Net-Zero North America: The current status of SAF and alternative methods of decarbonization in North America
Brought to you by King & Spalding
Nick Venetz
Partner, Denver
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King & Spalding
The U.S. has big ambitions to decarbonize commercial aviation. Are additional actions needed to make these ambitions a reality? This article takes a deeper dive into SAF policy to see if the industry is able to learn and apply those findings from similar experiences with wind and solar.
The “SAF Grand Challenge,” established under the Inflation Reduction Act of 2022 (IRA), targets the expansion of domestic sustainable aviation fuel (SAF) production to 3 billion gallons per year by 2030, with a further expansion to 35 billion gallons per year by 2050. International Air Transport Association’s (IATA) “Fly Net Zero” resolution commits IATA’s member airlines to achieve net-zero carbon emissions from their operations by 2050, which is largely expected to be achieved through use of SAF, and to a lesser extent, new technologies, infrastructure and operational efficiencies, and carbon capture and offsets.
The key subsidies for SAF development and commercialization are the result of recent federal action. From December 31, 2022, through January, 1, 2025, the IRA will provide a tax credit that applies to each gallon of SAF sold or used. The base credit is $1.25/gallon of SAF that has a minimum reduction of 50% of lifecycle greenhouse gas emissions, which can be increased by one cent for each percent reduction beyond 50%, up to a maximum credit of $1.75/gallon. January 1, 2025, this credit sunsets and is replaced by the Clean Fuel Production Tax Credit (CFPC), which provides a comparable financial incentive but itself will sunset at the end of 2027. SAF production also generates RINs that can be sold into EPA’s Renewable Fuel Program (RFS). The federal government’s “SAF Grand Challenge,” established under the IRA, also allocates funds to the DOE to provide grants to accelerate the production and use of SAF—as of August 16, 2024, the full program of $291 million had been awarded to 36 different projects.
Certain state programs and subsidies also incentivize the production of sustainable aviation fuel. The largest and most well-known program is the California Air Resources Board (CARB) Low Carbon Fuel Standard (LCFS) program, which provides LCFS credit for SAF produced through the HEFA pathway (Hydrotreated Esters and Fatty Acids). The LCFS credits can be sold to vehicle fuel producers in California. Oregon has a similar program, and Illinois and Washington State both offer credits of up to $2/gallon. Most recently, CARB proposed to eliminate the existing exemption for jet fuel used in intrastate travel; under current policy, the use of jet fuel does not generate deficits that need to be offset by credits. This policy change would mean that jet fuel producers within California would need to reduce carbon emissions and accordingly encourage the production of SAF.
At present, domestic SAF production is largely limited to SAF produced by World Energy, Montana Renewables and others at their existing refineries through the HEFA pathway. Phillip 66’s Rodeo Renewed and Diamond Green Diesel’s Port Arthur projects are expected to commence operation in 2024 and produce 10,000 b/d and 15,000 b/d, respectively.
The EIA anticipates that domestic production of SAF in 2024 will be nearly 30,000 barrels per day, or 1,260,000 gallons per day, resulting in production of nearly 11 million barrels over the course of 2024 (roughly 460,000,000 gallons). SAF produced through the HEFA pathway is expected to be the primary contributor to the production increases needed to hit the SAF Grand Challenge’s 2030 goal, though the Fischer-Tropsch and alcohol-to-jet pathways are expected to make contributions, as well. While production of SAF ramps up, SAF certificates allowing the user to claim a reduction in emissions are being used by airlines to indirectly reduce emissions. Though carbon capture and sequestration is also in early stages of development and commercialization, it also being pursued as another near-term option for decarbonization of jet fuel production.
SAF remains in the early stages of market development and commercialization, and its path to become a commercially viable, cost-competitive substitute to jet fuel remains uncertain. The industry faces challenges that are familiar to the renewables industry and new technology generally, including logistical limitations, backlogged and time consuming permitting processes, technology risk, and inconsistent policy incentives. Collectively, these challenges undermine the investment calculus required to underwrite the large, long-term capital outlays need to commercialize and ramp up SAF production.
The lack of consistent, long-term policy incentives is reminiscent of experiences with the production tax credit and investment tax credit for wind and solar projects, where annual installed capacity of wind and solar significantly dropped after each expiration of the applicable credit.
Some of the logistical issues facing SAF (e.g., fuel transportation infrastructure is already constrained at many airports and major hub airports across the United States) are not unique to SAF production and SAF production will benefit from overall increases in fuel transportation capacity. However, SAF faces additional logistic hurdles that will need to be overcome, like the inability to transport 100% SAF in petroleum pipelines and the need for additional infrastructure for blending and storage at terminals and airports.
Similarly, onerous permitting processes are not unique to SAF projects and navigating time-consuming, critical path permitting processes is a common complaint of any large infrastructure project. Fortunately, permitting reform and streamlining permitting process has become a focal point for bipartisan action in recent years, and SAF should benefit from such reforms to the extent that they allow for the more certain and timely construction of transportation infrastructure, logistic hubs and production facilities.
The ultimate success of wind and solar in the U.S.—installation of new wind and solar generation, along with battery storage, greatly outpaces all other sources of generation—illustrates the impact that long-term investments and incentives can make. Logistical issues (e.g., transporting turbine blades from Europe and across the US) and permitting challenges were also (and remain) present in wind and solar projects, all of which were adequately solved to provide investors the comfort needed for large capital outlays. The lesson may be then, that the success of wind and solar can be replicated for SAF, but to timely meet our domestic goals, we need a concerted push to put in place the longer term incentives and reduce the logistical and permitting burdens associated with ramping up SAF production.
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