Article
A fuels errand
Sustainable aviation fuel is key to decarbonizing air transport, but current production is tiny and expensive. Meeting climate goals requires making SAF competitive with conventional jet fuel through a multi-stakeholder approach.
Aviation is a classic hard-to-decarbonize sector. Jets need jet fuel—the alternatives are either too low in energy density (hydrogen) or so heavy they impede an aircraft’s range (batteries). Sustainable aviation fuels (SAF) offer a pragmatic solution. SAFs are chemically almost identical to conventional jet fuels (CJF) but produced using sustainable feedstocks, like waste products or non-food crops, rather than fossil fuels. Airplanes emit CO2 into the atmosphere when the fuel is burnt, but relative to CJF, SAFs reduce net lifecycle greenhouse gas emissions by up to 87% thanks to the carbon sequestered by growing the crops or avoided by using waste otherwise destined for landfills.1 SAFs are also “drop-in fuels,” so are compatible with existing engines and airplane designs, enabling the decarbonization of today’s infrastructure, rather than waiting for the planes of tomorrow.
The problem is they are in short supply and are far too expensive. Current SAF costs can be anywhere from 120%–700% higher than CJF.2 In an industry where fuel costs can make up to 30% of operational expenses,3 such a premium is all but disqualifying. This poses a chicken and egg problem: Reducing costs requires achieving economies of scale; achieving scale requires investment to establish the supply chain; attracting such investment requires derisking the demand outlook, which requires achieving cost competitiveness. There is no silver bullet. Solving these intertwined problems requires a multi-stakeholder approach, with coordinated action by policymakers, regulators, corporates, and financiers.
Flight plan
Flight plan
Arguably of utmost importance is getting the pricing right. On the one hand, higher carbon pricing can help improve SAF competitiveness vs. CJF, boosting demand; on the other, programs to subsidize SAF production can help grow supply. Here the US has blazed a trail with the Inflation Reduction Act, which provides a USD 1.25 per gallon tax credit on SAF sales, with an additional USD 0.5 possible depending on the percentage emission reduction achieved.4
Second is providing confidence on the demand outlook for SAF. Policy mandates (i.e., requirements to use a minimum amount of SAF in fuel blends) can help ensure a base level of demand while levelling the playing field between airlines. The EU will mandate that SAF makes up at least 2% of fuel used in flights from within its borders from 2025, rising each year, to 6% by 2030, 20% by 2035, and eventually reaching 70% by 2050.5 In Asia, Singapore plans to enforce a similar mandate from 2026,6 while Japan intends to mandate 10% from 2030.7 At the corporate level various airlines are committing to voluntary targets. For example, Hong Kong’s Cathay Pacific Airways has set a target of 10% SAF by 2030 and is working with China’s State Power Investment Corporation to establish a Chinese SAF supply chain.8
Third are programs to realize the offset value of the emissions reductions SAF enables, like a book and claim system such as that piloted by Singapore Airlines.9 These allow the carbon credits realized by using SAF to be booked by the airline but claimed (only) by customers toward their own emissions reductions. The EU too is looking to establish a book and claim system.10
Fourth are innovations and partnerships in standard-setting and product research. For example, in the UK Boeing and DRAX have partnered with the University of Sheffield to set up the Energy Innovation Centre, with additional funding from the UK government and European Regional Development Fund.11
The feedstock conundrum
The feedstock conundrum
All these efforts are moot however, without a reliable supply of the feedstocks required to make SAF in the first place. These vary widely, in both abundance, the process by which they convert to fuel, and the overall cost of SAF production. Vegetable oil and animal fats produce the cheapest SAF via the hydroprocessing (HEFA) method, but are in short supply. In order of increasing potential supply (but also cost) are: sugars and cereals (alcohol-to-jet); municipal solid waste (Fischer-Tropf); wood and agricultural residues (pyrolysis, among others); and carbon captured from industrial processes or simply from the air combined with green hydrogen (Fischer-Tropf).12
Oil and fats’ cost advantage means these have been the initial focus of ramping up SAF production, with Asia-Pacific (APAC) dominating production. Indonesia and Malaysia, for example, produce 95% of the world’s palm oil and the majority of the world’s sustainable palm-based wastes.13 Europe, which only allows waste or used cooking oils combined with a small proportion of animal fats (3%) for SAF production, is especially reliant on APAC feedstocks, with over 60% of its used cooking oil coming from China.14 But as APAC’s own demand ramps up—APAC bio-jet-fuel production is expected to grow by between 1–3 billion liters from 2023–2028 vs. global production in 2023 of just 0.6 billion15—it could disrupt the supply available to import-dependent countries and raise global prices. Just as importantly, efforts to grow supply of such feedstocks run the risk of increasing levels of deforestation, of virgin products being passed off as “used”16 and contributing to additional environmental degradation. Even if the feedstocks exported to Europe can be traced and verified as sustainable, if that results in unsustainable feedstocks being used in Asia, then Europe will be indirectly responsible for those impacts.
The US and Brazil, which allow alternative, crop-based biofuels like alcohol have fewer quantity constraints but, as well as being more costly, face similar concerns regarding deforestation and potential environmental damage, along with questions over how much they in fact reduce lifecycle emissions once land use change is taken into account, and their potential impact on food price inflation. For example, the WRI calculates that for the US to hit its goal of producing 35 billion gallons of SAF from ethanol annually it would require 114 million acres of corn, 20% more than the total area currently planted in the US for all purposes, including food production.17
Ultimately, diversification will be key to meeting SAF demand, particularly from 2030 onward, as national mandates accelerate. Perhaps most promising in the long term are synthetic fuels, which rely on non-biofuel feedstocks. While these can avoid some of the environmental pitfalls mentioned above, they have their own problems. They rely on nascent technology, are currently very expensive, unproven at scale, and will require major investment to ramp up. They also require the scaling of the green hydrogen supply chain, which requires a more than 100-fold expansion in today’s 1.1GW electrolyzer capacity. This is in the works—246GW of capacity has been announced, versus the 130–345GW needed to meet demand by 2030—18 but there is a potential fly in the ointment in that only 13% of green hydrogen projects have binding offtake agreements in place (i.e., contracts to buy the resulting hydrogen at a specified price) with a further 7% party to pre-contractual agreements.19 Green hydrogen remains more expensive than its fossil-derived counterparts, making commitments to purchase pivotal to expediting investments in the value chain, which will ultimately help to make green hydrogen price-competitive.
Unlocking the supply chain
Unlocking the supply chain
Transforming aviation is a mammoth task, requiring a multi-stakeholder approach. Airlines, infrastructure asset owners, and fuel suppliers will need to work together to scale up the SAF supply chain and project pipeline, and commit to buying its outputs. Realizing that pipeline will require large amounts of capex (over USD 160bn per year until 2050).20 Mobilizing private financing requires confidence that such investment will be rewarded, i.e., that the gap between SAF and CJF prices will be bridged in the medium term, that demand will be supported in the interim, and that high environmental standard feedstock suppliers will not be undercut by lower-standard imports. This requires confidence in policy, and for policymakers to lay out a plan of action and stick to it. Aviation emissions are hard-to-abate, but as is often the case with the transition, solutions exist, if we can put them into practice.
The author thanks the following people for their input: Annabel Willder, Declan O’Brien, Alex Leung, Aarti Ramachandran, William Nicolle, Jackie Bauer, and Andreas Hensler.
For further information, please visit www.ubs.com/institute-disclaimerLeadership disclaimer
