California Governor Gavin Newsom has put forward a plan to allocate significant tax credits aimed at boosting the production of “sustainable aviation fuel.” However, economists caution that this initiative could further strain Californians already grappling with unprecedented gas prices.

This legislative proposal, currently under review by state lawmakers, suggests offering fuel producers a tax credit of one dollar for every gallon of alternative jet fuel that manages to cut carbon dioxide emissions by 50% compared to standard jet fuel. If the emissions are reduced even further, the credit could rise to two dollars.

However, these tax incentives may come with a cost at the fuel pump. According to the California Fuels and Convenience Alliance, representing fuel retailers, the prices of gasoline and diesel could increase by 10 to 15 cents per gallon.

“While the benefits are concentrated among a few, the costs will be felt broadly,” asserted Alessandra Magnasco, a lobbyist for the alliance. She informed lawmakers that the tax credit could result in “billions in annual costs for consumers,” while simultaneously decreasing diesel excise tax revenues that are crucial for funding road maintenance.

In February, a study from the University of California, Berkeley, also forecasted potential gas price hikes. The study highlighted that not only would tax revenues suffer, but the attractiveness of the credit might prompt more companies to shift their production focus to green jet fuel, rather than renewable diesel for trucks. This shift could tighten diesel supplies and drive up its cost.

“They are likely to incentivize significantly more sustainable aviation fuel than anticipated,” stated Aaron Smith, a Berkeley economist, in an interview with CalMatters.

The total amount of tax credits is staggering. The state Department of Finance predicted the total credits would add up to 165 million, rising to 300 million, dollars during the tax credit’s proposed lifetime from late 2027 to end of 2035.

Helen Kerstein, with the Legislative Analyst’s Office, said it could be even bigger: a billion dollars or more, if companies import alternative jet fuel to California to take advantage of the credit.

The analyst’s office in fact recommended to lawmakers that Newsom’s proposal be rejected.

“We think the environmental benefits are probably quite limited, potentially overstated, and this is a very, as we see it, a potentially quite an expensive approach to decarbonization,” Kerstein said.

The Newsom administration defended the proposal as an important step to the state’s climate goals as alternative jet fuel is more expensive to produce. Andrew March, a budget analyst with the Department of Finance, told lawmakers other states with similar programs haven’t seen costs balloon.

“We know that this is important to help decarbonize the aviation industry, which is one of the most difficult industries to decarbonize in the nation,” March said, “and that there are a number of other states that have taken the opportunity to provide sustainable aviation fuel incentives, including the state of Washington and the state of Illinois.”

Four companies would qualify for the incentives, March told lawmakers, including Phillips 66, which has a refinery in Contra Costa County producing biofuels.

A number of lawmakers have backed Newsom’s proposed tax credit, arguing it would save jobs and prop up an energy sector that has been facing closures in the state.

“We must stand by this industry and our partners who have made the choice to embrace renewable fuels,” said Democratic Assemblymember Anamarie Farias. “Closing our refineries will have detrimental impacts in my district. This is not a regional problem. This is a statewide problem.”

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