OPIS Insights

A new draft plan from the California Energy Commission (CEC) outlines a managed decline of fossil fuel use and growth in low-carbon alternatives like renewable diesel (RD), biodiesel, ethanol (E15) and sustainable aviation fuel (SAF), highlighting a near 20% reduction in carbon intensity of fuels driven by the Low-Carbon Fuel Standard (LCFS).

The draft Transportation Fuels Transition Plan, released May 1, serves as a potential roadmap to navigate California’s rapidly declining in-state refinery capacity against the slow pace of transportation sector decarbonization. It models scenarios in which biofuels bridge the gap during the energy transition, thereby creating demand for low-carbon fuels. The draft plan offers investment signals for LCFS market participants through 2045.

Current Market Dynamics

The California Energy Commission previously projected that the state would become dependent on fuel imports to meet up to 30 percent of its demand needs by the summer of 2026. Fuel imports are more important to the state than ever. While Asian gasoline blending components make up a significant portion of the product arriving in the state, the Gulf Coast has played a big role as well, using the Bahamas as a stopover to blend fuel and avoid Jones Act restrictions.

The CEC’s draft transportation plan calls for the state to manage its fossil fuel wind-down through supply stabilization strategies, such as the resupply and minimum inventory powers granted to the CEC through AB X2-1. Pending results from two separate fuel analyses, California may eventually consider phasing out its boutique gasoline blend, CARBOB, in favor of a western region specification.

Projected Fossil Fuel Demand

The CEC models projections under a “moderate” electrification scenario, which reveals distinct trajectories for fossil fuels through 2045. (Read more. Subscription required.)

• CARB Gasoline: In-state demand is projected to plummet from 787 thousand barrels per day (TBD) in 2023 to just 117 TBD by 2045. The draft plan warns that falling demand may accelerate refinery closures, potentially leading to increased gasoline imports to meet residual demand and highlighting a significant supply chain risk.
• Total Diesel: In-state demand is also set to decline from 266 TBD in 2023 to 79 TBD by 2045. This steep drop is contingent on the successful electrification of the heavy-duty sector.
• Jet Fuel: In stark contrast, in-state demand is forecast to rise from 271 TBD in 2023 to 378 TBD by 2045. This growth poses a major challenge to decarbonization. The draft plan notes that declining crude processing for gasoline will reduce jet fuel production as a co-product. This will, in turn, make the state increasingly more reliant on imports, primarily from Asia.

An Indispensable Mechanism for Electrification

The draft plan frames the LCFS as an indispensable mechanism to manage the state’s fuel transition. The program’s primary purpose is shifting from encouraging low-carbon alternatives to ensuring fuel reliability and preventing a supply crisis as the fossil fuel system destabilizes.

The CEC explicitly recommends “sustaining the LCFS program” to ensure private investment continues to support the zero-emission vehicle (ZEV) market. This is reinforced by Executive Order N-27-25, which directs state agencies to expand ZEV use and includes LCFS as a method to attract investments in EV charging infrastructure. Recent LCFS data (April 2026) from CARB shows that the strategy is working. Total volumes of electricity (from EV charging) grew to 380.7 million gasoline gallon equivalents (gge) in 2025, up from 326.2 million gge in 2024. However, federal challenges to the state’s ZEV policies risk stalling new investments in EV charging infrastructure.

Biofuel Market Dynamics

The draft plan outlines diverging futures for the biofuels industry. The CEC models projections for RD, biodiesel and SAF under a “moderate” electrification scenario through 2045.

