Understanding Sustainable Aviation Fuel credits: Market evolution, adoption and impact

What are Sustainable Aviation Fuel credits (SAFc)?

Sustainable Aviation Fuel credits (SAFc) are environmental attribute certificates linked to the creation of one metric tonne of neat (unblended) SAF. They are designed to track and verify creation, create a compliance demand signal, and prescribe a revenue to the generation of SAF through their market-based value.

A SAF credit is traded and recorded using a ‘book and claim’ method, like renewable energy certificates. This means the ‘sustainable’ attribute can be traded separately from its underlying product. In other words, the fuel can be purchased by an entity from the aviation industry and the credit can be separately transacted to another entity from any industry.

To ensure quality and integrity of each credit, SAFc labels present all the information needed for buyers to quickly evaluate the sub-attributes of the credit.

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Role of SAF credit market in supporting climate priorities

The main role of SAFc markets today is to accelerate global SAF production.

Unlike the rest of the transport industry, aircrafts can’t be easily electrified. Battery trials have taken place, but the significant capital cost of this strategy is currently a deterrent.

SAF is a readily available drop-in fuel solution that emits up to 85% less emissions than conventional jet-fuel, yet it only constitutes around 3% of today’s jet fuel market.

This is because the cost to create SAF can be 2-4 times the cost to create conventional jet fuel and fuel accounts for 30-40% of an airline’s operational cost. The green premium is reflected in the price of SAF credits.

In terms of a general outlook, there is a current global shortage of SAF.

The International Civil Aviation Organisation (ICAO) ruled in late 2023 that 5% of CO2 emissions reduction must come from SAF and other low-carbon aviation fuels. The target reduction is 34MtCO2, meaning we need 14 million metric tons (mt) of SAF by 2030.

As of 2023, global SAF supply is sitting at 1.29 million mt and is expected to grow by about 65% in 2024. Global demand is estimated at 1.24 million mt in 2023 and will rise by over 70% in 2024.

This shortage is expected to continue with global demand’s compounding annual growth rate (CAGR) at 8.9% greater than supply, year-on-year towards 2050.

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In terms of pricing, a study by IATA et al. concluded that, in the long run, SAF will be a more economical emissions reduction option than the currently approved CORSIA carbon offset methodologies.

The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is one of the first schemes to provide guidelines on the use of carbon credits. To date, CORSIA allows airlines to reduce emissions with a mix of operational emissions reduction (such as SAF use) and carbon credits (after applying the mitigation hierarchy).

The rise in SAF adoption will help prices be more competitive with carbon. SAF was four times more expensive at the start of this decade and is expected to trade at a premium of about 30% by 2030. By 2050, the cost efficiency will make SAF about five times more economical than using generic offsets.

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There are two main ways SAF credits can help to increase the uptake of SAF:

• Increase demand participation
  SAF credits allow stakeholders outside of the aviation industry to participate in the uptake of SAF. A SAFc unit can be purchased like a carbon credit to meet decarbonisation goals.

• Increase supply variety
  There are currently four known methodologies to produce SAF, each delivering different levels of emissions reductions and developing at different rates. See table below. Like other biofuels, SAF is created from feedstock. As price signal, SAFc indicates where demand is heading and incentivises project developers to unlock more advanced feedstock processing methodologies.

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How the SAF credit market is currently evolving

Sustainable Aviation Fuel credit schemes are early–stage market mechanisms undergoing rapid evolution. Regulators and markets participants are working through operational challenges that will help support greater market engagement – and help contribute to resolving the global SAF shortage.

Key market challenges and their potential solutions include:

• Complex data and integration requirements
  The detailed SAF credit labelling system is translated to an equally complex accounting system. Market participants will need to have the technological capacity to process and link all the information contained within the SAF credit schemes.
  
  A global SAFc registry is being developed and managed by the Sustainable Aviation Buyers Alliance. This platform will handle voluntary SAFc issuances and retirements.
  
  This registry too will need to have high integration capabilities with current suppliers and commodity marketplaces.

• Disparate reference points
  SAF is an existing public commodity traded in international market and its price is determined by market activity. Defining the green premium price of the SAF credit can be a challenge.
  
  The prices of a SAF credit is likely to be correlated with the price of the underlying commodity. In some national schemes, however, such the EU’s ReFuelEU scheme and the US Inflation Reduction Act SAF Credit Scheme, the price of SAF’s green premium comes as a fixed tax credit.
  
  An example of an initiative to help address the price disparity is a revenue certainty mechanism being developed by the UK government.

