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

This policy brief by RMI outlines how U.S. states can utilize Low-Carbon Fuel Standards (LCFS) to incentivize the adoption of clean hydrogen and hydrogen-derived fuels, particularly for hard-to-abate sectors like aviation, maritime shipping, and long-haul trucking. It analyzes existing programs in California, Oregon, and Washington to provide four key lessons for future state policies to ensure clean hydrogen is directed toward high-priority uses rather than sectors where electrification is more efficient.

• Low-carbon fuel standards (LCFS) function as credit markets that reward fuels with carbon intensity (CI) below an annually decreasing limit and penalize those that exceed it, creating market dynamics that encourage a switch to clean transportation fuels.
• To effectively decarbonize aviation, states should move beyond 'opt-in' models—where sustainable aviation fuel (SAF) generates credits but fossil jet fuel does not generate deficits—toward mandatory reporting. California has proposed fully regulating intrastate jet fuel starting in 2028 to encourage next-generation e-fuels, as biogenic feedstocks like HEFA are limited.
• Maritime fuels, such as e-methanol and green ammonia, currently lack LCFS regulation in the U.S. The brief suggests designating these as opt-in fuels with a defined ramp-up to full regulation to provide a secondary income stream via credit sales and reward early decarbonization actions.
• LCFS policies must manage the demand for biogenic feedstock-based fuels to prevent unsustainable land use and food price increases. Over-incentivizing these fuels can lead to indirect land use change (ILUC), as seen in the EU with palm oil; therefore, policies should limit these feedstocks to encourage the development of hydrogen-based fuels.
• Current carbon accounting loopholes, specifically the 'book and claim' method in California, allow blue and grey hydrogen producers to use carbon offsets from dairy biogas that may not be truly carbon negative. This gives higher-carbon hydrogen a competitive advantage over clean hydrogen produced via electrolysis.
• While federal investments like the $7 billion for Hydrogen Hubs and the 45V Hydrogen Production Tax Credit provide production incentives, they are 'agnostic' to the final use of the hydrogen. State LCFS policies can fill this gap by directing scarce clean hydrogen toward high-priority sectors where electrification is not possible.

APA

RMI (2024). How States Can Use Low-Carbon Fuel Standards to Incentivize Clean Hydrogen-Derived Fuels. https://rmi.org/resources/how-states-can-use-low-carbon-fuel-standards-to-incentivize-clean-hydrogen-derived-fuels/

Chicago

RMI. How States Can Use Low-Carbon Fuel Standards to Incentivize Clean Hydrogen-Derived Fuels. 2024. https://rmi.org/resources/how-states-can-use-low-carbon-fuel-standards-to-incentivize-clean-hydrogen-derived-fuels/.

Wikipedia

{{cite report |author=RMI |title=How States Can Use Low-Carbon Fuel Standards to Incentivize Clean Hydrogen-Derived Fuels |date=9 February 2024 |url=https://rmi.org/resources/how-states-can-use-low-carbon-fuel-standards-to-incentivize-clean-hydrogen-derived-fuels/ |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{rmi2024how, author = {{RMI}}, title = {{How States Can Use Low-Carbon Fuel Standards to Incentivize Clean Hydrogen-Derived Fuels}}, institution = {RMI}, year = {2024}, month = feb, url = {https://rmi.org/resources/how-states-can-use-low-carbon-fuel-standards-to-incentivize-clean-hydrogen-derived-fuels/}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }