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How States Can Use Low-Carbon Fuel Standards to Incentivize Clean Hydrogen-Derived Fuels

Clean hydrogen has the potential to reduce pollution from some of the heaviest-emitting and hardest-to-reduce sectors and industries. These policies can make it a reality.


The federal government has recently made some huge investments in domestic hydrogen production, including $7 billion for Hydrogen Hubs, $1 billion for planned hydrogen procurement, and the 45V Hydrogen Production Tax Credit, which is worth up to three dollars per kilogram for the cleanest hydrogen. However, federal policies largely avoid determining where all this new hydrogen gets used: the 45V tax credit is agnostic to the offtake use of hydrogen, and hydrogen hubs were allowed to determine their own offtake plans, which range widely to include power generation, industrial uses such as refineries and fertilizer production, and all types of light- and heavy-duty transportation. But clean hydrogen will be scarce as early projects come online and should be directed toward high-priority sectors where energy efficiency and direct electrification are not possible. The sectors of interest in this brief are fuels for aviation, maritime shipping, and some long-haul trucking.

States can complement federal leadership by putting in place incentives and guardrails to ensure clean hydrogen is put to its highest and best use. One policy tool that states can use for this task is the low-carbon fuel standard (LCFS; also called Clean Fuel Standards, or Clean Transportation Standards). A few first-moving states have already implemented this type of program, demonstrating it as an effective tool for reducing carbon pollution, and offering lessons to states that may follow behind. This brief provides an overview of LCFS programs in general and outlines four key lessons that can be learned from these early-moving states to help future LCFS programs stimulate demand for clean hydrogen, set a manageable glidepath for industry to transition, encourage more clean industrial projects in-state, and draw more federal dollars through Inflation Reduction Act (IRA) incentives.



Low-carbon fuel standards are credit markets that incentivize the adoption of lower carbon fuels by establishing an annually decreasing carbon intensity (CI) limit on fuels used in transportation. Providers of transportation fuels (called regulated parties, or RPs) must use LCFS-approved “pathways” to report the carbon intensity of their fuels. The RP is determined by the type of fuel — for example, the RP for most fossil-based fuels is the importer or producer, but for hydrogen the RP is the owner of the fueling equipment. Each fuel regulated under the LCFS has specific rules around who may be the regulated party. When RPs provide fuels that emit less than the CI limit, they generate credits they can then sell on a Credit Clearance Market. RPs providing fuels that overshoot the limit generate deficits and must purchase credits on the market to offset their extra emissions. In this way, LCFS policies use market dynamics to reward low-carbon fuel users and encourage high-CI fuel users to switch over, thereby bringing about greater use of clean transportation fuels.

California and Oregon implemented LCFS policies in 2011 and 2016 respectively, and Washington state joined them by passing its Clean Fuel Standard in 2023 and implementing it in 2024. These West Coast states are already successfully lowering statewide transportation pollution as well as proving the co-benefits that LCFS policies provide, including low adoption costs for state budgets, flexible and technology-neutral compliance options for regulated fuels, and increased availability of low-carbon fuels for all types of vehicles. These successes have led many more states to introduce legislation to enact an LCFS (NM, MN, IL, MI, NY, VT, MA) or to explore the idea of passing one (NE, OH, PA, NJ, HI, CO). These states have the opportunity to design LCFS programs that encourage clean hydrogen offtake in high-priority sectors and to position themselves to be clean industrial leaders.

Exhibit 1: Low-carbon fuel standard (LCFS) adoption across the United States.


Currently, existing LCFS policies primarily focus on light-duty on-road transport, which as of 2020, makes up 58 percent of transportation emissions nationally. Electrification is the most prominent strategy for decarbonizing light-duty vehicles, and electric vehicle charging stations can generate LCFS credits in California and Washington. However, electrification may not be suitable for heavier modes of transport, such as long-haul trucks, aviation, and shipping. In these cases, hydrogen and hydrogen-derived fuels are essential for completely decarbonizing these sectors. As such, it will be important that the next wave of LCFS policies ensure that low-carbon fuels are more fully included to avoid unfairly advantaging electrification solutions in sectors where they are not the most efficient solution. Low-carbon fuels include hydrogen for heavy-duty trucking, sustainable aviation fuel (SAF) for aviation, and methanol or ammonia for shipping. Hydrogen will be needed as both a direct input for these fuels (in the case of a hydrogen fuel cell) or as a feedstock (in the cases of SAF, ammonia, and e-methanol), making heavy transportation a key offtake sector for clean hydrogen.  Furthermore, because LCFS policies incentivize the use of clean fuels rather than the production, they can incentivize production in states that don’t have an LCFS but are close enough to transport clean hydrogen or clean fuels into an LCFS state.