• Renewable Diesel: RD is established as the cornerstone of California’s diesel pool but faces a peak and gradual downturn as electrification accelerates. Recent LCFS data confirms this saturation, showing RD volumes decreased to 2.21 billion gallons in 2025 from 2.45 billion in 2024. The era of explosive growth is most likely over. Future credit generation could depend on displacing the last barrels of fossil diesel rather than market expansion. In-state demand is projected to peak at about 2 billion gallons (135 TBD) in 2030, then gradually decline to about 1.1 billion gallons (72 TBD) by 2045.
• Biodiesel: Demand is forecast to hold a modest but steady role. In-state demand is projected to move from approximately 275 million gallons (18 TBD) in 2023 to about 107 million gallons (7 TBD) by 2045. Recent LCFS data confirms a decline to 211.2 million gallons in 2025 from 243.4 million in 2024. This is likely due to displacement by the more dominant RD, high feedstock costs, low profitability and LCFS amendments that limit virgin oil feedstocks.
• Ethanol: With the passage of Assembly Bill (AB) 30 (subscription required) in 2025, California approved the sale of E15. Theoretically, this new law would expand the state’s ethanol market, which was previously capped at E10. The CEC views E15 as a policy win for carbon goals but a logistical challenge for retailers. While the economics, driven by federal subsidies and LCFS credits, make it cost-competitive, a significant uptick in volumes requires CARB to finalize its regulatory process (subscription required). Moreover, retailers would also need to overcome investment hesitancy. The draft plan notes that increased volumes would most likely be transported via rail. Recent LCFS data shows ethanol volumes were slightly down year-over-year at 1.41 billion gallons in 2025 compared to 1.45 in 2024.
• Sustainable Aviation Fuel: With jet fuel demand projected to rise, the CEC is pushing SAF as the primary decarbonization strategy for aviation. The draft plan notes that RD facilities are well-positioned to retrofit for SAF production, potentially offsetting future declines in RD demand. However, because SAF is more expensive to produce than RD, conversion only happens when government incentives make the “value stack” viable. A key headwind is the proposed federal 45Z tax credit (subscription required), which caps the SAF credit at USD 1 per gallon, eliminating the “special rate” premium. This underscores the importance of state-level incentives, such as Gov. Gavin Newsom’s proposed USD 1-2/gallon SAF tax credit (subscription required), currently under budgetary review. Despite this, SAF is poised to become the next major driver of LCFS credit generation, with in-state production set to grow from about 46 million gallons (3 TBD) in 2023 to approximately 429 million gallons (28 TBD) by 2045. For reference, recent LCFS data shows strong growth, with alternative jet fuel volumes reaching 119.5 million gallons in 2025, up from 91.9 million gallons in 2024.

Looking Ahead

The draft plan reveals California’s strategy to avoid a fossil fuel supply cliff by ensuring LCFS is firmly in place to maintain long-term fuel reliability for the transportation sector. This suggests that the state will likely manage LCFS to prevent a price collapse as the pool of regulated entities shrinks by 2045.

However, a significant concern arises from the potential increase in GHG emissions associated with the reliance on imported fossil and low-carbon fuels. Increased transportation of these fuels, whether through international cargo or interstate rail, could lead to higher life-cycle emissions. Moreover, fuel production in countries with weaker environmental regulations may result in no net reduction in global emissions, or even an increase. Because GHG emissions are a global issue that transcends state lines, local fuel production and stricter accountability for import emissions would be important.

“I think it is shortsighted to think that California is going to solve (climate change) on the supply side, because we’re going to just substitute, in many cases, for international,” Professor and Economist Severin Borenstein of Energy Institute at Haas said during a May 5 California Assembly hearing addressing shocks to the state’s fuel supply chain after the closure of the Strait of Hormuz. “In terms of greenhouse gases, we should consider the full ramifications of: if we do this, what is the outcome? Where does that come from? On the other hand, we are importing either crude oil or we are importing gasoline, so something is going to get shipped here. The alternative is to produce more crude oil here. And to the extent that you do a cost-benefit analysis, one of the factors should be we don’t emit as much on shipping. I will also say that the sort of raw numbers is that it’s such a tiny share of the total greenhouse gas footprint of using gasoline that it really won’t move the needle, but it should be in there.”

Additionally, the transition to electrified transportation will likely require greater electricity generation, posing challenges for an aging electrical grid. This infrastructure not only risks constrained capacity but could also lead to higher emissions during the initial build-out phase as the state seeks to enhance its power supply to support the transportation sector. Addressing these challenges will also be critical to ensuring that the state’s carbon-neutrality goals are practical and economically sound.

For now, the message for LCFS market participants is clear: pivot towards the future. The greatest opportunities for credit generation and investment are in enabling electrification and decarbonizing aviation, rather than serving a declining diesel pool. California is charting a course for LCFS to evolve from a broad low-carbon fuel stimulus into a targeted tool in a predominantly electrified transportation system of the future.

The comment period for the draft plan is open, with feedback due by June 15 (subscription required). The CEC will incorporate public comments before finalizing the plan.