SAFs are said to offer aviation’s only realistic emission reduction route, but scaling up faces significant risks and barriers.
Sustainable aviation fuels (SAFs) are widely seen as playing a central role in the transition to a low-carbon aviation industry, itself regarded as a key element of the global economy’s net zero trajectory. Despite positive steps to date, action must accelerate sharply in scaling SAFs to a feasible alternative to traditional jet fuels.
The aviation sector’s overall global environmental contribution is 2.5% of carbon emissions and 3.5% of all greenhouse gas (GHG) emissions that contribute to climate change. However, emissions from aviation are projected to rapidly increase in the coming decades, due to increased demand, with the industry’s contribution to global CO2 emissions expected to increase to 16% by 2050.
According to International Energy Agency, emissions from aviation need to fall by 80% by 2050 for the sector to align with a 1.5°C pathway. Jasna Selih, Stewardship Specialist at Climate Action 100+ (CA100+) tells ESG Investor that “action needs to be taken now”.
Since 2016, more than 450,000 commercial flights have used some amount of SAFs, the only alternative fuel source that can be used on current aircraft without modifications.
Louis Bromfield, Lead Sustainable Investment Associate at Foresight Capital Management, says that investors need to pay attention to SAFs, with aviation representing “one of the most difficult sectors to decarbonise”. There are currently very few commercially available solutions to decarbonise the industry, he adds, with SAFs being the most prevalent.
According to the Global Carbon Project, the grounding of flights during the pandemic saw emissions from aviation fall by up to 60%. Despite airline travel currently remaining an estimated 15% below 2019 emissions levels, current projections anticipate a full recovery in air traffic by 2024, underlining the need to accelerate the production and adoption of SAFs.
The Transition Pathway Initiative’s 2020 ‘State of the Transition’ report, found that 91% of assessed airline companies were not aligned with even the least ambitious climate emissions reduction targets. “The aviation industry will not be able to align with Paris Agreement goals without a massive scale-up in the use of SAFs,” Selih said.
Trouble on the tarmac
A key challenge in scaling up SAFs comes from production. Feedstocks used to create SAFs include cooking oil and other non-palm waste oils from animals or plants, and solid waste from homes and businesses, such as packaging, paper, textiles, and food scraps that are otherwise incinerated or go to landfill.
Other potential sources include forestry waste, such as waste wood, and energy crops, including fast growing plants and algae.
According to Jason Cheng, CEO at Kerogen Capital, a firm that invests in SAFs, the most proven way to create the fuel is by refining vegetable oils, waste oils, or fats into hydrotreated esters and fatty acids (HEFA), through the process of hydrogenation.
While the combustion of conventional jet fuel emits non-carbon GHGs including water vapour, nitrous oxides and soot particles, estimates suggest that SAFs could reduce the sector’s emissions by up to 90%.
According to research by the International Air Transport Association, an airline trade association, there are currently more than 130 relevant renewable fuel projects publicly announced by 85 producers across 30 countries.
By the end of this year, SAF producer Neste of Finland expects to have the capacity to produce up to 1.5 million tonnes (515 million gallons) of SAFs annually.
However, the HEFA method of production for SAFs is constrained by the availability of feedstocks.
Bromfield says that crop feedstocks will only be able to meet a small fraction of future demand, with large-scale use running the risk of triggering “significant environmental impacts” such as biodiversity loss and intensified competition for food.
Analysis by Luisa Barnes, ESG Analyst at aviation data, intelligence and advisory company IBA, highlighted that the cultivation, harvesting, storage and transportation processes involved and the Indirect Land Use Change impacts during extraction and production of certain SAF feedstocks will result in GHG emission release that will have “detrimental environmental consequences”.
Research by the Royal Society found that a full transition to the use of SAFs would require the utilisation of 50% of the UK’s agricultural land.
Clara Mallinckrodt, Climate Change Analyst at Schroders, says investors must “avoid ‘carbon tunnel vision’ and consider the wider environmental and social impacts” of producing SAFs.
SAFs’ use of first-generation energy crop feedstocks, such as soybean, palm oil and sugarcane, puts the fuel’s production in “direct competition for land use” with food as well as risking deforestation of carbon sinks. On average, land conversion accounts for over a third of lifecycle emissions for first-generation energy crop feedstocks, Mallinkckrodt adds.
The IBA concurs that potential removal of rainforests, especially given their role as carbon sinks, is “illogical”.
Regulatory propulsion
Nevertheless, regulatory forces are driving uptake and investment. In April, the EU passed the ReFuel EU Aviation law. This includes a SAF blending mandate for fuel producers. It requires suppliers to supply a minimum share of SAFs at EU airports, starting at 2% of overall fuel supply by 2025, moving to 6% by 2030, and reaching 70% by 2050.
To achieve the 2030 target, approximately 2.3 million tonnes of SAFs would be required, but the current maximum potential SAF production capacity is estimated at around 0.24 million tonnes per annum.
The EU’s Fit for 55 package includes an SAF blend mandate and a sub-target for e-fuels. In December, the EU Council and Parliament agreed to revise the EU Emissions Trading System rules on aviation. The updated rules on emissions trading will accelerate the implementation of the polluter pays principle by phasing out free allowances for the aviation sector by 2026, meaning that the aviation industry will have a greater responsibility to pay for its carbon footprint
In 2026, the European Commission is due to assess the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to evaluate if it is sufficiently delivering on the goals of the Paris Agreement.