There are a few key lessons that states considering LCFS policies can learn from first-mover states to maximize the effectiveness of LCFS as a tool for hydrogen use to high-priority end uses:

LESSON #1: Designate intrastate aviation fuel as a mandatory reporting fuel and explore stricter regulation options.

Aviation fuels have been brought in as “opt-in” fuels under LCFS programs in California, Oregon, and Washington state, meaning that sustainable aviation fuel (SAF) can generate credits, but the use of traditional jet fuel does not generate deficits.

Under this “all carrot no stick” method, SAF uptake has been slow. In 2021, around 8 million gallons of SAF qualified under California’s LCFS, representing only 0.3 percent of LCFS credits sold. Additionally, the only SAF pathway that has been applied for under California’s LCFS is based on biogenic feedstocks known as Hydrotreated Esters and Fatty Acids (HEFA), which includes used cooking oil, waste fats, and vegetable oils. HEFA’s feedstocks are limited, so the approval of hydrogen-based SAF is necessary for full decarbonization. However, it should be noted that despite this small showing, California still leads US states in SAF deployment in part because of the SAF LCFS opt-in option. A 2023 study on SAF by the US Government Accountability Office (GAO) reported that over a third of the stakeholders they interviewed cited California’s LCFS as a key incentive for SAF development.

The California Air Resources Board (CARB) recently published a proposed rulemaking to update the details of California’s LCFS. One of the proposed changes to the regulations is to fully regulate intrastate jet fuel under LCFS starting in 2028, which means that fossil-based jet fuel used in these flights will generate deficits. This would likely encourage the production of next-generation e-fuels for aviation as the availability of biogenic feedstocks cannot replace the entire aviation fuel supply. Furthermore, using hydrogen to produce SAF has a more significant potential greenhouse gas (GHG) reduction than HEFA and therefore could ​generate more credits.

British Columbia, the only Canadian province to have an LCFS policy, recently integrated SAF by regulating all aviation fuel suppliers. In December 2023, the province published rules that would require all jet fuel sold in the province to be at least 1 percent SAF by volume in 2028, with an increasing percentage requirement in subsequent compliance periods. This is paired with an increasing CI reduction requirement as well. This is the only LCFS policy in North America that requires SAF use.

Other US states currently considering an LCFS can more fully include aviation fuel in their programs from the outset by offering a managed integration of the aviation industry into the LCFS. For example, states could allow a period of opt-in participation (where SAF generates credits, but conventional jet fuel does not generate deficits) followed by a defined ramp-up to a more robust regulatory model like California’s proposed regulation. Another approach is to include allowances for regulated parties in the aviation industry to “bank” or hold onto generated credits to meet future obligations, instead of being required to sell them to other parties.

While the Federal Aviation Administration (FAA) has final regulatory power over aviation fuel requirements, states may allow intrastate flights using SAF to qualify for credit generation and may eventually allow interstate flights to generate credits but not deficits without violating federal regulation. It remains to be seen if the FAA challenges California when it publishes the final rulemaking that would qualify intrastate flights to generate deficits as well as credits under its LCFS. The result of that process will provide following states with more information about how far they may go in regulating the decarbonization of aviation fuel.

LESSON #2: Designate maritime fuel as an opt-in fuel with a defined ramp-up.

Currently, no ocean-going vessel (OGV) fuel is regulated under a LCFS policy in the United States. However, ports and shipping companies have been favorable towards the idea of being phased into LCFS programs like aviation fuel has been. This is likely in part because shipping companies already face stringent requirements from the International Maritime Organization (IMO) and the European Union’s Fuel EU to incentivize the adoption of low-carbon fuels, and LCFS participation could be an additional incentive for actions they are already compelled to take.

Fuels like e-methanol and green ammonia depend on clean hydrogen as a feedstock and will be necessary to decarbonize the shipping industry. States can use LCFS policies as a catalyst to encourage the switch to cleaner maritime fuels by offering the secondary income stream of credit sales under an LCFS program.

