The U.S. and Europe’s Roads to SAF

Edward Russell

August 22nd, 2022

President Joseph Biden, standing behind a dais in the White House on August 16, boldly claimed that the Inflation Reduction Act he was about sign was: “The biggest step forward on climate ever — ever.”

Indeed, the law’s $369 billion for climate and energy security is a large investment in the U.S.’s effort to curb carbon emissions despite being dramatically smaller than BIden’s initial multiple-trillions-of-dollars proposal. Its beneficiaries range from electric vehicles to renewable energy and, in section 13203 of the bill, the first incentives for sustainable aviation fuel, or SAF.

The legislation provides several tax credits for SAF. The first is a credit of at least $1.25 per gallon for fuels that reduce carbon emissions by 50 percent; the amount increases 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, or Jet A, and are only applicable in 2023 and 2024. The second, which runs from 2025 to 2027, provides SAF producers 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 law uses ICAO’s Corsia standards to define SAF and acceptable feedstocks, for example agricultural residues or used cooking oil, and bars fuels derived from palm fatty acid distillates or petroleum.

“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 legislation 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.

The law, like much coming out of Washington, does not go as far as the industry hoped. The initial Sustainable Skies Act proposal that was the basis for much of the Inflation Reduction Act’s SAF incentives proposed an up to $2 per gallon tax credit that expired in 2031 — $0.25 more per gallon and four years longer than what President Biden signed. Raymond James refining analyst Justin Jenkins has written that the energy industry saw a $2 credit as necessary to “structurally compete with renewable diesel,” or low-emission fuels for ground-based vehicles. As demand for sustainable fuels ramps up, many believe there will be competition between renewable diesel and SAF for refining capacity. However, Jenkins believes that the new incentives could work if airlines pay the minimum $0.25 per gallon premium.

SAF is widely viewed by the airline industry and others as the quickest and easiest way to cut carbon emissions, and meet the goal of net-zero emissions by 2050. Numerous carriers, from Japan Airlines to KLM, Qantas, and United, have signed offtake agreements for the fuels but the biggest challenge is scaling supply quickly and economically to meet the industry’s carbon goals. Hence the near-universal push by the sector for government support. However, tax and other financial incentives that can close the price gap between a gallon of Jet A and SAFs — by many estimates the latter are 3-5 times more expensive than fossil fuels — are only 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 requires both subsidies and mandates.

“There is no one thing that is going to bring [SAF] 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., is starting with the mandate side of the equation. In July, the European Parliament approved the EU’s ReFuelEU Aviation standards as part of the broader Fit for 55 emissions reduction package. The parliament set SAF usage requirements 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, including trade group Airlines for Europe (A4E), had pushed for a lower 5 percent requirement — with 2 percent of that coming from synthetic sources, like e-kerosene. The ReFuelEU standards must go through the Trilogue process, which is the equivalent of U.S. reconciliation but between the European Parliament, European Council, and the European Commission; the proceedings are expected to begin around September 8 with an aim to implement the SAF mandates in January.

What the ReFuelEU standards do not do is provide financial support or incentives to develop the SAF industry in the bloc. Many believe that the EU will need to provide some support, especially as production of the fuels scales up, with the industry lobbying heavily for some form of funding.

International Airlines Group (IAG) Group Head of Sustainability Jonathan Counsell said in July that the EU standards, as well as the UK’s proposed mandate of 10 percent SAF by 2030, need to be backed by what he referred to as a “price stability” mechanism. 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 UK’s Jet Zero Strategy, a policy framework towards net-zero aviation emissions by 2050 unveiled at the Farnborough Air Show in July, includes the 10 percent SAF mandate and outlines plans to develop a strategy to “create the long-term conditions for investable [SAF] projects in the UK” by the end of the year. It suggests using carbon trading markets to help fund SAF production and usage.

“What’s important is that you need to do something on the policy side to jumpstart this industry,” said Robin Riedel, a co-lead of the McKinsey Center for Future Mobility who worked on the decarbonization report. While he declined to say whether financial incentives or mandates — the proverbial carrot and stick — are better in the case of scaling SAF production and use, he noted that policy should be adapted to each country or jurisdiction’s unique culture and history.

The difference in U.S. and European SAF policy could be seen as an example of their cultural differences. The former has long preferred to incentivize private industry to make a sought after change — in this case to produce and use more sustainable fuels — rather than requiring the change, whereas authorities in the latter have frequently used mandates or bans to force change. For example, France’s 2021 law barring domestic flights that serve local traffic on routes where competing train service takes less than two-and-a-half hours.

Riedel added that, whatever the government policy, there are still many unknowns about how SAF will develop. Industry has yet to determine what production processes and feedstocks will come down the cost curve and scale the fastest; something that could differ from country to country, or region of the world. Then, despite the forecasts of need, there are still the questions of how much SAF and where it will be needed.

The EU, UK, and U.S. government steps will undoubtedly provide a needed boost to the SAF industry that has been more talk than walk over the past decade. 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.”

Edward Russell

Edward Russell

August 22nd, 2022