The California LCFS credit bank after the 2025 step-down

The Low Carbon Fuel Standard credit bank reached its maximum of 43.26 million credits at the close of the second quarter of 2025 and has fallen in each of the three quarters reported since, standing at 36.86 million credits at the end of the first quarter of 2026. The reversal follows the entry into force on 1 July 2025 of the amended carbon intensity benchmarks, which apply to fuel supplied from the third quarter of 2025 onwards and leave the first two quarters of that year under the previous standards.

The step-down

The amendments raised the required carbon intensity reduction for the second half of 2025 from 13.75 per cent to 22.75 per cent against the 2010 baseline, with 24.20 per cent applying in 2026 and the schedule extended to a 30 per cent reduction by 2030 and 90 per cent by 2045. Expressed in benchmark terms, the gasoline standard fell from 85.77 to 76.60 gCO₂e/MJ and the diesel standard from 86.64 to 81.70 gCO₂e/MJ on the same date.

Credits and deficits are both calculated from the difference between the benchmark and the certified carbon intensity of the fuel, multiplied by energy supplied and the applicable energy economy ratio, so a step-down of this size operates on both sides of the ledger at once. Each unit of gasoline and diesel supplied generates a larger deficit, each unit of low-carbon fuel generates fewer credits than it did under the previous benchmark, and any fuel whose carbon intensity falls between the former and the current standard ceases to generate credits altogether.

Credit and deficit generation

Deficit generation rose by 54.7 per cent between the second and third quarters of 2025, from 6.49 million to 10.04 million, while credit generation fell by 15.9 per cent over the same interval, producing a net deficit of 1.71 million credits that was the largest recorded in the programme to that point and has since been exceeded by the first quarter of 2026. Measured against the corresponding period a year earlier, credits generated in the second half of 2025 were 19.7 per cent lower than in the second half of 2024 and deficits were 67.7 per cent higher. The same comparison holds on a like-for-like quarterly basis, with first-quarter credit generation falling 15.0 per cent between 2025 and 2026, from 8.16 million to 6.93 million, while first-quarter deficits rose 72.1 per cent, from 5.68 million to 9.77 million.

Across the calendar year 2025 remains in surplus, with credit generation of 34.18 million against deficit generation of 31.85 million and a net addition to the bank of 2.33 million credits, compared with 13.68 million in 2024. The whole of the reduction in the annual surplus is accounted for by the two quarters supplied under the amended benchmarks.

Coverage

Coverage, the closing balance divided by deficit generation over the preceding four quarters, has fallen from 1.81 at the second-quarter 2025 maximum to 1.03 at the end of the first quarter of 2026, having passed through 1.59 at the end of 2024 and 1.25 at the end of 2025. The bank stood behind approximately twenty-two months of deficit generation at its maximum and stands behind a little under twelve months now. The ratio falls faster than the balance because the denominator rises as the numerator falls, and it remains the more reliable measure of the slack left in the market.

Bank drawdown

The bank has fallen by 6.40 million credits, or 14.8 per cent, from its second-quarter 2025 maximum, with the quarterly net position deteriorating in each successive quarter, from 1.71 million in the third quarter of 2025 to 1.86 million in the fourth and 2.83 million in the first quarter of 2026.

Deficits last exceeded credits on a sustained basis between the first quarter of 2017 and the second quarter of 2020, across which the bank fell from 9.86 million to 7.87 million credits, a reduction of 20.2 per cent over fourteen quarters. That episode was reversed by supply growth in renewable diesel, renewable natural gas and transport electrification, which restored net credit generation and carried the bank from under 8 million to above 43 million within five years. The present drawdown differs in origin, proceeding from a tightening of the standard rather than from a demand cycle, and the supply response that reversed the earlier episode is already largely built into the credit base.

Where the bank runs out

Climate Decode models the California balance forward on the amended benchmark schedule. Credit creation continues to grow through the second half of the decade, but gross deficits grow faster in every year, so the bank thins gradually rather than through any single discontinuity and is substantially exhausted by around 2030. The pace of vehicle electrification moves that point by roughly a year in either direction without changing it materially, since a smaller obligated gasoline pool removes deficits and electricity credits in close to offsetting measure.

Beyond that point, the regulation carries two structural limits that the modelling brings into view, the five-year repayment deadline that a deficit cohort eventually reaches unrepaid, and the year in which no fuel makes the marginal credit at any cost. Neither is a forecast that California fails to comply. Both mark where the regulation as drafted runs out of things that can be bought, and no regulatory response is assumed.

Forward position

Three quarters is a short record, and the first quarter of any year is seasonally the weakest for credit generation, which places part of the 2026 figure within the normal pattern. The direction is nevertheless consistent across all three, with credits below deficits in each and the net draw widening in each.