California LAO Recommends against Proposed SAF Tax Credit

March 04, 2026

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by Erin Krueger (Biomass Magazine) The California Legislative Analyst’s Office, the state legislature’s nonpartisan fiscal and policy advisor, on Feb. 24 recommended state lawmakers do not move forward with California Gov. Gavin Newsom’s proposal to create a sustainable aviation fuel (SAF) tax credit.

Newsom proposed plans to implement a SAF tax credit in his proposed 2026-’27 state budget, which was released in January. The proposal would create a new diesel excise tax credit for producers of SAF that meet a carbon intensity (CI) as calculated by the California Air Resources Board. The credit would be worth $1 to $2 per gallon of SAF produced for use in California, depending on the fuel’s CI score. The credit would be in place between January 2026 and December 2035. As proposed by the governor’s office, producers could only claim the credit if they also have diesel excise tax liability within the state.

“The administration estimates this credit could reduce diesel excise tax liability by as much as $165 million per year initially, then ultimately growing to $300 million per year,” the LAO said in its report. “In our assessment, the proposed tax credit is not a cost‑effective approach to reducing greenhouse gas emissions (GHGs) and may result in lower than anticipated environmental benefits. Moreover, the implementation of the tax credit could have negative implications for transportation funding—potentially even larger than those estimated by the administration—and would not be consistent with the spirit of voter‑approved restrictions on the use of diesel tax revenues. In light of these concerns, we recommend the Legislature reject the Governor’s proposed tax credit.”

A full copy of the LAO’s assessment is available on the agency’s website. READ MORE

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High Costs and Few Benefits from California’s Proposed Sustainable Aviation Fuel Tax Credit (Resources)
California Legislative Analyst’s Office (LAO) Recommends Rejecting Governor’s SAF Tax Credit (CCarbon Markets)
Legislative analyst pans Newsom’s sustainable aviation fuel tax credit proposal (E&E News Climatewire)
Effects of the Proposed New California SAF Tax Credit (Energy Institute at HAAS)
The 2026-27 Budget -- Governor’s Sustainable Aviation Fuel Tax Credit Proposal (California Legislative Analyst's Office) PDF

Excerpt from Resources: This credit would reduce road funding, raise gasoline and diesel prices, and deliver small and expensive carbon emissions reductions.

In California, road construction, maintenance, and repairs are funded primarily through excise taxes on gasoline and diesel. Governor Gavin Newsom’s latest budget includes a proposal that would diminish this dedicated source of revenue. It would allow fuel suppliers to reduce their diesel excise tax liability by selling sustainable aviation fuel (SAF).

Deciphering the implications of this proposal is tricky because SAF is closely related to renewable diesel, the main biofuel substitute for petroleum diesel that now comprises 70 percent of diesel in California. Moreover, the proposed tax credit would exist in a complex web of regulations and tax credits at the federal level, in California, and in other states.

The Newsom administration estimates the SAF tax credit would reduce diesel excise tax receipts by about 10 percent ($165 million). We have analyzed this proposal in the broader context of national and state biofuel policies.

Based on our analysis, we project three outcomes:

The tax credit will incentivize much more SAF than projected by the administration.
That increase in SAF comes at a cost: diesel excise tax receipts decrease by at least 20 percent and as much as 75 percent within a few years, and the prices of gasoline and diesel increase by 10–15 cents because of interactions with existing policies.
Because the SAF largely would come from diverting biofuels from surface transport to aviation, the net reductions in carbon emissions would be small and expensive.

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As we wrote last fall, current policies will yield very little SAF because it costs at least three times as much to produce as petroleum jet fuel. Although SAF currently earns substantial incentives, including credits in the federal renewable fuel standard, low carbon fuel standard credits from California, and federal tax credits, SAF does not receive enough to make up for its higher production cost relative to fossil jet fuel. At the same time, renewable diesel costs somewhat less to produce than SAF, benefits from a more favorable subsidy stack, and faces a smaller price gap with petroleum diesel, while also competing with SAF for feedstocks and production capacity.

SAF produced at a carbon intensity at least 50 percent below that of jet fuel would be eligible for California’s proposed tax credit, which is $1 per gallon of SAF, plus 2 cents per gallon for each additional percentage point of reduction beyond this 50 percent threshold, up to a maximum $2 per gallon. Based on the California Air Resources Board’s existing carbon intensity models, the tax credit would apply to SAF produced from waste oils and fats such as used cooking oil, tallow, and distiller’s corn oil. Crop-based oils such as soybean or canola oil would not qualify, ....

