High Costs and Few Benefits From California’s Proposed Sustainable Aviation Fuel Tax Credit

Why It Matters

The proposal threatens a primary funding stream for California’s road network while raising fuel costs, creating a fiscal and political dilemma for policymakers.

Key Takeaways

• Tax credit could cut diesel excise revenue up to 75%
• SAF production may rise to 1 billion gallons annually
• Net CO₂ reduction costs $1k‑$2.8k per ton
• Gasoline and diesel prices could increase $1.9‑$2.3 b annually
• Renewable diesel may be displaced by SAF, reducing road‑fuel supply

Pulse Analysis

California’s SAF tax credit sits at the intersection of two entrenched funding mechanisms: the diesel excise tax that bankrolls highway construction and the Low‑Carbon Fuel Standard that mandates cleaner fuels. By allowing refiners to claim up to $2 per gallon of SAF against their diesel tax liability, the state risks diverting a sizable portion of the $1.6 billion annual diesel tax pool. Early estimates from the Newsom administration suggest a 10 % revenue dip, but detailed modeling indicates the loss could swell to 75 % if all eligible refineries shift production, jeopardizing road‑maintenance budgets that rely on a stable tax base.

The chemistry behind SAF further complicates the calculus. The most mature pathway, hydroprocessed esters and fatty acids (HEFA), converts waste oils and animal fats into jet fuel, yet its production cost remains roughly three times that of conventional jet fuel. ATJ, which upgrades ethanol or isobutanol, is even pricier and still experimental. Although the credit targets low‑carbon feedstocks, the displacement of renewable diesel—a cheaper, lower‑intensity biofuel—means that overall carbon savings are modest. The model projects a net reduction of 0.5‑2.1 million metric tons of CO₂ at an abatement cost far above the social cost of carbon.

Beyond the fiscal ledger, the credit reshapes market dynamics. Higher gasoline and diesel pump prices—estimated at 11‑14 c per gallon—translate into $2 billion in added consumer expenses each year. Refineries may pursue financial engineering, such as joint ventures, to align tax liabilities with credit eligibility, while the limited pool of eligible SAF producers could strain supply chains. Policymakers must weigh these unintended consequences against the strategic goal of decarbonizing aviation, perhaps by pairing the credit with stricter caps on renewable diesel or by incentivizing cost‑reducing innovations in SAF production.