As the aviation industry pins its hopes on sustainable aviation fuel (SAF) to achieve Net Zero carbon emissions by 2050, Joe Clinton, Matthew Townsend, Richard Chamberlain and Ying-Peng Chin outline the regulatory, investment and production challenges of taking SAF production to scale and the impact on the Middle East.

The aviation industry continues to recover strongly from the economic shock of Covid-19 – widely seen as the worst crisis in the industry’s history.

Now airlines face a challenge that, arguably, poses a bigger threat to their long-term sustainability: the race to achieve Net Zero by 2050, in line with the Paris Agreement.

This is a significant challenge, considering that aviation is a notoriously hard-to-abate sector. Achieving this goal will require advancements in technology, operations and infrastructure. It will also require effective regulations and strategies, including measures to dramatically increase the supply and use of SAF, improve system efficiencies both in the air and on the ground and continuously modernise fleets and develop carbon removal technologies. It is also likely to rely on emissions trading systems and offsetting schemes such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

In the second half of this century, important disruptive aircraft and propulsion technologies will have a significant impact, including aircraft powered by hydrogen, electricity or hybrid systems. These are, today, in the very early stages of development and their impact ahead of the 2050 deadline is likely to be minimal.

In the short term, SAF is expected to make the most critical contribution towards decarbonising aviation. The International Air Transport Association (IATA), the airline industry’s main trade body, anticipates that SAF could contribute around 65% of the emissions reduction necessary to decarbonise the aviation industry by 2050.

For this to become reality, the production of SAF needs to increase sharply – according to the International Energy Agency, SAF currently accounts for less than 0.1% of all aviation fuels consumed. SAF is currently in short supply and is still expensive to produce. To bring the SAF market to scale, massive investment is required across all stages of the supply chain, including upstream renewable energy, sustainable feedstock, refineries and blending facilities, and distribution networks.

Despite these challenges and the fact that SAF production is still in its infancy, we expect to see a significant increase in production in the coming years, as the push for Net Zero accelerates.

The industry prepares for take off

There is strong commitment globally, at an industry level and inter-governmental level, for the aviation industry to attain Net Zero carbon emissions by 2050.

Notably, in the last two years, IATA, committed to the Fly Net-Zero 2050 programme; and the International Civil Aviation Organization (ICAO), the specialised agency of the UN that sets regulations for the aviation industry adopted a long-term global aspirational goal for international aviation to be Net Zero by 2050.

The ICAO has also adopted CORSIA, an offsetting scheme aiming to freeze global aviation emissions at a baseline. Any emissions above the baseline must be offset by operators through the purchase of offsets or the use of eligible fuels, which include SAFs that meet certain criteria. After an initial period of voluntary application, the CORSIA requirements will become mandatory from 2027 for all international flights, with a few exceptions.

A key role for sustainable aviation fuel

The aviation industry is convinced that SAF will make by far the biggest contribution (65% according to IATA) to decarbonise a sector that, according to the IEA, accounts for 2% of global energy-related CO2 emissions.

It is no surprise that the industry is pinning its hopes on SAF production being brought to a mass scale. SAF is widely designed to act as a “drop-in” replacement for conventional jet fuels, ready to be used without having to modify aircraft engines or fuelling infrastructure.

The demand for SAF is robust and will only increase, considering Net Zero ambition. Most major carriers are already using SAF to some degree as drop in fuels blended with conventional jet fuels. Many airlines have set clear short-term goals to increase their use, with the majority targeting 10% of SAF in their fuel mix by 2030.

However, the deadline for scaling up SAF production is tight, given that this remains a nascent manufacturing process requiring billions of dollars of investment.

The statistics clearly spell out the distance that needs to be travelled:

• Although the airline industry bought all 100 million litres of the SAF produced in 2021, this represented a tiny proportion (just 0.03%) of the total demand for jet fuel.
• Production was increased in 2022 but still accounted for less than 0.1% of demand, and the fuel produced cost between three and five times more to make. Industry players have stated that electricity-based synthetic fuel is currently ten times more expensive than conventional jet fuel.
• To reach the industry’s own Net Zero target, it is estimated that nearly 450 billion litres of SAF will need to be produced a year, requiring the construction of many hundreds of production plants.

