Debate Grows Over Proposed California SAF Tax Credit, Supply Chain Impact

Conflicting opinions from California lawmakers and the state’s oil industry stakeholders have emerged, potentially jeopardizing a trailer bill from California Gov. Gavin Newsom that aims to accelerate sustainable aviation fuel (SAF) production amid highly uncertain supply chain dynamics.

Revealed in January, the four-page trailer budget proposal from the governor proposed that monthly tax returns filed by SAF producers with diesel excise tax liability in the state after Nov. 1, 2027, and before Jan. 1, 2036, will be eligible for a $1/gal base tax credit under the Diesel Fuel Tax Law.

Jet fuel producers whose product includes “50% or less carbon dioxide equivalent emissions than conventional jet fuel carbon intensity (CI) value” would be eligible for the tax credit. They can increase their credit by 2cts/gal for every additional 1% reduction in emissions over the 50% threshold for a maximum tax credit of $2/gal.

The SAF credit trailer bill added that the California Air Resources Board (CARB) would calculate and certify credit amounts for producers based on their sales from the previous year. If credits exceed the tax owed in a month, producers can carry over the excess credit to future months for up to five years. While the bill is intended to remain in effect legally till Jan. 2041, the credit applies to fuel produced and sold between Jan. 1, 2026, and Dec. 31, 2035.

In their final legislative hearing about the topic on April 9, panelists during the Senate’s Budget #2 Subcommittee hearings expressed their concerns about the credit, arguing it will take away road maintenance budgets to increase long term gasoline and diesel prices, shift priorities from renewable diesel production to SAF and barely affect the bottom line of greenhouse gas (GHG) emissions in the state.

Helen Kirstein, analyst at California’s nonpartisan Legislative Analyst’s Office (LAO), recommended that the state legislature reject the tax credit, because the proposal was “not a cost-effective approach to reducing greenhouse gas emissions and may result in lower than anticipated environmental benefits.”

According to CARB’s Greenhouse Gas inventory, aviation accounted for only roughly 1% of the state’s emissions, LAO’s Kirstein said. She also said that estimates of the relative contribution of aircraft to national and global GHG emissions total about 3%.

UC Berkeley professor Aaron Smith said his model projected SAF production could at least double and reach up to seven and a half times the administration’s projection, depending on the pace of scaling up SAF production from ethanol. He added that the SAF credit would reduce diesel excise tax receipts by between 20% and 75%.

“Those lost taxes represent money that would not be available for road construction, maintenance and repairs,” Smith said.

Smith added that gas and diesel prices would rise in the long term as the cost of complying with the Low Carbon Fuel Standard (LCFS) programs would increase. He highlighted the “fundamental tension” with the credit would be the incentivizing of more SAF production over renewable diesel.

Andrew March, budget analyst at the California Department of Finance, said the reason for choosing the diesel excise taxes for the credit was that the department didn’t believe corporations bearing the tax liability were very profitable.

He argued in the meeting that the “tension” between SAF and renewable diesel “is highly unlikely to happen” as he highlighted the production capacity of SAF and the amount of additional feedstocks available in the country. He also disputed a rise in retail gasoline prices, stating the claim assumes a limited feedstock supply, leading to producers shifting between SAF and renewable diesel.

Matthew Botill, division chief at CARB, said the agency has seen waste-based feedstocks grow to almost triple their availability in the last five years. He said the growth shows that the supply chain can grow “pretty significantly.”

“So this question about, ‘is there enough waste feedstock?’ It’s a good question. We’ve seen the private industry respond to these incentive signals to find new, creative ways to access those waste feedstocks at cost-effective prices that have driven a bigger supply to be able to meet the demand from the biofuel production,” Botill said.

Graham Noyes, managing attorney with Noyes Law Corporation representing low-carbon fuel companies such as Twelve and Gevo, advocated at the hearing that the tax credit be modified and broadened to allow dedicated SAF producers to participate and monetize the credit, and not be restricted to oil refiners that bear diesel excise tax liability.

In particular, Noyes advocated for a technology-neutral lifecycle accounting methodology that is aligned with federal Section 45Z and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) methodologies, and for a transferability provision.

“We really would like to see a level playing field in terms of this credit being available to everyone that’s supplying SAF in California,” Noyes told OPIS.

“What we’re really focused on primarily is enabling access to low-carbon electricity via book-and-claim and getting a transferability provision into this so that a dedicated SAF producer that doesn’t have any diesel excise tax liability could sell the credit in the same way that you can sell a Section 45Z credit. Dedicated SAF producers are the ones who built the SAF industry and
should not have less access to a SAF incentive than petroleum refiners,” Noyes said.

California lawmakers questioned the timing and viability of the tax credit in the meeting. Citing the small reduction in GHG emissions – about 1% according to CARB – California Senator Steven S. Choi said his “worry” was that if SAF production was incentivized, it would require involvement from refiners.

“We need to encourage more refineries to work on that (producing SAF) to reduce the cost of that. But our refiners … I hear some six of them are left in our state right now… will there be enough to produce the needed aviation fuels? That’s the question,” Choi said.

