Airline Execs See Tax Credit for Sustainable Fuel in Inflation Reduction Act as Good First Step

The Inflation Reduction Act headed to U.S. President Joseph Biden’s desk gives the nascent sustainable aviation fuel industry a long-sought after boost with new tax incentives. A definite win for those pushing to green aviation, the legislation is only half of what many say is a needed two-pronged approach to meeting the airline industry’s ambitious net-zero emissions goals.

The legislation provides several incentives for sustainable aviation fuel, also known as SAF. The first is an at least $1.25 per gallon tax credit for fuels that reduce carbon emissions by 50 percent that rises by one cent per percentage point of emissions reduction to as much as $1.75 per gallon. These credits go to the companies that blend sustainable fuels with traditional jet fuel, known as Jet A, and are only applicable in 2023 and 2024. The second, which kicks in in 2025, provides sustainable fuel producers tax credits that range from, for example, $0.35 per gallon for fuel that reduces emissions by 57 percent, to up to $1.75 per gallon for a 100 percent reduction for domestically-produced fuels. The bill also includes roughly $250 million for competitive grants to develop sustainable aviation fuels.

“Creating a new tax credit for sustainable aviation fuel and enhancing other crucial incentives for clean energy and carbon capture will slash greenhouse gas emissions,” United Airlines CEO Scott Kirby said in a statement following the U.S. House of Representatives approval of the Inflation Reduction Act on August 12. “That’s an important step in the right direction.”

Kirby has been one of the biggest proponents of federal support for sustainable aviation fuels. In December, he flew legislators and industry leaders on a sustainable fuel demonstration flight aboard one of United’s Boeing 737s from Chicago to Washington, D.C., in a very public push for Congressional action.

There is near universal agreement in the aviation industry that tax or other financial incentives are an important step — as Kirby said — to close the significant price gap between a gallon of Jet A and more expensive sustainable fuels. However, they are also seen as just one side of the equation. A July McKinsey & Company report on decarbonizing aviation found that achieving the airline industry’s goal of net-zero emissions by 2050 requires both subsidies and mandates.

“There is no one thing that is going to bring it to scale at a commercially viable price,” Alaska Airlines Senior Vice President of Public Affairs and Sustainability Diana Birkett Rakow said on a Cowen & Co. podcast in July.

Europe, in contrast to the U.S., has started with sustainable fuel mandates. In July, the European Parliament approved the EU’s “ReFuelEU Aviation” standards that set usage requirements beginning at 2 percent of all aviation fuel in the bloc by 2025, and rising to 85 percent by 2050. This included a controversial mandate of 6 percent by 2030 — most European airlines had pushed for a lower 5 percent requirement — with 2 percent of that coming from synthetic sources. The EU has yet to move on the financial incentive side of the equation to develop sustainable aviation fuel production despite industry pressure. The EU mandates are expected to enter into force on January 1, 2023.

International Airlines Group, which includes British Airways and Iberia, Group Head of Sustainability Jonathan Counsell said in July that the EU standards, as well as the UK’s proposed mandate of 10 percent sustainable fuels by 2030, need to be backed by what he called a “price stability” mandate. In other words, the EU and UK governments need to provide financial support to guarantee a certain price for a gallon of sustainable aviation fuel to make it competitive with Jet A.

The moves by the EU, UK, and U.S. governments provide a key boost to the sustainable aviation fuel industry. By all measures, production needs to ramp up quickly to meet the industry’s net-zero emissions targets. McKinsey estimates that 300-400 new plants are needed by 2030 to produce 40-50 megatons (10.4-13 billion gallons) of sustainable fuels in order to achieve the mid-century zero emissions goal. Today, global sustainable aviation fuel production is less than 100,000 tons (26.4 million gallons), according to Counsell.

“SAF does represent the greatest near- to medium-term opportunity that we have to decarbonize aviation,” Rakow said. “So, all of us are very committed to that pathway. The question is how far, how fast can we get there.”

President Biden has tweeted that he will sign the Inflation Reduction Act into law sometime during the week of August 15. The legislation was first passed by the U.S. Senate on August 7.