The California Low Carbon Fuel Standard (LCFS) provides credits for reducing the carbon intensity of transportation fuels. The value of these credits depends on the carbon intensity of the fuel and the market price of LCFS credits, which has ranged from less than 50 cents a gallon in 2014 to over $4 a gallon in 2022. LCFS credits are the most valuable component of the incentive stack for renewable diesel sold in California, and have been the main driver of the renewable diesel boom in the state.
Compliance value for renewable diesel under the federal RFS and California LCFS. The value of compliance with federal and state fuel policies can be substantial, and has ranged from less than 50 cents a gallon to over $1.50 a gallon. Compliance value is tied to the carbon intensity of the fuel and the specific requirements of the policies. Compliance value is important for ensuring that renewable diesel producers meet their obligations under federal and state regulations.
Avoided compliance costs for ULSD under state or climate policies. By producing renewable diesel, oil companies can avoid compliance costs associated with ultra low sulfur fossil diesel (ULSD) under state or climate policies. The value of avoided compliance costs can be significant, and has ranged from 20 cents a gallon to over $1 a gallon. Avoided compliance costs provide an additional incentive for oil companies to produce renewable diesel and reduce their carbon footprint.
Overall, the incentive stack for renewable diesel in California is complex and multifaceted, with multiple overlapping policies providing support for the production and consumption of renewable diesel. The renewable diesel boom in California has been driven by a combination of federal and state incentives, including tax credits, RFS credits, LCFS credits, compliance value, and avoided compliance costs. These incentives have created a lucrative market for renewable diesel producers, leading to significant growth in the industry over the last decade.
Looking forward, changes to federal and state policies will continue to shape the renewable diesel marketplace, with new preferences for domestic feedstocks and soybean oil creating uncertainty for the future of the industry. It will be important to track these changes and their impact on the incentive stacks for renewable diesel, in order to understand how the industry will evolve in the coming years. By following the money and understanding the incentives that drive the renewable diesel market, we can make informed decisions about the future of biofuels and their role in reducing carbon emissions and combating climate change.
as a reference. In 2025, the LCFS credit generation for renewable diesel pathways continued to depend on the LCFS credit price and the carbon intensity (CI) of each pathway relative to the CI of the LCFS standard. The values used for comparison were from the 2025 Phillips 66 LCFS pathway report, based on California’s version of GREET, which includes indirect land use change (ILUC) emissions for crop-based biofuels.
Soybean oil renewable diesel had a peak LCFS credit value of $0.89/gallon in 2019-2020, which fell to $0.24/gallon in 2024. On the other hand, renewable diesel made from used cooking oil peaked at $1.70/gallon in 2020 and fell to $0.51/gallon in 2024. ILUC emissions for bio-based diesel fuels added 29.1 g CO2/MJ for soybean oil, 19.4 g CO2/MJ for canola oil, and 71.4 g CO2/MJ for palm oil. Secondary fats and oils, such as UCO, distillers corn oil, and tallow, did not have assessed ILUC emissions, receiving a greater incentive than vegetable oils.
Each gallon of renewable diesel sold in California reduced an oil company’s ULSD deficit, with the value of avoided deficits depending on the LCFS credit price and the stringency of the LCFS standard compared to ULSD. The value peaked at 22 cents per gallon in 2021 and fell to 11 cents a gallon in 2024. Renewable diesel fuel sold in California also reduced oil companies’ obligation to buy Cap and Trade (C&T) allowances, with the value of this avoided obligation rising gradually over time to 36 cents a gallon in 2024.
Observations showed that the total policy support for renewable diesel was substantial, with an average incentive stack for soybean oil-based renewable diesel in California at $3.40/gallon between 2014-2024. Federal support for biofuels was greater than California support, with the balance depending on credit prices in the RFS versus the LCFS. ILUC emissions were important on the margin, with a preference for UCO over soybean oil-based fuel that varied over time. California support effectively favored renewable diesel over biodiesel, as renewable diesel was not subject to blending constraints.
Changes in federal policy in 2025 encouraged domestic feedstocks and fuels, with uncertain credit prices in the RFS, LCFS, and Cap and Trade affecting the forward-looking incentive stack. The future of renewable diesel pathways and their incentives will continue to evolve as policies shift and new regulations are implemented.
In conclusion, the changing landscape of federal biofuel tax credits, RFS standards, LCFS credit prices, and Cap and Trade allowance prices are shaping the incentive stacks for renewable diesel producers in 2026. Imported UCO, once favored, is now at a disadvantage due to federal incentives discouraging imports. US DCO comes out on top with significant preferences in both California and federal policies, but potential growth may be limited due to supply constraints. Soybean oil, on the other hand, is the feedstock that is both available and policy advantaged, but transportation costs may hinder its widespread use. These changes highlight the complex interplay between policy, economics, and logistics in the renewable diesel industry, and producers will need to carefully navigate these factors to optimize their operations in the coming years.
Moving feedstock by ship is generally a cost-effective method, but restrictions on Jones Act tankers could limit the amount of US soybean oil that can be transported to California via ship. This limitation poses a challenge for companies looking to utilize soybean oil in the state.
The cap on LCFS (Low Carbon Fuel Standard) credits for soybean oil diesel is expected to have a minimal impact. While the cap on vegetable oil-based diesel fuels is set to take effect in 2028, it only accounts for a small portion of the overall incentive stack for soybean oil. Additionally, the cap does not affect essential factors such as avoided ULSD deficits and CA Cap at the Rack. The loss of LCFS credits can be offset by preferences for domestic feedstocks, ensuring that the incentive stack for soybean oil remains competitive.
Analyzing incentive stacks provides valuable insights into the complexities of the biofuel industry. Factors such as feedstock costs, availability, tariffs, and logistics also play crucial roles in determining the choice and quantity of feedstocks used. The uncertainty surrounding future incentive stacks hinges on credit prices for all relevant policies.
If the EPA finalizes the half RIN proposal, the impact on imported feedstocks could significantly outweigh other factors, putting biofuel producers reliant on imported feedstocks at a disadvantage. This could lead to a shift of domestic feedstocks from non-fuel uses to fuel production. However, if the half RIN proposal is dropped, the differences in incentives will be less pronounced, requiring a balance between feedstock costs, availability, and logistics.
The LCFS cap on credits for vegetable oil feedstocks is a nuanced policy intervention. Even when fully effective in 2028, vegetable oil-based diesel fuels beyond the cap will still receive substantial support in California. Combined with federal incentives and the abundance of domestic soybean oil, the use of soybean and canola in California is expected to continue growing. The cap does not apply to bio-based jet fuel, potentially leading to increased consumption of vegetable oil-based fuels in California, especially if additional policy support is implemented.
In conclusion, while incentive stacks provide valuable insights, the biofuel industry’s dynamics are multifaceted. Factors such as policy changes, feedstock availability, and logistics will continue to influence decision-making in the industry. By considering these variables, biofuel producers can navigate the evolving landscape and capitalize on opportunities for growth and innovation.
