California’s New Sustainable Aviation Fuel (SAF) Tax Credit

California’s proposed tax credit for sustainable aviation fuel (SAF) is projected to increase gasoline and diesel prices for consumers, according to a new analysis released by the state’s Legislative Analyst’s Office in late February 2026.

The analysis, commissioned by state lawmakers to evaluate the fiscal and market impacts of Governor Gavin Newsom’s SAF incentive program, concludes that the tax credit—designed to reduce aviation emissions—would inadvertently raise fuel costs at the pump by diverting renewable feedstocks from road transportation fuel production.

Under the proposal, producers of SAF would receive a per-gallon tax credit of up to $1.75, funded through California’s Low Carbon Fuel Standard (LCFS) program. The credit aims to make SAF cost-competitive with conventional jet fuel, which currently trades at a significant premium due to limited supply and high production costs.

However, the Legislative Analyst’s Office found that the increased demand for feedstocks such as used cooking oil, agricultural residues, and waste fats—key inputs for both SAF and renewable diesel—would create competition that drives up prices for bio-based diesel used in trucks and buses. As renewable diesel becomes more expensive, petroleum-based diesel and gasoline prices are expected to rise as refiners pass on higher blending costs or reduce output of lower-margin fuels.

The report estimates that the SAF tax credit could increase average gasoline prices by 8 to 12 cents per gallon and diesel prices by 10 to 15 cents per gallon by 2028, assuming full program uptake and current feedstock constraints. These increases would add approximately $150 to $250 annually in fuel costs for the average California household.

Industry analysts noted that the state’s LCFS program, which generates credits for low-carbon fuels, is already under pressure due to growing demand from multiple sectors. Aviation, trucking, and maritime industries are all seeking access to the same limited pool of renewable feedstocks, intensifying competition as California pushes to meet its 2045 carbon neutrality goal.

“The SAF tax credit is well-intentioned, but it risks creating a zero-sum game where decarbonizing one sector raises emissions costs in another,” said Dr. Elena Ruiz, a senior energy economist at the University of California, Berkeley, who reviewed the analysis. “Without expanding feedstock supply or investing in next-generation technologies like power-to-liquid fuels, we’re likely to see cost shifting rather than net emissions reduction.”

The Western States Petroleum Association, a trade group representing oil refiners, echoed these concerns, stating that the policy could undermine the LCFS’s effectiveness by inflating compliance costs for diesel and gasoline blenders. The group urged the state to consider a broader feedstock strategy, including imports and synthetic fuel development, to avoid market distortions.

Supporters of the SAF credit, including environmental groups and aviation industry representatives, argue that the analysis underestimates the long-term benefits of scaling SAF production. They contend that early market incentives are necessary to attract private investment and drive down costs through innovation and economies of scale.

“Waiting for perfect supply conditions would delay decarbonization indefinitely,” said Maria Gonzalez, policy director for Sustainable Aviation California. “The tax credit is a bridge to a future where SAF is abundant and affordable. Short-term price impacts are a trade-off for achieving our climate targets.”

Governor Newsom’s office has not yet responded to requests for comment on the analysis. The SAF tax credit remains under review by the California Air Resources Board, which oversees the LCFS program. A final decision on the proposal is expected later in 2026, following public hearings and additional economic modeling.

If enacted, California would become the first U.S. State to offer a direct tax credit specifically for SAF production, potentially setting a precedent for other states seeking to reduce aviation emissions. However, the Legislative Analyst’s Office warns that without complementary policies to expand renewable fuel supply, the initiative could lead to higher energy costs for consumers and businesses across the state.