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The other viable way to produce SAF is alcohol-to-jet (ATJ), ....

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If the six current HEFA refineries that are equipped for SAF were to produce at maximum capacity, they would crank out 834 million gallons of SAF per year. At $1.25 per gallon, that is $1.04 billion in tax credits, or 65 percent of diesel excise tax receipts. Adding ATJ SAF would generate even more tax credits, as would more renewable diesel facilities retooling to produce SAF.

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How Would the Sustainable Aviation Fuel Proposal Change Fuel Prices?

As a result of this policy, we estimate that both gasoline and diesel prices would rise in California. Gasoline prices would increase by 11–14 cents and diesel prices by 12 cents. Californians use about 13 billion gallons of gasoline and 4 billion gallons of diesel per year, so these price increases imply that annual costs to consumers would rise by between $1.9 billion and $2.3 billion.

Fuel prices rise because of complex interactions between the tax credit and existing policies. In particular, California’s low carbon fuel standard requires that every gallon of fossil gasoline and diesel be matched by some amount of cleaner (i.e., lower carbon intensity) fuel such as renewable diesel or SAF.

When California fuel suppliers reduce renewable diesel in favor of SAF, the lost renewable diesel has to be backfilled with fossil diesel to meet road transportation fuel demand. But more fossil diesel means that more low-carbon fuel has to enter the system to meet the goal specified by the low carbon fuel standard. This is why the tax credits cause a smaller decline in renewable diesel than the increase in SAF, as shown above in Figure 2. The additional required low-carbon fuels raise costs.

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We predict that the proposed tax credit would increase SAF adoption more than expected and generate some additional emissions reductions, but at a high cost through lost road funding and higher fuel prices. If incentivizing SAF were to spur future cost reductions through new technologies, then it may be worth paying a high price, but there is limited evidence for significant cost declines in the biofuels sector so far. READ MORE

Excerpt from California Legislative Analyst's Office: The Governor proposes budget trailer legislation to create a new tax credit against diesel excise tax liability to incentivize the use of sustainable aviation fuel (SAF) in California. The administration estimates this credit could reduce diesel excise tax liability by as much as $165 million per year initially, then ultimately growing to $300 million per year. In our assessment, the proposed tax credit is not a cost‑effective approach to reducing greenhouse gas emissions (GHGs) and may result in lower than anticipated environmental benefits. Moreover, the implementation of the tax credit could have negative implications for transportation funding—potentially even larger than those estimated by the administration—and would not be consistent with the spirit of voter‑approved restrictions on the use of diesel tax revenues. In light of these concerns, we recommend the Legislature reject the Governor’s proposed tax credit.

Background

Aircraft Produce Relatively Small Share of GHG Emissions… Aircraft are not among the largest contributors to GHG emissions. According to the California Air Resources Board’s (CARB’s) GHG inventory, aviation accounts for only roughly 1 percent of the state’s emissions. While this estimate may be somewhat understated, as it only accounts for intrastate travel, estimates of the relative contribution of aircraft to national and global GHG emissions are still relatively modest, totaling about 3 percent.

…But Are Particularly Hard to Decarbonize. Despite the aviation sector’s relatively small contribution to GHG emissions, policymakers have shown significant interest in addressing aircraft emissions as the sector is viewed as among the more difficult to decarbonize. For example, while batteries are a feasible—if sometimes relatively expensive—alternative to gasoline and diesel for cars and trucks, they are not currently viewed as viable for aircraft due to their weight, size, and potential fire hazards.

SAF Is a Non‑Petroleum Alternative to Conventional Jet Fuel. One of the main existing approaches to help reduce the aviation sector’s GHG impacts is reducing the carbon emissions from aviation fuel. This can be done by replacing conventional, petroleum‑based jet fuel with non‑petroleum‑based alternatives known as SAF. SAF can be made from a variety of plant and animal‑based feedstocks—such as distillers corn oil (a byproduct of the production of corn ethanol), used cooking oil, and animal tallow—as well as some alternative processes. A key advantage of SAF is that, due to its chemical similarity to conventional jet fuel, it can be used in place of traditional fuel without modifications to aircraft engines or infrastructure. Conversely, a major barrier to the use of SAF is its relatively high production cost, resulting in prices that are generally at least twice those for conventional jet fuel. In large part due to this cost differential, currently only a small share—less than 2 percent—of aviation fuel used in the United States is SAF.

