Tag Archives: aviation

Airlines & SAF

It’s been a while since I’ve written and since coming back from a SAF conference last week, the challenges faced by the entire ecosystem continues to weigh on my mind. The most obvious challenge in the fact that producers (energy companies or feedstock suppliers venturing into SAF production) and users (airlines) diverge sharply on their views of what is a price that the market can exist and perpetuate at.

To me, this is a symptom of underlying issues including the fact that SAF mandates are crudely determined with a volumetric blend, and that more often than not, the mandates could just force all airports to try and adopt SAF as opposed to starting with some key nodes and rolling out to the minor airports. Or the mandates could just be fulfilled by airlines at the level of their fleets. Or in the case of domestic carriers and flights, all of the flights for that year of reporting. This allows airlines to meet the mandates flexibly. And the market can then optimise for the logistics of delivery as well.

Another issue with the volumetric blending mandates is that typically there’s a threshold of emissions reduction that the fuel must meet to be considered SAF, and the users will purchase just the cheapest one available. That means that producers are not incentivised to produce any fuel better than the mandated threshold. This throws up questions: whether you could blend a bit of A1 Jet fuel into a SAF with much lower carbon intensity than the threshold and then call it ‘neat SAF’? Tricky. And controversial.

At the end of the day, what are regulators and the economy trying to achieve? Decarbonisation. Is aviation important enough for policymakers to focus their attention? Yes and no. Yes because it is hard-to-abate and if no regulations are in place, they will just keep going and spew more carbon into the air. But no because ultimately, aviation emissions are only 2.5% of the global emissions. The proportion will surely grow as the rest of the economy decarbonises; so most of the approach now essentially is to throttle that aviation emissions growth.

Will throttling aviation emissions growth destroy aviation demand? Surely without a doubt. Should we do that only in places where there’s substitutes which are low-carbon (such as trains and electric transportation)? Perhaps. For individual government and agencies making decisions, ultimately, aviation is really not a huge area compared to most other carbon-emitting industries. There’s perception that aviation will have higher willingness-to-pay but I don’t think that should necessarily be the excuse to push the emissions reduction on them.

Again, those are just my opinions and musings for the week.

SAF sustainability and pricing

This year, the EU mandated 2% Sustainable Aviation Fuel (SAF) blending in all airports feeding into aeroplanes. The definitions of SAF for EU is clear, mostly based on a whitelist of feedstocks that are proven to be ‘sustainable’ and achieves a high level of carbon emissions reduction on a lifecycle basis (70% or more compared to A1 Jet Fuels). Unlike CORSIA, which puts the onus on airlines to reduce their emissions from jet fuels, RefuelEU regulations put the responsibility on fuel suppliers that supply to the airports. These suppliers will need to quote their prices to airlines accounting for these regulations, and while airlines don’t have to deal with the hassle of making sure the blend is correct to meet compliance requirements, they will need to bear the increased costs.

Now, there are also similar SAF regulations in the US under Renewable Fuel Standards, but their requirements for feedstocks and lifecycle carbon emissions reductions are different. Just to caveat first that I’m way less familiar with the US standards and requirement but based off some work from my colleagues, I understand they are less stringent, defining SAF to require 50% reduction in lifecycle carbon emissions compared to conventional jet fuels. This allows feedstocks such as corn ethanol, or other dedicated energy crop-based feedstocks (including canola, other oilseed crops) to be used for their SAF.

And if you refer back to the ICAO standards set under CORSIA, they only require that there’s 10% reduction in carbon emissions. It is still unclear to me what would constitute ‘SAF’ to the countries in Asia Pacific that are all introducing some SAF volumetric blending mandate.

One of the key challenges with just defining a standard threshold for carbon reduction and then setting a volumetric SAF target is that you don’t incentivise SAF producers to reduce their lifecycle carbon emissions. It becomes a race to the bottom for the airlines or fuel suppliers to buy the cheapest SAF that meets the threshold for compliance. If instead, we set a carbon emission reduction target and require the blend to achieve that target, then we can benefit from a greater diversity of SAF feedstocks and pathways that meets the economics on the basis of a unit carbon abatement cost. After all, the carbon emission reduction is the piece of value we care about for SAF at the moment, won’t it be better to price that?

SAF and fuel mandates

I wrote about the trickiness of cutting subsidies which raises the cost to various groups in the society. This is effectively changing the underlying dynamics of wealth transfer in the society. Another thing that could alter the dynamics is putting some kind of regulation into the system. This tends to be less controversial when people are in agreement that the regulation is necessary. For example, getting companies to increase climate disclosure or just improve packaging labels etc would raise prices for customers as companies need to bear these costs in order to comply.

One could argue the consumers benefit from those regulations so it is fair for them to pay the price. What about when passing environmental regulations? Essentially when you first pass them, it creates benefits for parties going beyond the consumers themselves. Take the case of putting pollution control regulations on a manufacturing plant; eventually the consumers of the product of that plant is paying the cost but the ones who benefit from the regulation are the ones living near the manufacturing plant. That is when you evoke the ‘polluter pays’ principle because in this case, you are regulating away a ‘cost’ that existed in the system rather than creating a new benefit.

That brings us to the issue of climate change and greenhouse gas emissions. I work in the field of energy transition and this is intimate linked to those problems. For one, my day job is focused on solving these issues. What I’m wondering, as the CORSIA regulations kick in to push aviation industry to decarbonise, is whether national governments will choose to spend time going out to set up agreement to enable carbon credit trade which involves corresponding adjustments, or put in fuel blending mandates for Sustainable Aviation Fuel (SAF) which can play a role in airlines meeting CORSIA obligations.

Setting up fuel blending mandates will cost the airlines, who will then pass on the cost to the passengers. And perhaps that will reduce the tourism to the country, or perhaps it could increase the cost of doing business and hence make it less attractive for inbound investments. All of that factor causes it to be unclear who is paying the cost for the environmentalism and whether it ends up hurting the country more. Fuel blending mandate could nevertheless bring about new manufacturing jobs and opportunities that offset the job losses. And at the same time, you might attract relevant, future ready technologies to be based in your country.

Looking at the situation now, it is unlikely for SAF or other green fuels to get into the market through a supply push. The fact is that without a proper, transparent and accepted carbon price, there is no incentive to use a greener fuel that would cost more expensive. And this are green fuel that still ends up emitting carbon dioxide albeit in the short-cycle and hence considered to have zero greenhouse warming potential. Government should take the stance that they will have to mandate the blending and then manage the impact of the costs later. In this case, the ‘polluter pays’ principle could be evoked as a foundation but then various other instruments and tools can be used to cushion the impact for various groups to continue achieving economic objectives.