Investigation

Low Carbon Fuel Standard Credit Prices and Pass-Through at the Pump—A Preliminary Investigation

State governments have increasingly looked to a Low Carbon Fuel Standard (LCFS) to reduce greenhouse gas emissions from the transportation sector. LCFS policies create an implicit subsidy for biofuels that are blended onto finished fuels. The implicit subsidy is issued via tradable credits to low-carbon fuel producers or fuel blenders. The effectiveness of the policy then relies crucially on full pass-through of these subsidies downstream in the supply chain. While studies have estimated pass-through from similar policies and contexts, this white paper will estimate the pass-through of state LCFS credit prices from fuel suppliers downstream to retailers at major rack locations on the west coast. The researchers will use daily spot credit prices for the California LCFS and Oregon Clean Fuels Program (CFP) and rack biodiesel and renewable diesel prices to estimate the extent to which suppliers pass through costs downstream. The estimates will be supplemented with a simple theoretical framework that highlights the mechanisms through which full pass-through can be hindered in a diesel industry subject to a LCFS-type policy.

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