The meeting revealed that there are currently only six refineries across the U.S. that have the technology to substantially produce SAF to meet and exceed demand. One of those refineries is Phillips 66’s 128,000-b/d Rodeo refinery, which completed its transition to renewable fuel production in 2024.

California Senator Catherine S. Blakespear questioned if part of the goal of the tax credit was to help Phillips 66 and its Rodeo facility be successful.

“If that is a goal, I’d rather have that be an overt goal that we’re talking specifically about them and what they need and that we’re not trying to hide the ball or obscure that, if that is actually what’s happening here,” she said.

She said her main concern was the defunding of the Caltrans budget for roads and highway transit for a proposal that isn’t a cost-effective way to reduce carbon emissions.

“The buzzword right now, of course, is affordability, which, taking money out of the road tax, doesn’t help with that. I think the bandwidth in the legislature is going to be more focused on things that face consumers and producers,” Adam Schubert, senior associate with Stillwater Associates, a transportation fuel market consultancy based in Irvine, Calif., told OPIS.

Industry stakeholders and experts have shared support and opposition for the proposal since Thursday’s legislative hearing.

Harold “Skip” York, a non-resident fellow at the Baker Institute of Public Policy who has been working on SAF production analysis, said the claim that gasoline and diesel prices would increase depends on the assumption that petroleum diesel production has to rise if renewable diesel refining goes down, which he believes is flawed because it assumes that renewable diesel production in the U.S. is constrained.

With current U.S. renewable diesel production at 60% utilization, York said there is “no capacity constraint” for renewable diesel production. A supply chain is already in place for PADD 5, he said, highlighting diesel coming from the Gulf Coast, the Midcontinent, and in a smaller chunk, from the East of the Rockies, as all three regions currently send renewable diesel into California via rail.

“It (the supply chain) just gets bigger. The trains just get longer. That’s what happens. The unit cost per unit of RD is going to be exactly the same, because if you’re railing, it costs you just as much to rail 95 rail cars as it does for 90 rail cars, because a rail car is a rail car,” York said. “So, you don’t get that increase in prices, because if you don’t get a change in LCFS prices, you don’t get an increase in gasoline or diesel prices.”

York argued that converting renewable diesel barrels into SAF actually creates the potential to drive down gasoline prices. He said some demand for pure petroleum jet fuel is replaced with the intake of SAF production; refiners can “re-optimize” their facilities to produce less jet fuel and more gasoline, ultimately enhancing the yield to pre-pandemic levels.

One industry source said the tax credit is a continuation of California’s push for renewable fuels, which will ultimately create independence from supply chain shocks — such as those from the conflict in the Middle East — that have scarred California.

While increasing SAF production capacity considerably in California may take some time, the source said the tax credit’s 10-year availability allows the state’s refiners to create pathways for greater renewable diesel production. The source added that SAF production’s indirect yield in naphtha blends will reduce required gasoline components, and a Renewable Fuel Standard (RFS) opt-in can put downward pressure on LCFS with more generation.

In a statement on Wednesday, Phillips 66 said it supports Newsom’s tax credit “because sustainable aviation fuel can meaningfully improve and diversify jet fuel supply resilience.”

“California has the opportunity to lead in this industry while ensuring consistent, reliable supply from in-state production, that also helps meet the state’s decarbonization goals while supporting family wage jobs,” the statement read. “Scaling SAF requires collective efforts, from producers to airlines to regulators, to overcome adoption barriers. We look forward to continuing to work with the Governor and the Legislature to advance solutions that support California’s energy and climate objectives.”

The 50,000 b/d Phillips 66 Rodeo plant processes about 800 million gallons per year of renewable feedstock, out of which it produces 150 million gallons of SAF per year, according to Phillips 66’s website. That comes out to a roughly 18% to 19% yield of the renewable product.

In a conference discussing freight this week, Ronald Sanchez, vice president of Phillips 66 Aviation, called SAF “one of the most impactful lower-carbon solutions available today to help meet global energy demand.”

“…but its potential depends on policies that support sustained investment and long-term participation across the value chain,” he said at the conference.

One industry member said there is “always going to be pushback and balance and monitoring in the careful assessment going forward” in the renewable fuels sector.

Major airlines in the country find SAF relevant despite the headwinds the product has faced. A Delta Airlines spokesperson told OPIS this week that they are “committed to our 10% SAF by 2030 goal, which is reflected in our Difference Report being published later this month.”

The airline “continues to see SAF as one of the most important levers for decarbonizing flight and is committed to being a key player in supporting its development,” the spokesperson said.

With the airline growing annual SAF usage by 80% to 23.4 million gal last year, it recognizes that the technology for SAF “has not advanced as rapidly as the industry or our ambitions require, and this represents potential risk for decarbonization ambitions across the airline industry.”

Newsom is expected to consider and release a revision of the proposed budget in mid-May that will be derived from negotiations between the governor and legislature over the next month. A budget bill must be passed by the legislature by midnight on June 15.

That budget bill will then go to the governor for signature, which may result in last-minute amendments to the budget that typically are finalized by July 1.

Reporting by Shaheer Naveed, snaveed@opisnet.com and Bryan Sims, bsims@opisnet.com; Editing by Jordan Godwin, jgodwin@opisnet.com