How low-carbon fuel standards can support transport electrification

Alternative fuels Strategies

Electrification of the passenger vehicle fleet is an essential component of transport decarbonization, but the typically higher up-front cost of electric vehicles (EVs) and concerns about sufficient charging infrastructure can hinder their wider adoption. To address these barriers, a variety of policies and programs have been deployed at the state and federal level. Offering purchase rebates has been effective in spurring increased deployment of EVs, but rebates alone have thus far been insufficient in driving the rate of fleet turnover necessary to achieve deeper carbon reductions. In addition, some of these programs are set to expire before we expect cost parity with conventional vehicles to be reached and before a robust charging infrastructure ecosystem is fully developed. This threatens continued growth in EV ownership. California administers several EV incentive programs, including the Clean Vehicle Rebate Project (CVRP), which is funded through cap-and-trade auction proceeds that have not kept pace with increasing EV sales volumes. As a result, California has scaled back the CVRP rebate amount and number of qualifying vehicles. At the same time, the Federal Tax Credit has already begun phasing out for some EV manufacturers. As these programs are scaled back or expire, a durable financial incentive for EVs can be found in California’s Low Carbon Fuel Standard (LCFS).The LCFS incentive is in addition to any value received from other incentives such as the CVRP and the Federal Tax Credit.

California’s LCFS requires a reduction over time in the carbon intensity of fuels, i.e., the life-cycle greenhouse gas (GHG) emissions from using a unit of fuel supplied to the transportation sector. Alternative fuels generate LCFS credits according to their life-cycle GHG savings compared to conventional gasoline and diesel, and these credits can then be bought and sold. Electricity supplied to EVs is eligible for LCFS credits, and these are generally awarded to the supplier. The number of credits awarded is calculated based on the carbon intensity of the electricity grid and the volume of electricity sold. Base credits are awarded to utilities for home charging based on the average carbon intensity of that utility’s electricity. In addition, there is an option to generate incremental credits if the electricity supplied has a lower carbon intensity than grid average electricity. Owners of public charging infrastructure can also generate and sell credits, including incremental credits, for EV charging. 

Additionally, starting in 2019, a portion of the value of LCFS credits generated from residential EV charging has been directed to statewide point-of-purchase rebates for EVs through the Clean Fuel Reward program. This is to encourage greater EV penetration. Both battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) are able to generate credits and qualify for rebates under the program; here, we focus on the revenue generation and rebates for BEVs. The proportion of revenue from LCFS credits that electric distribution utilities must contribute toward the Clean Fuel Reward Program depends on whether they are investor-owned or publicly owned, and on the volume of electricity they sell annually. As of 2019, 67% and 35% of base credit revenue from California’s large investor-owned utilities and large publicly owned utilities, respectively, must be used to support statewide point-of-purchase rebates for EVs. Smaller utilities have a smaller obligation; medium- and small-sized utilities contribute 20% and 0%, respectively. Starting in 2023, these contributions increase to 45% for large publicly owned utilities and 25% and 2% for medium and small utilities, respectively. The remaining base credit revenue from charging, called “holdback credits,” is intended to provide funding for broader electrification projects such as building public charging stations or electrifying public transit, fleets, and school buses in underserved communities.

Is the potential of these combined credit revenue streams from home charging enough to provide a sustained source of funding for EV owners? To assess this, we start by using survey data from the CVRP to determine the distribution of EV owners across electric utility structures and sizes. To estimate the credit generation potential, we assume that 80% of EV charging takes place at home, that LCFS credits will remain at their present-day value of around $200 per tonne of carbon dioxide equivalent (CO2e), that EVs travel approximately 13,000 miles per year, and that EV growth follows sales projections from a previous ICCT analysis. Using these assumptions, we estimate the aggregate credit revenue, GHG savings, and approximate rebate amounts that could be generated via residential EV charging. For PHEVs, we assume that 55% of their annual miles traveled are powered by electricity.  

Figure 1

As shown in the figure above, we estimate that the average BEV owner’s residential charging could generate around $500 of LCFS credits annually, including roughly $300 worth of credits for the rebate program, and save around 3 tonnes of CO2e emissions each year. The revenue generation and GHG savings from PHEVs would be lower due to their lower share of electric miles traveled. Additional incremental credits and GHG savings could also be generated through smart charging or charging from renewable electricity; these are separate from base credits and do not fund the Clean Fuel Reward program. In a business-as-usual scenario, annual EV sales, including both BEVs and PHEVs, are projected to grow from around 198,000 in 2020 to over 365,000 in 2025. This EV sales projection does not take into account ongoing policy changes, particularly with respect to federal rules such as the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule. Averaging from 2021 to 2025, we estimate that residential EV charging could generate sufficient credit revenue to support rebates of around $1,200 for newly sold BEVs—just more than half of the total rebate value the CVRP currently offers of $2,000 (though some low or moderate-income consumers qualify for an increased rebate of $4,500). While the revenue generation potential for EVs in the LCFS can change significantly depending on the fluctuation of the LCFS credit price, we note that the credit price has been relatively steady near the $200 price cap since 2018 and the program’s overall carbon intensity target continues to get more stringent toward 2030. 

California’s ambitious goal of carbon neutrality by 2045 necessitates long-term, coordinated policy support for decarbonization of the transportation sector. Central to this transition will be the success of the LCFS and other policies in driving widespread adoption of EVs and providing additional financial support for charger owners. California’s efforts to tie the credit generation from residential EV charging to subsequent EV purchase rebates and reinvestment in complementary infrastructure could be a template for federal policy moving forward. 

Note: This is an updated version of a post that was published on August 6, 2020.