Starting maritime fuel as opt-in fuel and providing a set timeline for full regulation has the benefit of acquainting the industry to the LCFS market before requiring full compliance. The inclusion of a definite timeline to bring maritime fuel fully under an LCFS program can assure first movers and will reward early actions toward maritime decarbonization. In this way, SAF can serve as a test case for how to gradually bring less mature clean fuels markets (like maritime fuels) under the jurisdiction of LCFS programs.

LESSON #3: Manage biogenic feedstock-based fuel demand to encourage hydrogen fuels.

As mentioned above, most SAF available on the market in California right now is made via the HEFA pathway, which relies on biogenic feedstocks. However, this pathway is not a sustainable solution for the entire aviation industry. There is a finite supply of waste-based biogenic feedstocks that can be made into SAF, as well as competing demand from other alternative fuels like biodiesel. Biogenic feedstocks used to create low-carbon fuels primarily come from lipid-based feedstocks like vegetable oil, waste oil, and animal fat, but also encompass cellulosic feedstocks like forestry and agricultural waste. When demand for waste-based biogenic feedstocks exceeds supply, fuel producers may look to other non-waste biogenic feedstocks like vegetable oils, which can lead to inefficient land use, increased food prices, and the undermining of the sustainability of the eventual fuel. Indirect land use change (ILUC) that results from the demand pressures on biogenic feedstocks must be managed in a successful LCFS policy to avoid these outcomes.

The European Union recently illustrated the challenges that arise when biogenic feedstocks are over-incentivized when European biofuel subsidies led to price increases for palm oil in Malaysia and Indonesia. As a solution, the EU passed regulations that banned the importation of palm oil unless it could be proven to not have caused deforestation. Minnesota’s recent (unpassed) Clean Transportation Standard Act also attempted to solve this problem by prohibiting credit generation from biofuels made from feedstocks grown on land with less than five years of cropping history.

In California, the ICCT and NRDC both recently called for a market cap on lipid feedstock-based fuels under the CA LCFS program to avoid the negative outcomes related to ILUC from biofuels. The most recent proposed rule changes to California’s LCFS do not go as far as introducing a cap on these feedstocks, but they do propose to prohibit palm oil-based fuels from generating credits and would require fuel producers to track crop and forestry-based feedstocks to their point of origin to avoid adverse impacts on carbon sinks like forests.

All of these policy approaches can help encourage hydrogen-based fuel production by preventing the unmitigated flooding of biogenic feedstock-based fuels into an LCFS market. LCFS policy must encourage the development of hydrogen-based fuels and simultaneously limit the unintended consequence that demand for more sustainable fuels could lead to unsustainable sourcing of biogenic feedstocks.

LESSON #4: Ensure accurate emissions accounting for all fuels and credits.

Finally, employing rigorous methodologies to assess the CI of fuels is critical to ensuring fuels derived from clean hydrogen get evaluated fairly on the LCFS market. Currently, California’s LCFS program includes a book and claim method of accounting that allows blue and grey hydrogen producers (which use natural gas as a feedstock) to purchase carbon offsets from dairy farms located anywhere in North America that are converting biogas into methane.

The LCFS considers this process to be carbon negative under the assumption that the biogas would have been released into the atmosphere otherwise. However, in terms of real emissions, this process is at best carbon neutral and in many cases results in positive emissions. So, these “carbon negative” credits used to offset the carbon emissions of blue and grey hydrogen producers are actually emitting carbon themselves.

By allowing blue and gray hydrogen to use these inaccurately accounted credits to claim carbon neutrality, California’s current LCFS schema gives them a competitive edge and disadvantages lower-carbon options like clean hydrogen from electrolysis, while ultimately adding to overall emissions. Furthermore, the recent proposed rulemaking would allow this accounting method for blue and grey hydrogen projects to exist through 2045. A clean fuel program that successfully incentivizes clean hydrogen could avoid this loophole from the outset by not offering a book and claim carbon accounting method for blue and grey hydrogen, and by updating the assumptions around biogas carbon accounting to reflect the actual emissions associated with those operations.


Clean hydrogen production will enable new low-carbon fuels to decarbonize hard-to-abate sectors, but without incentives and guardrails, limited supply may be used in sectors with other, more effective decarbonization solutions. As LCFS policies are debated in statehouses across the country, it is crucial that policymakers recognize and take the opportunity to incentivize hydrogen and hydrogen-based fuel production. By learning from first-moving states’ successes and avoiding some of their failures, the next wave of LCFS policies can be an essential tool to do just that.

This research was conducted with support from Breakthrough Energy. Results reflect the views of the authors and not necessarily those of the supporting organization.