It is a huge challenge.

Strong impetus for scaling sustainable aviation fuel production

The impetus for scaling SAF production is strong – and is getting stronger – with clear incentives to act and equally strong reasons to avoid inaction. These include:

• Regulatory factors:
  • Regulations bolstering SAF uptake – Across the globe, jurisdictions such as the U.S., Canada, the EU and its member states, Brazil, China, Japan, Singapore and Indonesia are taking steps to get the SAF industry off the ground.
  • Sustainability reporting and disclosures – As reforms to sustainability reporting and disclosure regimes gather pace, companies in the aviation supply chain will face greater scrutiny as they come under pressure to be increasingly transparent and precise about their environmental and broader sustainability impacts. Notably, the International Sustainability Standards Board issued reporting standards in June 2023 that require entities to disclose scope 1, 2 and 3 GHG emissions. These standards are expected to be incorporated into the laws of many jurisdictions. The EU, being a front-running jurisdiction in sustainability reporting, has already passed laws requiring businesses to report their material impacts on the environment, including GHG emissions. As more data is disclosed, investors and broader stakeholders will have unprecedented visibility of how entities are progressing towards net zero. Those who fail to pursue decarbonisation solutions like SAF will be viewed unfavourably compared to their front-footed competitors.
  • Environmental labelling – Environmental labelling schemes are beginning to emerge in aviation. In the near future, the EU will likely introduce a voluntary EU label that certifies the environmental performance of flights, on the basis of the expected carbon footprint per passenger and the expected CO2 efficiency per kilometre.
  • Carbon taxation – The likelihood that increasingly punitive carbon taxes will be imposed to limit CO2 emissions – a threat heard in the EU’s proposed Energy Taxation Directive – should act as a significant incentive to move away from the use of fossil fuels in air transport, given the huge potential cost of such taxation on the aviation sector.
• Public sentiment and activism on ESG issues:
  • Aviation is an industry that is harder to decarbonise than others, so its current share of contributions to global emissions is set to grow as other sectors decarbonise, with an inevitable impact on public opinion. Attitudes to frequent flying among leisure and business travellers alike are clearly changing while the industry’s environmental impact remains so significant. Offering passengers the chance to offset carbon emissions from their flights will not be enough.
  • We are already seeing some powerful investors adopt activist shareholder tactics to force portfolio companies to decarbonise at a much faster pace, including the threat of withdrawing investment. Climate activists are also likely to continue targeting the aviation industry, particularly as they gain greater visibility of the environmental impacts of individual entities through increased regulatory reporting and disclosures, as discussed above.

The impact on the Middle East

Whilst much of the current regulatory reform and activism is centred in the West, these impacts will ripple through into the emerging markets in two key ways. The first is prevalence of major (usually government owned) airlines in the Middle East in particular whose business model relies on using their home base as a hub for transit passengers. These airlines will need to comply with regulations in the countries they fly to in order to be able to continue to operate in those jurisdictions. As such, access to long-term cost-effective SAF supply will become increasingly imperative to their ongoing business.

Secondly, the Middle East has access to various resources which have the potential to make it a major centre for SAF production. This includes technological expertise gained through its existing hydrocarbon facilities, practical experience of bringing new large-scale industrial facilities to operation within a regulatory and permitting environment that allows this to happen quickly and at scale, and access to abundant renewable energy resources which are required for the production of SAF through the P2L pathway (see further below).

Three key challenges

Challenges around regulation, investment and technology need to be overcome before we see SAF production ramp up to the necessary levels and, given the scale of the task, it could take ten to 15 years before we see mass production become anything like a reality.

Sustainable aviation fuel-related regulations give rise to risks and opportunities

Regulatory authorities and policymakers will play a vital role in incentivising the expansion of SAF supply and end use, the reduction of the cost of SAF, and the enhancement of the sustainability of SAF.