The UK launched its Jet Zero Strategy last year, aiming to achieve a net zero aviation sector by 2050 by focusing policy across six measures: system efficiencies, SAFs, zero emission flight, market-based measures and removals, consumer demand and non-CO2 impacts.
The UK government has committed £180 million of funding to support the development of a UK SAF industry, estimating that the aviation sector contributes £22 billion to the country’s economy.
Through the development of this new UK SAF industry, it aims to create up to 5,200 UK jobs from the domestic production of SAFs, and a gross value added of up to £2.7 billion from UK production and global exports.
It is also planning to introduce a SAF mandate to trigger demand. To this end, it is currently running a second industry consultation with the aim of beginning the legislative process early 2024.
The US Inflation Reduction Act includes an SAF tax credit. Eligible SAFs need to have at least 50% lower lifecycle emissions compares with conventional jet fuel. The credit starts at US$1.25 per gallon and rises incrementally to US$1.75 per gallon for a 100% reduction.
The US has a 2050 target of 100% SAF use for domestic flights.
Kristoffer Inton, ESG Equity Strategist at Morningstar, says that incentives and regulation could be key in driving the more rapid adoption of SAFs and closing the gap in the amount of fuel required to transition.
“Unless there’s a policy that forces you to transition to SAFs, perhaps credits for using SAFs or costs for continued use of fossil fuels, you’re not really going to see that gap close,” he says.
CA100+’s Selih echoed these sentiments, commenting that policy incentives will be “crucial for the required scale-up of SAF”.
Nicole Sautter, Senior Manager of Global Sustainability at B2B travel platform American Express Global Business Travel (Amex GBT), flags the need for private and public sector collaboration to scale SAFs in line with a 2050 net zero pathway.
The private sector must drive progress through continued investment, research, and development, she says, while the public sector needs to set regulatory frameworks and give assurance that commitments today will “yield longer-term benefits tomorrow”.
Tailwind for investors
In recent years, SAF initiatives have proliferated. In 2022, Amex GBT and Shell Aviation launched a programme with 1 million gallons of SAFs available for corporate customers – enough to power almost 15,000 business trips from London to New York.
A Virgin Atlantic led-consortium recently confirmed the world’s first 100% SAF flight across the Atlantic, which is set for take-off on 28 November 2023, pending further regulatory approvals and testing.
Last month, on behalf of the Australian Government, the Australian Renewable Energy Agency opened an A$30 million (US$19.8 million) funding initiative to reduce emissions in the aviation sector.
By 2050, Europe and the US could have around 120 million tonnes (42 billion gallons) of SAF capacity installed, offering up to a projected US$600 billion of ESG investment opportunities.
And unlike the switch to electric vehicles and renewable energy, decommission costs are minimal. Airlines also don’t need to modify aircraft or engines to use SAFs, which means that there is no requirement to invest in new airport or aircraft infrastructure to facilitate the widespread use of the fuel.
A June 2023 report by Morgan Stanley on the decarbonisation of aviation suggested that there could be a potential US$450 billion investment opportunity for the industry to meet Paris-aligned 2030 decarbonisation targets.
A key factor underscoring the importance of SAFs is the lack of alternatives to air travel. Cars produce substantially more emissions than aircraft to move the same volume of passengers, but there are other options for ground-level travel such as trains and buses, while there are no practical alternatives for cross-ocean journeys.
Sustainable Aviation, a group representing the UK aviation industry, had previously warned that the cost of decarbonising air travel is likely to push up ticket prices and put some off flying. However, due to the lack of alternatives to air travel, the IBA says the cost burden for the airline and customer will be “largely manageable”.
Additionally, while many around the world can’t afford regular air travel, which limits the sector’s overall contribute to climate change, a report by Morningstar has warned that rising incomes could see aviation’s share of emissions jump sharply by 2050.
IBA’s Barnes says that once the technological and cost barriers are overcome, alternative fuels possess “significant potential”.
One clear runway?
For now, however, cost is a frequently cited barrier to the scaling up and adoption of SAFs. The fuel is currently estimated to be two to four times more expensive than traditional jet fuel.
Morningstar’s Inton says the costs of SAFs are “just so high relative to traditional fuel”, and that their widespread use seems “quite far off both costs and time wise”.
AirFrance CEO Anne Rigail said the airline’s goal of using 10% SAFs by 2030 would add €1.3 billion ($1.4 billion) to costs if prices do not fall.
She noted that the “overcost” of SAFs is one of the air transport industry’s biggest challenges as it seeks to decarbonise, with the incorporation of the fuel already set to add €100 million to Air France’s costs this year.
According to analysis by SkyNRG, reaching 2050 decarbonisation mandates in Europe would require the deployment of over 150 SAF refineries, representing an ESG investment opportunity of €250 billion, but also a significant production and distribution challenge.
Despite the problems facing SAFs, the Royal Society noted that scientists have been unable to find a single clear alternative to jet fuel that would help the aviation industry achieve net zero.
Kerogen Capital’s Cheng notes that whilst other technologies such as hydrogen and electric-powered planes are being researched, these are not expected to reach commercialisation within the next two decades, especially in the context of long-haul flights.
Inton agrees that the electrification of air travel would be “even more difficult” than SAFs.
Sautter says there is currently a clear policy gap caused by the UK government’s lack of investment in research and development regarding diversification of feedstocks and production pathways, including renewable energy for synthetic fuels.
Nevertheless, SAFs represent the “only viable solution to decarbonise the aviation sector rapidly enough to keep pace with regulatory mandates and the pressing need to reduce carbon emissions”, says Cheng.
