The ethanol industry has always been adaptive, responding to new policies, market signals and technology pathways. Today, producers are capitalizing on near-term opportunities, such as the 45Z Clean Fuel Production Credit, to capture value and improve margins in a favorable policy environment. But beneath that momentum, a more structural shift is underway, one that could redefine competitiveness in low-carbon fuel markets over the next decade. The message is simple: what earns credits today may earn deficits tomorrow.

A Changing Compliance Curve 
Low-carbon fuel programs, particularly in California, are designed to reduce fuel carbon intensity (CI) over time. The compliance curve, the benchmark that decides whether fuels generate credits or deficits, declines each year, increasing stringency. At present, many ethanol pathways remain comfortably below the 2026 compliance threshold of 24.2% reduction, allowing them to generate credits and support favorable economics. However, recent data indicates that the margin is narrowing. As compliance increases, the stringency aims for a 52.5% reduction by 2035, doubling the reduction planned for 2026. 

CI targets for 2028 and beyond may be accelerated by the Automatic Acceleration Mechanism pursuant to section 95484(b). 

For example, average CI scores for ethanol in Q3 2025 averaged at 58.59  gCO2e/MJ, and by 2035, a CI score above 47.09 gCO2e/MJ for gasoline and 50.23 gCO2e/MJ for diesel curves will result in earning deficits. This is not a distant or hypothetical shift. It is built into the program’s structure and requires a regulation change to modify. As the benchmark declines, fuels that once generated credits will eventually fall below the line, resulting in deficits rather than revenue.

From Credit Generation to Deficit Risk 
This shift will significantly alter market dynamics. Currently, ethanol producers base their strategic choices on existing credit values and logistics. Sometimes, they have withdrawn from markets such as California due to transportation expenses and compliance requirements that outweigh credit earnings. But as the compliance curve tightens, demand will increasingly favor the lowest-CI fuels available. Regulated parties—those responsible for meeting carbon targets—will prioritize ethanol with the lowest possible CI scores to avoid deficit exposure.

This shift establishes a new reality: lower CI ethanol gains increased value, while higher CI ethanol becomes less competitive, yet remains somewhat competitive compared to gasoline. As compliance requirements tighten, credit prices are expected to rise. Essentially, the market will favor early preparers and penalize those who delay.

The Limitations of Short-Term Thinking 
The current focus on 45Z is understandable. It offers immediate financial upside and has become a central part of strategic planning for many producers. However, 45Z alone is not a long-term strategy. Facilities that optimize solely for near-term incentives risk missing the broader trajectory of carbon markets. Investments made today can capture current value while also positioning facilities to meet compliance thresholds over the next five to 10 years. The most competitive producers are already defining long-term CI targets and aligning their operations with those goals.

Pathways to Lower Carbon Intensity 
Lowering CI is not a single decision; it is a portfolio of operational and strategic improvements. Many producers have already taken initial steps, but further reductions will be necessary to remain competitive. Key areas to assess include energy and utilities optimization. Cutting down natural gas and electricity use or switching to lower-carbon energy sources can lead to significant CI reductions. Renewable energy integration through behind-the-meter solutions like renewable natural gas (RNG) or on-site solar can greatly enhance carbon performance. 

Process improvements and efficiency gains, such as converting corn kernel fiber into cellulosic ethanol, can reduce CI while creating additional value streams. Assessing the carbon intensity of inputs, including chemicals and upstream processes, can provide incremental benefits. Although extensively studied, carbon capture and sequestration (CCS) remains a key option where feasible. While these steps may seem incremental individually, collectively they can determine whether a facility remains competitive in a tightening market.

While these strategies are widely understood, the challenge for many producers is not identifying potential improvements but determining where to begin and how to prioritize investments. Each facility operates within unique constraints, including access to feedstocks, energy infrastructure, capital availability and regional market dynamics. As a result, there is no single pathway to achieving lower carbon intensity. Instead, producers must evaluate a combination of options and consider how incremental improvements compound over time.

In many cases, early-stage feasibility assessments can reveal opportunities that are both technically achievable and economically viable, particularly when aligned with future credit market conditions. Engaging with technology providers, utilities and regulatory experts at an early stage can also help clarify timelines and avoid delays later in the process. Importantly, these conversations often uncover dependencies that may not be immediately visible, such as permitting requirements, infrastructure limitations or verification timelines, all of which can influence when a project ultimately delivers value.

Planning Takes Time 
One of the most overlooked challenges in carbon markets is timing. Lowering CI is not an overnight process. It requires feasibility studies, capital investment decisions, technology partnerships, regulatory approvals and operational changes. In some cases, regulatory engagement alone—such as validating new pathways or CI adjustments—can take years. That timeline is precisely why planning must begin now. Producers who wait until the compliance curve becomes restrictive will find themselves reacting under pressure, with fewer options and higher costs.

A Market Signal Producers Can’t Ignore 
The development of low-carbon fuel markets is increasingly understood as a policy certainty as regulatory frameworks continue to evolve and tighten over time. The compliance curve will continue to decline, and the standards for what qualifies as “low-carbon” will become more stringent. Additionally, the market will increasingly differentiate between producers based on their CI performance. With change already underway, the focus is shifting toward how prepared producers are to respond to evolving market conditions.

The Next Phase 
The ethanol industry has consistently demonstrated its ability to innovate and adapt.  
The next phase of that evolution will be defined by how effectively producers manage carbon intensity across both current incentive structures and future compliance requirements. Those who take a long-term view, invest in CI reduction, evaluate new technologies and align with future compliance thresholds will be best positioned to compete. Because in the next phase of low-carbon fuel markets, the advantage will belong to those who planned ahead.

In practice, this means shifting from a reactive approach to a more structured, forward-looking strategy. Producers that establish clear internal benchmarks for carbon intensity, regularly evaluate progress and revisit their assumptions as regulations evolve will be better equipped to navigate uncertainty and capture emerging opportunities in low-carbon fuel markets.

Author: Chelsa Oren, Ethanol and Biodiesel Service Director,  
 EcoEngineers 
       coren@ecoengineers.us