SAF Production Occurs Alongside Other Renewable Fuels. Currently, a few refineries in the United States are set up to convert feedstocks into both renewable diesel (RD)—which accounts for the majority of diesel purchased in California—and SAF. These refineries can shift production between these two types of fuels with relative ease depending on market conditions, as the industrial processes for producing RD and SAF are similar, using the same feedstocks and much of the same equipment. There also are a number of other refiners in the United States that currently produce RD and could, with the purchase of some additional equipment, be converted to produce SAF in addition to, or instead of, RD. In either case, as a result of the interchangeability of the production processes for these two fuels, without significant additional investments in overall production capacity for renewables or innovation in the production process, an increase in SAF production likely would result in a roughly equivalent decrease in RD production.

State and Federal Governments Have Various Existing Policies to Incentivize SAF. In recent years, both the state and federal governments have implemented various policies that encourage the adoption of renewable fuels, including SAF. The main such policies affecting California include:

California Low Carbon Fuel Standard (LCFS). LCFS establishes statewide “carbon intensity” (CI) standards for diesel and gasoline supplied in California. LCFS uses a system of tradeable credits to determine compliance with the program. Entities that supply regulated fuels with a CI above the standard accrue deficits, whereas those that supply fuels with a CI below the standard generate credits. Unlike diesel and gasoline, jet fuel is not regulated under LCFS. However, producers of SAF can voluntarily participate in the program and receive credits for the gallons they supply to California. These producers can then sell the credits they generate, producing revenue that serves as a subsidy for SAF production.
Federal Renewable Fuel Standard (RFS). At the federal level, RFS is a policy that requires a designated level of renewable fuels to be sold annually in the United States. Refiners and importers must either sell their share of the required volumes themselves or buy credits (known as Renewable Identification Numbers or RINs) from other producers that generate an excess of credits. Because producers of SAF can sell the RINs they generate, this program can provide an additional production subsidy.
Federal Tax Credit. The federal government also currently offers a tax credit of up to $1 per gallon for SAF that meets certain requirements.

The above policies work together to create a “stack” of incentives for SAF production. The total value of this stack depends on various factors such as LCFS and RFS credit prices, as well as the feedstocks used, but cumulatively could total a couple dollars per gallon for SAF producers.

State Imposes Excise Taxes on Aviation and Other Transportation Fuels. The state levies per‑gallon excise taxes on various fuels sold and consumed in the state. These include a 2‑cent‑per‑gallon excise tax on jet fuel, which is applied to both petroleum‑based jet fuel and SAF. The tax generates about $4 million annually and supports airports and other aviation‑related activities. The state also imposes an excise tax on diesel fuel, which is assessed on both petroleum‑based diesel and RD. Diesel is primarily used by medium‑ and heavy‑duty trucks, buses, and other large vehicles. The diesel excise tax is currently 46.6 cents per gallon and is adjusted each July for inflation. In 2026‑27, the tax is projected to increase to 48.2 cents per gallon and generate about $1.5 billion. Diesel excise tax revenues support state and local transportation activities. These include (1) support for the California Department of Transportation (Caltrans) and its highway maintenance and rehabilitation programs, (2) direct suballocations to cities and counties for local streets and roads, and (3) competitive infrastructure grants on freight corridors through the Trade Corridor Enhancement Program (TCEP).

Governor’s Proposal

Provides Tax Credit for Producers of SAF.

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LAO Assessment

Proposal Represents Relatively Expensive Approach to Decarbonization.

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With Limited Exceptions, Makes Sense to Focus on Most Cost‑Effective Approaches to Reducing GHGs.

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Environmental Benefits of Incentivizing SAF Are Uncertain.

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Magnitude of Diesel Excise Tax Revenue Reduction Is Uncertain, but Could Be Much Smaller or Larger Than Anticipated.

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Reducing Diesel Excise Tax Revenues Would Negatively Impact Transportation Programs.

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Caltrans.

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Local Streets and Roads.

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TCEP.

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Deviates From Spirit of Transportation Funding Approach Embraced By Voters.

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Recommendation

Reject Proposed Tax Credit. We recommend the Legislature reject the proposed budget trailer legislation establishing a credit against diesel excise tax revenue for sale of SAF in California. The proposal appears to be a relatively expensive approach to reducing GHGs and may not result in the full anticipated environmental benefits. Moreover, the implementation of the proposed tax credit could have negative implications for transportation funding—potentially even larger than those estimated by the administration—and would not be consistent with the spirit of voter‑approved restrictions on the use of diesel tax revenues. READ MORE