Propelling forward: SAF and the path to a greener aviation industry

Sustainable aviation fuels are seen by many as the answer to reducing carbon emissions. But how can the industry reach the high adoption targets set by policy makers, when supply is still lagging behind demand. In this analyisis, we look at production trends, supply sources and pricing patterns

Change within the aviation industry is crucial to propelling society into a greener economy in the global movement toward decarbonizing the planet.

Without intervention, according to the US Federal Aviation Administration (FAA) estimates, the growing demand for air travel could double global greenhouse gas (GHG) emissions from 2019 levels by 2050. As technological barriers put the electrification of airplanes on a more distant horizon than trucks, trains and ships meeting carbon reduction goals will be challenging for the industry.

The International Civil Aviation Organization (ICAO) has recognized the need to address aviation emissions and set a goal to reach net zero by 2050.

Sustainable Aviation Fuel (SAF) has emerged as a key strategy to reduce emissions in the aviation sector, with the potential to lower lifecycle GHG emissions by at least 50 percent from conventional jet fuel.

By raising the portion of sustainable aviation fuels, the industry can significantly reduce its carbon footprint and achieve long-term sustainability goals. Unfortunately, while sustainability goals are widely supported, economic competitiveness remains the fastest and surest path to growth. Given that the biofuel industry remains relatively young and detailed governmental mandates are often absent (depending on the country of legislation), the development of the SAF industry depends on policies that focus on economic incentives for adoption, like the credit system legislated under the Inflation Reduction Act (IRA) in the US.

The United States faces several difficulties in making its aviation sector more sustainable, particularly when it comes to producing and adopting SAF.

With ambitious targets set by the Sustainable Aviation Fuel Grand Challenge (SGC), the US government aims to deliver three billion gallons of SAF by 2030 and 35 billion gallons by 2050. However, meeting these targets poses significant hurdles, including the need for robust policy support, sustainable feedstock availability and cost competitiveness with conventional jet fuel.

The cost factor is particularly critical, given the focus on cost management and the growth in the low-cost carrier strategy, which accounted for 29 percent of the world market in 2018, according to the International Air Transport Association (IATA).

Policy frameworks and financial incentives are crucial in driving SAF production and bridging the supply gap, emphasizing the importance of long-term sustainability and climate goals in the aviation industry.
As the US aviation sector grapples with the transition towards SAF, stable policy frameworks and binding targets are essential to ensure the success of sustainable aviation initiatives. The reliance on public subsidies and out-of-sector pass-through costs to bridge the cost gap between SAF and conventional jet fuel highlights the need for more sustainable and cost-effective SAF technologies for long-term decarbonization.

Regulation and incentives

In the United States, SAF adoption is primarily driven by voluntary initiatives and financial incentives such as tax credits rather than binding mandates.

The US Sustainable Aviation Fuel Grand Challenge (SAFGC) aims to produce 3 billion gallons of SAF by 2030 and 35 billion gallons by 2050, supported by tax credits of up to $1.75 per gallon through 2027 alongside Renewable Identification Numbers (RINs) credits and other incentives to attract investment in the industry. However, the absence of detailed sustainability criteria creates uncertainty around the overall climate impact of these policies. To enhance SAF regulation, policymakers could consider implementing SAF blending mandates through federal legislation, setting minimum blend requirements for aviation fuel.

Despite the credit incentives for SAF production in the US, there are still significant challenges in narrowing the cost gap between SAF and conventional jet fuel. Perhaps more could be done to explore additional incentives to reduce SAF production costs and enhance the competitiveness of SAF in the market to address these barriers. Government programs like the LCFS in California supported the advance in technology represented by renewable diesel, allowing the market to finance the surge in the growth of renewable diesel capacity, which likely peaked in 2023 or will peak in 2024 and the same could be done with SAF products.

The long-term viability of SAF will much depend on the support from governmental incentives. As an investment in SAF is a long-term decision – typically, it takes three to five years between the project announcement of a SAF plant and the fuel commercialization – there’s always a risk associated with the frequent changes in the regulatory landscape that may happen over time. This aspect of the industry highlights the need for cooperation between the market and the regulatory entities to design incentive programs that aim for the industry’s resilience and long-term sustainability.

Implementing the second phase of the IRA will change the calculation of the fuel credit value, which may significantly impact the market depending on how the US. Internal Revenue Service (IRS) sets the baseline carbon intensity for each feedstock and the implied effect on credit values. In contrast to the LCFS program – which demands that every facility acquire a unique pathway for each feedstock and its entire production process – the IRA removes incentives for individual facilities to invest in carbon intensity reductions. Unlike the RFS or LCFS credits, instead of generating a CI score for each pathway, credits under the IRA rely on CI scores published annually by the IRS. Each year, the IRS will publish a table of emission rates for comparable types and categories of transportation fuels determined by lifecycle GHG emissions.

To reduce GHG emissions, despite the lack of incentives for specific facilities to reduce carbon intensities, the IRS will reduce the cap used as the cutoff CI score to qualify for credit generation.

The US aviation sector’s transition from fossil fuels towards SAFs hinges on narrowing the spread between SAF and conventional jet fuel. With only a few reported SAF prices to use as guidelines, it is not easy to estimate the spread precisely. This transition requires a robust framework considering resource supply, cost, and technological readiness to achieve near- and long-term production targets. By evaluating the effectiveness of policy levers and assessing the feasibility of expanding domestic SAF production, the US can work towards meeting its ambitious SAF targets while ensuring sustainable and cost-effective solutions for the aviation industry.