A supportive regulatory environment is likely an important reason why the U.S. has the largest number of known planned SAF production facilities in the world (around 30 according to third-party research as of May 2023). The U.S. SAF Grand Challenge is underpinned by policies and actions designed to support the industry in achieving domestic production of 3 billion gallons of SAF by 2030, and to supply 100% of projected domestic aviation jet fuel use by 2050. In addition, the U.S. Inflation Reduction Act contains a range of generous tax breaks and subsidies to promote the development of green technologies, including SAFs.

In the EU, multiple pieces of proposed and in-force legislation have been designed to bolster investment in SAF, most notably the Refuel EU Aviation regulation, the Renewable Energy Directive (III), the EU Taxonomy Regulation’s Climate Delegated Act, and the Energy Taxation Directive. In particular, the Refuel EU Aviation Regulation looks set to require aviation fuel suppliers to ensure that all fuel made available to in-scope aircraft operators contains a minimum share of SAF (increasing progressively from 2% in 2025 to 70% in 2050), which includes a sub-target for synthetic fuels.

The EU Climate Delegated Act may also bolster investment in SAF by treating certain SAF-related activities as EU Taxonomy eligible.

The UK is also a jurisdiction to watch for SAF investment opportunities. The UK government plans to introduce a SAF mandate in 2025 to require at least 10% of jet fuel to be made from sustainable feedstocks by 2030. It also announced that it will introduce a revenue certainty mechanism to support SAF production in the UK and boost its uptake.

Out-of-sector measures also play a crucial role in incentivising SAF uptake. Schemes such as CORSIA and emissions trading systems (ETS) can incentivise airlines to use SAF by regarding SAF as eligible offsets or as zero emissions, which do not require the purchase of ETS allowances.

Regulation around SAF is only beginning to take shape, with the EU, UK and U.S. setting the pace. The approaches in these jurisdictions will likely influence how other countries, including the emerging markets, develop and implement their own national policies to promote SAF uptake.

Investment uncertainty amidst an evolving regulatory landscape

The emerging patchwork of regulations aimed at bolstering SAF uptake globally will be a challenge for the industry to grapple with.

Investors and fuel suppliers in particular will be concerned to understand the sustainability and GHG emissions saving criteria that fuels must meet in order to qualify as “SAF”, which differ across regulatory frameworks. For example, the UK proposes that SAF must have a carbon intensity reduction of at least 40% relative to fossil kerosene, whereas the EU Renewable Energy Directive (and the proposed amendments) require emissions savings of at least 70% for synthetic fuels and of at least 50-70% for biofuels.

Understanding the nuances and variation of different sustainability and GHG emissions saving criteria is important, considering that the fulfilment of those criteria is necessary for accessing benefits and discharging obligations under applicable regulatory frameworks.

The challenge is a persistent one, given that sustainability and GHG emissions saving criteria are expected to evolve continuously as SAF technologies emerge and mature over time, and as policy makers grow in ambition.

While this remains the case, there is inevitable uncertainty around the financing of new SAF production capacity. Investors financing a hugely expensive production plant will look for certainty that what the facility produces over its 30-plus year lifespan will continue to be classified as SAF. If not, it will lose its green premium and will simply be reclassified as conventional fuel.

Overcoming this uncertainty will require sophisticated contractual arrangements between buyers and sellers, where the risk of any change in regulation or law is clearly apportioned between the producer and the offtaker.

Attracting debt financing for these projects may face another challenge: lenders will only be willing to invest if they can ensure that the end-buyer – the airline – is good for the money. Without that assurance, projects quickly become unbankable.

Before Covid-19, the traditionally highly volatile airline industry had entered a prolonged period of greater financial stability. The pandemic, for obvious reasons, changed all of that and few airlines today have a credit rating of BB or above, which will make many investors cautious, at least in the short term.

That raises the possibility that projects involving airlines with strong sovereign backing, such as the major Middle Eastern carriers, might be among the first to get projects off the ground. It is notable that big carriers in the region have formed SAF production or testing alliances and ventures, such as Etihad’s MoU with Masdar, the renewable energy tech company, to develop SAF production from household waste; and Emirates’ MoU with GE Aerospace and Boeing to conduct test flights using 100% SAF.

