Reducing transportation-related greenhouse gas emissions using a market-based approach is the goal of low-carbon fuel standards (LCFS), such as the clean transportation standard considered by the Minnesota Legislature in 2024. These LCFS programs work by incentivizing fuel producers to reduce their production of higher-carbon fuels (such as conventional fossil fuels) and develop lower-carbon fuel alternatives (such as electricity, hydrogen, and biofuels). Producers participate in a credit market, in which lower-carbon fuel producers can generate credits and sell them to higher-carbon fuel producers.
Although Minnesota’s clean transportation standard didn’t pass in 2024, “The legislature may consider it again in an upcoming session,” says Monica Haynes, director of the Bureau of Business and Economic Research (BBER) at the U of M Duluth’s Labovitz School of Business and Economics and an adjunct professor of economics. “However, there is some concern that, if the state’s clean transportation standard were passed into law, it could impact the price of transportation fuels, including gasoline.”
To explore how a clean transportation standard in Minnesota could affect prices at the pump, UMD researchers from the Labovitz School and BBER conducted a study, funded by the Center for Transportation Studies, to examine the factors influencing gasoline prices, particularly the impacts of LCFS programs.
Researchers began by creating an overview of existing LCFS programs and comparing how these standards have been implemented. California and Oregon, along with the Canadian province of British Columbia, have implemented LCFS standards. All three programs have been highly effective in spurring innovation in lower-carbon fuel technologies and reducing greenhouse gas emissions—exceeding initial goals for carbon intensity reductions.
In the study’s second phase, the research team examined how broad market and state-level factors (including LCFS programs) influence fluctuations in the price of transportation fuel. Researchers found that early LCFS programs have shown limited direct impact on retail gas prices, in part because crude oil prices have fallen since the policies were first implemented. On the other hand, studies suggest that more aggressive LCFS targets might have a greater impact on fuel prices moving forward.
Finally, researchers identified additional costs and benefits to businesses and consumers of LCFS policies such as the one introduced in Minnesota. Benefits from a clean transportation standard include significant greenhouse gas reductions, strong public support, and increased investment in lower-carbon fuels and infrastructure. But the economic impacts of a clean transportation standard, particularly on gasoline prices, are complex and multifaceted.
“While the burden of LCFS compliance may be passed to consumers through higher gasoline prices, several factors—including competition and location-specific challenges—can constrain a firm’s ability to shift the burden” says Neil Wilmot, associate professor of economics at UMD and a research affiliate with the BBER. “For Minnesota, these findings emphasize the importance of carefully considering regional market conditions, credit price fluctuations, and policy design as the state moves toward implementing a statewide clean transportation standard.”
