Tradable credits system design and cost savings for a national low carbon fuel standard for road transport

This research examines the economic implications of different designs for a national low carbon fuel standard (NLCFS) for the road transportation sector. A NLCFS based on the average Carbon Intensity (CI) of all fuels sold generates an incentive for fuel suppliers to reduce the measured CI of their fuels. The economic impacts are determined by the availability of low carbon fuels, estimates of which can vary widely. Also important are the compliance path, reference level CI, and the design of the credit system, particularly the opportunities for trading and banking. To quantitatively examine the implications of a NLCFS, we created the Transportation Regulation and Credit Trading (TRACT) Model. With TRACT, we model a NLCFS credit trading system among profit maximizing fuel suppliers for light- and heavy-duty vehicle fuel use for the United States from 2012 to 2030. We find that credit trading across gasoline and diesel fuel markets can lower the average costs of carbon reductions by an insignificant amount to 98% depending on forecasts of biofuel supplies and carbon intensities. Adding banking of credits on top of trading can further lower the average cost of carbon reductions by 5%–9% and greatly reduce year-to-year fluctuations in credit prices.

► We model credit markets for low carbon fuel standards. ► Costs depend on supply of low carbon fuels, estimates of which vary widely. ► Credit trading across fuel markets significantly reduces compliance costs. ► With trading average costs range from $33 to $284/tCO2e, depending on supply. ► Banking further lowers average costs 5% to 9% and reduces yearly fluctuations.