Production pathways – challenges around feedstocks and supply

SAF is already being produced today through various manufacturing processes, known as production pathways, where feedstock is converted into aviation fuel.

Generally speaking, different types of SAF fall into two broad categories:

• Fuels derived from biomass and waste – for example, from animal manure and sewage sludge, crude glycerine, biomass fraction of mixed municipal or forestry waste, fatty acids, used cooking oil or animal fats.
• Power-to-Liquids (P2L) – synthetic or so-called e-fuels that are produced through a process of fuel synthesis using renewable hydrogen and carbon captured either from the atmosphere or from industrial sites.

Different types of SAF made from blending up to 50% biofuels with conventional jet fuels have been approved for use as drop-in fuels. Their carbon emissions saving capacity varies depending on the production pathway and source of the feedstock, but is known to be up to 80% when measured on a life cycle basis.

All fuels have pros and cons, which will need to be weighed up carefully, particularly at the policy-making stage and at the investment stage. Biofuels rely on feedstocks that may come with risks of wider environmental damage. For instance, fuels derived from specially grown plants might involve land being displaced that could otherwise be used for growing food, or, without careful controls, might involve deforestation. The EU’s SAF mandate specifically excludes biofuels produced using food and feed crops, and this approach is likely to be followed elsewhere.

In addition, there are uncertainties on biofuel feedstock availability for the SAF industry. For example, fuels made from hydroprocessed esters and fatty acids (HEFA) may divert feedstocks from road transport, where they are still needed to transition to zero emission road vehicles.

There are warnings that the demand for animal fats will be hard to meet and could force other industries like pet food manufacturing to resort to environmentally damaging palm oil as an alternative. The world only produces so much used cooking oil.

By contrast, household waste could be a credible feedstock, given the urgency to divert waste from landfill and with the advantage that SAF producers may be able to acquire it at no cost or may even be paid to take it away.

The case for P2L

Perhaps the most promising long-term pathway for SAF is so-called power-to-liquid fuels or “e-fuels”. P2L production relies on inputs which are abundantly available: upstream renewable energy (e.g. wind, solar and hydropower) to create renewable hydrogen, which is used to convert carbon into synthetic gas. The synthetic gas is then upgraded to finished fuels.

Synthetically produced P2L fuels are known to achieve carbon emissions savings of between 90% and 100% on a life-cycle basis, making it potentially the cleanest of all SAF production. This is good news for the Middle East with its abundant solar resource, expansive plans to become a green hydrogen production hub and expertise in industrial processes.

This makes e-fuels look the most attractive in the long run, but there are obstacles here too around efficiency, cost and technology.

Currently, they are only produced at very high cost and in low volumes, although both of these issues should diminish as the production of green hydrogen scales up.

In the short term, biofuels look likely to have the upper hand, but most expect synthetic SAF to dominate once the technology is refined, the costs reduced and the efficiency boosted. The production and uptake of synthetic SAF will be bolstered as more jurisdictions prescribe minimum shares of synthetic SAF (such a mandate is already found in the ReFuelEU Aviation regulation and is expected to be introduced in the UK).

Shaping a sustainable future for air travel

The race to Net Zero clearly presents the aviation industry with an existential challenge. Without real action to address the industry’s climate impacts, it will become increasingly unsustainable, and its growth potential will be snuffed out.

Airlines, fuel suppliers, airports and airframe and engine makers alike need to translate targets into action at a rapid pace. The deadline to achieve Net Zero by 2050 may seem relatively far away but, given the challenges ahead, it remains incredibly tight.

SAF presents a real opportunity to decarbonise the industry and, when done at scale, in potentially dramatic ways.

But regulators need to keep holding the industry’s feet to the fire with measures that incentivise urgent action while providing the clarity investors need to finance the widespread production of SAF. Investors, for their part, need to recognise that transition is not only critical but offers a very real and rewarding opportunity.

Aviation must change radically. For now, SAF looks to offer the best chance of meeting that challenge.