Accelerating Sustainable Aviation Fuel Production: United States

Overview

The aviation sector accounts for 2-3% of global CO2 emissions, or 12% of emissions from transportation. As governments pledge to decarbonize by 2050, policymakers have begun discussing strategies to accelerate aviation’s net-zero trajectory. Electrification and hydrogen, two technologies with nascent potential in this space, are still a long way from mainstream use in commercial flights, leaving sustainable aviation fuel, better known as SAF, as one of the most feasible near-term opportunities for reducing the sector’s emissions.

SAF comprises liquid hydrocarbon fuels, either derived synthetically or from biogenic feedstocks. It usually comes from feedstock, such as corn, sugar and agricultural residue, and can lower carbon emissions by 80% compared to traditional jet fuel, depending on the feedstock used.

Being nearly identical to conventional fossil fuels in both its chemical and physical properties, SAF is a ‘drop-in’ fuel that is, in theory, fully fungible with fossil fuels. In practice, however, it is still subject to a 50% blending limit as the aviation industry has rigorous testing and approval processes for certifying fuel. Testing is already underway by the likes of Boeing and Rolls-Royce in an effort to achieve certification for 100% SAF-fueled flights.

The US is taking an incentive-based approach to increase the production of SAF. As part of the Inflation Reduction Act passed in August 2022, policymakers sought to help make SAF production cost competitive with other renewable fuels to drive aviation decarbonization.

Impact

The US SAF credit targets the supply side and encourages producers to use the lowest-emitting feedstock available by establishing a sliding-scale incentive, meaning projects are rewarded for minimizing their emissions. The credit starts at $1.25 per gallon produced, and recipients can receive an additional $0.01/gallon for each percentage point above the minimum 50% greenhouse gas reduction threshold compared to conventional jet fuel. For example, SAF produced with 60% lower emissions would generate $1.35/gallon of incentives from this credit. The total potential tax credit amount is therefore capped at $1.75/gallon.

The US has the largest pipeline of renewable fuel projects, and many of these can produce both renewable diesel and SAF. However, 80% of them have been optimized for renewable diesel instead of SAF production. This is because both federal- and state-level policy incentives have historically focused on incentives for road fuels.

Legacy US incentives for road fuels include the Renewable Fuel Standard (RFS), a biofuel mandate that began in 2007 and sets annual volume targets for certain types of biofuels. The RFS generates credits called renewable identification numbers (RINs), used to track renewable fuel production. RINs can be traded between companies so they meet their volume targets. Producers in California also benefit from trading Low Carbon Fuel Standard (LCFS) credits and renewable diesel producers benefit from the Biodiesel Tax Credit (BTC) at $1/gallon.

SAF producers can opt into these incentive schemes as well. But SAF is more expensive to produce due to its lower energy density and the additional equipment required to refine the fuel, so it receives a lower credit value and refineries tend to maximize their renewable diesel production. As a result, the LCFS and the BTC enabled renewable diesel to average a $1.50 per gallon profit margin advantage over SAF in 2022.

The figure below illustrates the impact that the new tax credit has on the policy incentives available for SAF and renewable diesel in the US. While the RIN and LCFS credit values fluctuate, the new tax credit will likely enable SAF to receive an equivalent – or potentially even higher – amount of policy credits than its renewable diesel counterpart. This will help accelerate adoption and promote new technology development for SAF production, but it’s not enough to fully close the gap and additional policy intervention may be necessary to spark further production.

Opportunity

In contrast to the US incentive-based approach, policymakers in Europe are focusing more on demand-side policies, including SAF blending mandates, starting with a 2% target for 2025. Blending mandates can help ensure there is sufficient market demand for a new fuel, especially when paired with supply-side production credits.

In countries where SAF is not currently produced, a credit could encourage producers to convert old oil refineries to renewable fuels or to set up new projects in that location, which could increase jobs and opportunities. This could be particularly beneficial in emerging economies where air travel is expected to see strong growth in the next few decades. Lastly, this policy mechanism could be applied to shipping or other hard-to-abate sectors to incentivize the production of specific low-carbon fuels.