US lawmakers are not the only ones considering aggressive targets for SAF usage. The EU government has also set ambitious targets, aiming for a 20-percent blending rate by 2035 with an ultimate goal of a 70-percent blend rate by 2050. The EU faces similar challenges, with uncertainties about feedstock availability and concerns about the sustainability of biofuel sources. Additionally, the EU’s efforts to ban crop-based feedstocks pose challenges for the biofuel industry as it navigates between sustainability goals and the need for viable feedstock sources.

As the industry grapples with the evolving landscape, including government initiatives, elections and global competition for feedstocks, uncertainty and price volatility will continue. The US and the EU are navigating the complexities of meeting SAF targets, with the need for sustained incentives and the challenge of balancing increasing demand with sustainability criteria. The coming year will likely provide insights into the progress of these initiatives and the industry’s ability to overcome existing challenges in the SAF sector.

US SAF production

The US SAF industry remains nascent. According to Environmental Protection Agency (EPA) data, the industry produced 12.1 million gallons of SAF in 2023, up from 7.9 million gallons in 2022, and imported another 12.2 million gallons of SAF. The sharp increase in SAF production in 2023 marks a milestone in the SAF industry; however, it still has a long way to go before meeting the ambitious SGC goal of producing three billion gallons of SAF in 2030.

Even though SAF production grew more than 53 percent last year, the US SAF supply represents very little of the total jet fuel supply. In 2023, the US consumed 25.9 billion gallons of jet fuel, suggesting a blending rate of only 0.1 percent of domestic aviation fuel consumption. The industry must grow at a compounded annual growth rate (CAGR) of 200 percent to increase annual output from 12 million gallons in 2023 to three billion gallons by 2030 to meet the SGC’s target of three billion gallons of SAF production.

Fastmarkets estimates that three billion gallons of SAF production imply a feedstock demand of nearly 26 billion pounds, considering it is only vegetable and waste oils. However, the two primary feedstock sources available in the US – corn grain and soybean oil – will not meet the life cycle GHG reductions required by the incentive programs and, therefore, will not qualify for credit generation, a crucial component of SAF producer’s revenue.
On a global scale, the challenges are also enormous. According to the IATA, global SAF volumes reached 600 million liters (158 million gallons) in 2023, twice the volume of 2022.

The IATA expects SAF production to triple to 1.875 billion liters (480 million gallons) in 2024, accounting for 0.53 percent of jet fuel demand.

Challenges and risks for the SAF industry

As SAF is a relatively new industry, there is a lack of market information around it, which hinders stakeholders from navigating trade with clarity, thus potentially slowing down industry growth. There is also a problem when it comes to leveraging data and using this as a basis for expansion: a small-scale SAF production hampers the generation of reliable data, and at the same time, lack of reliable data hinders industry growth.

Due to the fact that this market is very susceptible to incentives and regulatory obligations, the SAF industry faces the risk of internal policy changes that could significantly alter its trajectory. The effectiveness of regulatory instruments is also a risk to the industry’s performance: D4 renewable identification number (RIN) prices collapsed from 150 cents per gallon in August 2023 to less than 50 cents per gallon in the first weeks of March. RIN credit revenue is a relevant element in the profitability calculation for all biofuel producers, and fluctuations in the price can either push biofuel producers out of the market or slow down the industry’s expansion in the US as the industry becomes less profitable.

Supply shocks caused by the aggressive expansion of the industry also create market distortions that can generate inefficiencies until the new production capacity is accommodated. When creating a new sector through incentives and regulation, the market often reacts with a wave of optimism and this eventually distorts actual trade conditions. After the initial optimism, we usually tend to see some adjustments in trading patterns that more realistically reflect the status quo. For instance, the more mature renewable diesel market is currently going through this exact phase, where there is a slowdown in expectations for industry growth and a correction of price distortions.

There is a global push for the decarbonization of energy consumption, led by advanced economies and followed by advanced developing countries, which exposes national biofuel markets to risks related to the stability of feedstock supply. With more countries creating or expanding their national programs for the domestic use of biofuels, competition for feedstocks will grow as demand increases, exposing countries dependent on feedstock imports to price shocks and supply disruption.

Over the next ten years, if the US feedstock supply will continue to rely on imported goods, like it has over the recent period, US domestic supply will be exposed to risks from changing sustainability policies in exporting countries. Adding to the dangers of building an industry on imported feedstock is the trend toward geopolitical fragmentation, which gained traction following the trade war between the US and China and continues to gain strength with rising political divisions between developed countries in the West and developing countries, particularly the BRICs alliance. The widening gap between the differing world views increases the risk of trade disruption motivated by political differences. It is also essential to factor into the risk analysis the potential for the governments of developed and advanced developing economies to recognize the value added to material that was until recently considered waste and craft policies that capture the additional value in the domestic market.

Policymakers must balance the success of the RFS and LCFS programs in incentivizing the conversion of substantial volumes of waste material into biofuel with increased stress on the world food supply and the impact on consumer prices. Still, if the trend continues, the next logical step in the industry is for major exporting countries to implement policies aimed at producing the fuel domestically and exporting it to the most attractive market. However, the trend toward global trade disengagement and protectionism suggests that more programs in developed countries will follow the example of the credits authorized by the Inflation Reduction Act that exclude imported volumes from credit generation.

SAF is relatively unique because its demand bridges countries and markets, policies specific to one country can potentially drive changes in different global markets. If countries currently without domestic biofuel policies and with feedstock supply move towards decarbonizing transportation, expanding global biofuel demand and rising competition for feedstocks could disrupt established trade relationships, as a domestic market can be more economically attractive to a local feedstock producer. Considering that the trend for decarbonization is growing internationally, over the next decade, the current strong reliance of the US industry on imported feedstock will no longer be viable, and this could delay or prevent it from meeting decarbonization goals due to a reduction in imported supply

View our SAF production and credit price data

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