Will California rise to the Biden administration’s SAF Grand Challenge?

From a bird’s eye view, the U.S sustainable aviation fuel (SAF) sector is poised for growth. Following the announcement of the federal SAF Grand Challenge last fall, which proposed a near-term 3-billion-gallon production target, alternative fuel investors and developers have lined up in support of a budding SAF market. The passage of the Inflation Reduction Act this summer added additional momentum to the industry by offering up to $1.75 per gallon in tax credits for SAF through 2027. Proposals to expand support for SAF under existing regulations such as the federal Renewable Fuel Standard and increasing funding under biorefinery grant assistance programs have picked up alongside the enthusiasm.

For California, however, early enthusiasm for SAF’s has met with some stumbling blocks. SAF has generated a lot of interest in the state because it is one of the only in-sector technologies able to reduce emissions in the aviation sector. The California Air Resources Board lays this out in its 2022 Climate Scoping Plan, which presents several scenarios for meeting the state’s long-term climate targets. Under an ambitious 2045 carbon-neutrality scenario, the Scoping Plan’s vision for aviation rests on SAF providing up to 90% of aviation fuel demand by 2045, with the remainder from zero-emission technologies in smaller applications. Despite this ambition, Governor Newsom vetoed a bill in September that would have required California to produce 1.5 billion gallons of SAF or blend 20% of the alternative fuel into its aviation fuel pool by 2030. The governor’s veto came as a surprise to many and was justified on the basis that the California Low-Carbon Fuel Standard (LCFS) is already a mechanism to support SAF uptake and thus renders bill AB1322 redundant. This begs the question, is the LCFS an effective policy lever to galvanize the state’s SAF industry?

The LCFS regulates the carbon intensity of on-road transport fuel consumed in California. As of 2019, aviation fuel is eligible under the program as an opt-in fuel. That means that refiners are not required to reduce the carbon intensity of jet kerosene by co-processing alternative fuel or purchasing credits. Instead, alternative aviation fuel (i.e., SAF) producers can generate and sell LCFS credits to obligated parties for revenue. Current LCFS policy design hasn’t done much to support the uptake of SAF in-state. SAF made up only 8 million gallons, comprising 0.3% of LCFS credits sold in 2021 in California. Part of the reason for this sluggish growth is because existing renewable diesel production is more lucrative. Renewable diesel and SAF are typically produced as co-products at biorefineries from the same raw materials and producing more SAF can require reconfiguring those refineries and reducing their renewable diesel yields. If SAF blending commitments are only voluntary, then why would refiners bother?

Voluntary commitments like the SAF Grand Challenge and existing LCFS program have shown to be insufficient measures to overcome SAF’s cost barriers. Some proponents argue that obligating aviation under renewable fuel policies could have better outcomes. Expanding the LCFS to regulate both on-road and aviation fuel could accelerate the production of SAF but, as it turns out, not by much. At a recent LCFS workshop, CARB explored the option of obligating California’s intra-state aviation fuel consumption—flights that begin and end in California. However, recent ICCT research estimates that expanding the coverage of the LCFS to aviation fuels consumed for intra-state flights will barely move the needle on deficits in the LCFS program. The report estimates that by 2030, intra-state aviation would only generate approximately 300,000 tonnes of LCFS deficits; by contrast, the overall size of the LCFS program already reached 20 million tonnes of credits in 2021. Extrapolating from today’s average SAF carbon intensity in California, that would necessitate approximately 50 million gallons of SAF in 2030—far lower than the volumes envisioned by California’s governor and legislature.

If voluntary measures can’t cut it, then policymakers can turn to mandates. In policy terms, mandates are “sticks” and can face obstacles such as industry pushback or legal opposition. Even though a bill like AB1322 made it through California’s legislature, mandating the quantity of SAF that must be consumed on intra-state travel runs the risk of federal pre-emption. A familiar example of the power of pre-emption was the Trump Administration’s rollback of fuel economy standards in its 2018 SAFE Act. Although some policymakers may want to avoid the headache of legal challenges, there are several workarounds. Though the Clean Air Act preempts states’ abilities to regulate aircraft emissions, the role of states on regulating fuels’ life-cycle GHG emissions is far more ambiguous. LCFS’s for the road sector have also overcome legal scrutiny in California and Oregon, and it may be possible to expand the obligation to a greater share of aviation fuels, such as for all domestic flights.

Without clear federal guidance, it may appear that the state government’s ability to jumpstart the California SAF industry is at a standstill. But let’s not forget about the “carrot”, the flipside of the policy “stick”. Positive incentives may be the best method for building out a SAF industry hub in California. This may come in the form of upfront grants or guaranteed revenue streams once the project breaks ground. The LCFS itself could act as a mechanism for investing in nascent technologies such as second-generation biofuels or zero-emission planes.

In California, several complementary measures are available to support SAF scaleup. These include low-interest loans for SAF development funded through the state Infrastructure Bank or Treasury Office and offtake agreements between SAF producers and buyers to ensure future price stability. Other measures include imposing a levy on conventional jet fuel consumption and reinvesting funds into research and development programs for SAF. It’s clear that there’s no foolproof solution to meeting the state’s aviation decarbonization goals and, ultimately, the federal government’s ambition for carbon neutrality. A combination of carrots and sticks will be necessary to build an early market for SAF in California and translate lessons learned to other states.

Aviation Fuels