Credit Multipliers as a Mechanism to Incentivize Low-Carbon Fuel Policy Adoption and to Reduce Fuel Shuffling

Abstract

Low-carbon fuel policies such as the federal Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) encourage the use of low-carbon fuels through different incentive mechanisms. One outcome of these market-based designs is that incentives for fuel shuffling exist for low carbon intensity fuels. Fuel shuffling reduces policy efficiency and potentially increases greenhouse gas (GHG) emissions due to transport. One way to address this inefficiency is to differentiate a commodity through the use of certification (e.g. GHG emissions or sustainability standards). We argue that decoupling certificates from physical quantities of fuel will mitigate shuffling concerns, improve the economic efficiency of fuel regulation, and better incentivize technology innovation for fuels. Use of decoupled certificates may also circumvent concerns associated with the General Agreement of Tariffs and Trade regulation by the World Trade Organization. While this analysis indicates that certificate decoupling adds substantial value to low-carbon fuel policy, the policy may also be inefficient if decoupling incentivizes paper shuffling. We propose using credit multipliers in addition to certificate decoupling to overcome this problem. This approach may provide economic benefits of over $50 billion dollars for the trade of ethanol between the U.S. and Brazil alone.