• Limited SAF production
  The overarching challenge for SAF is that demand currently outstrips supply. IATA recommends that governments incentivise supply production. This could be through a policy that supports existing refineries in co-processing more renewable feedstocks alongside crude oil. It is estimated that this strategy alone can immediately unlock 5% of the potential form currently approved feedstock sources, materially expanding SAF production.
  
  Efforts to address price disparity will also help provide greater certainty to investors which may in time also further support production.

Status of SAFc market adoption

Several regions, including the US, the EU and the UK, are developing SAFc market frameworks that align with their specific objectives. There is also significant momentum in voluntary activity in the SAFc market, with several large organisations are leading the way.
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Country specific initiatives include:

• US Inflation Reduction Act SAF Credit Scheme
  This scheme provides a tax credit to boost production of SAF. It offers a base credit of US$1.25 per gallon of SAF that achieves at least a 50% reduction in lifecycle greenhouse gas emissions compared to CJF.
  
  An additional credit of up to US$0.50 per gallon is available for SAF that meets more stringent emissions reduction criteria, potentially raising the total credit to US$1.75 per gallon.
  
  In April 2024, the Treasury Department announced a new production accounting methodology which incorporates new data, updated key feedstock modelling, as well as new integrations with key GHG reduction strategies such as carbon capture and storage, renewable natural gas and renewable electricity.
  
  This update enables more proponents to participate in the market.

• European Union's ReFuelEU
  As part of the EU’s “Fit for 55” climate pathway, it launched the ReFuelEU aviation initiative late last year, with some parts of the scheme falling into effect since the start of this year.
  
  Part of the target includes a mandatory 2% SAF production for all EU jet fuel suppliers by 2025.
  
  The scheme was launched as a tax credit, priced at €1,020/ ton SAF. Such incentive has the potential to draw supply production from other countries to be imported to the EU.
  
  If countries in the EU can catch up with the demand and provide a surplus, there is a potential for this market include voluntary participation.

• UK SAF mandate
  In late April 2024, the UK announced a target of at least 2% SAF in every jet fuel mix. The target is set to increase on a linear basis to 10% by 2030, growing the size of SAF demand in 2030 to 1.2 million mt.  In July 2024, the government announced that this target will increase to 22% in 2040 delivering up to 6.3 MtCO2e emission reduction from the launch of this scheme.
  
  The mandate acknowledges the constraint in supply methodology. HEFA is currently supplying 100% of SAF in the UK.42 The mandate allows this proportion to continue for the next 2 years, but it must fall to 71% by 2030 and 35% by 2040.
  
  There is also a separate obligation for PtL methodologies to supply 3.5% of UK SAF demand by 2040.
  
  This mandate also includes a buy-out mechanism. If suppliers are unable to meet demand, they will have to pay £4.70 per litre of SAF (other than PtL) and £5.00 per litre of PtL SAF. This will incentivise producers to generate more SAF, instead of paying this fee.
  
  In a subsequent update, UK’s Department of Transport also announced the SAF Revenue Support Mechanism Bill, which outlines the potential schemes to reduce investors risk.
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  Based on the previous government’s consultation, the most favoured scheme is the Guaranteed Strike Price, which works similarly to Contract for Differences (CfD).43 In this scenario, buyers and sellers agree on a ‘strike price’. If the actual SAF market price is greater than the strike price, the seller must transfer this price difference to the buyer, and vice versa.

Voluntary activity highlights:

• According to IATA, 43 airlines have committed to increasing the use of SAF from 5% to 30% by 2030, with the majority committing to 10% SAF use.
• Capacity wise, Boeing, Airbus and other aircraft builders are ensuring their fleet can run 100% on SAF by 2030.
• Out of the three major airline alliances, only OneWorld has announced a SAF target of 10% by 2030.
• Sustainable Aviation Buyers Alliance (SABA) is currently the main global demand initiative set to accelerate SAF adoption. It has helped to set up the SAFc Registry and will continue to promote this market to a wider audience.
• SABA members may be non-airline entities because SAF investments can contribute to Scope 3 and beyond-value-chain mitigation efforts.

Ongoing innovation and investment key to SAFc market growth

Sustainable Aviation Fuel (SAF) credit markets are important early-stage environmental markets helping funnel finance to support transitional priorities not enabled by current market dynamics.

With ongoing adoption and supportive policies, these market schemes will play an increasingly important role in the aviation industry’s transition to sustainability. Continued innovation and investment will be key to overcoming current challenges and maximising the impact of SAF credits on global emissions reduction efforts.

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To learn more about other emerging environmental markets and their role in supporting our global climate objectives, read our recent report: Beyond carbon and renewable energy markets: How emerging environmental markets support post-2030 transition priorities

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