Even as the airline industry struggles to determine how to pay for the high cost of reducing its carbon footprint, there is significant uncertainty about the political future of fledgling tax incentives that are supposed to reduce the high cost of producing sustainable aviation fuel.
So, the industry and its fuel suppliers will be relying on some of the same political support that has ensured the duration of government incentives that have long been critical to conventional biofuels and renewable energy.
The Inflation Reduction Act that Democrats enacted over GOP objections in 2022 created new tax incentives for SAF, but they are scheduled to expire after 2027. A new tax credit worth up to $1.75 per gallon, known as Section 40B, is in effect through 2024. It will be replaced by a broader clean fuels production credit, known as 45Z, that takes effect in 2025 and runs through 2027.
The short-term, temporary nature of the tax credits, and the political uncertainty in Washington heading into the 2024 election, has been a top of discussion this week among airline officials, investors and SAF producers attending an SAF-focused conference in Houston this week.
“We need to see that long-term certainty in policy, and it has to be transparent,” said Lindsay Fitzgerald, vice president of government relations for Gevo Inc., which is commercializing the production of SAF from corn ethanol.
“We’re talking three to five years to build out a facility … and then you’re talking about another 10, 15, 20 years to pay off that investment,” she added.
Despite attacks by congressional Republicans on the IRA and President Joe Biden’s climate policy, many industry players take heart from the fact that Congress has repeatedly extended much older tax incentives, including the blenders’ tax credit for biomass-based diesel, which has repeatedly lapsed before being renewed.
The biomass-based diesel credit “has enjoyed bipartisan support ... for a very, very long time,” said Donna Warndof, head of U.S. public affairs for Neste, a Finnish oil refiner that has become a leader global supplier of SAF and renewable diesel.
“I'm pretty sure that everyone running for president is going to be paying attention to how people in our agricultural belt feel (about biofuel incentives) in those early primary races,” she said.
Donna Warndof, Neste (Photo: Sustainable Aviation Futures)“I would just remind everybody that if you can, if you stick with these proven policies that have had bipartisan support, they're going to keep having bipartisan support," Warndof added.
Fitzgerald argues that ensuring agriculture has a role in SAF production means that rural lawmakers will have a stake in SAF policy.
“When you are including ag, we’re getting back to the rural economy,” she told Agri-Pulse.
“Not everybody who supported traditional ethanol and biodiesel may support SAF and vice-versa. But I think we have an opportunity to pull a lot of those guys (rural lawmakers) along and then expand beyond that,” Fitzgerald said.
Kyle Vinson, a vice president of Goldman Sachs who specializes in transportation financing, said regulatory uncertainty around SAF and the “pretty short window” of the 45Z tax credit is a “big barrier” to financing SAF projects. Banks will be reluctant to lend or will have to charge higher rates for projects depending on their concerns about a potential extension of the 45Z credit.
Loans for such projects are typically for about seven years, which means they would already extend beyond the current life of the tax credit, he told Agri-Pulse.
Bruce Marsh, director of corporate affairs for DHL, said the IRA tax incentive is scheduled to expire just as the shipping giant will be ramping up usage of SAF under its off-take agreements with producers.
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“It's just not realistic to think that in five years, the industry is going to be completely changed. … The best policy, I think, would be a 10-year tax credit," he said.
Another source of uncertainty is a continued struggle over whether imported fuel produced by Neste and other companies should be eligible for tax credits. The 45Z credit is limited to U.S.-produced fuel. The 40B tax incentive is a blender’s tax credit, so it applies to imported as well as domestic fuel.
Airlines have pledged to use 3 billion gallons of SAF by 2030, 10% of their projected fuel consumption, and many have longer-term goals to get to net zero.
The fundamental challenge for U.S. airlines is that they argue that they can’t afford to foot the entire bill for the significantly higher price of SAF, which costs at least twice as much as conventional jet fuel, depending on the technology, experts say.
Some airlines allow travelers to voluntarily pay for offsetting the carbon emissions of their flights, but relatively few people do; at the SAF conference, almost no one raised his or her hand when asked if they had paid to offset their flight to Houston.
So, the airlines are looking create to an income stream from corporate customers for SAF usage to complement the government assistance to SAF producers.
The industry is moving toward getting corporations that need to pay for SAF usage as a means to reduce the carbon footprint of their travel. Under that concept, known as “book and claim,” corporations would get a certificate from the airline for the amount of SAF for which they pay.
There are still challenges to be worked out, including ensuring that the SAF credits aren’t being double-counted. But “there is no viable alternative” to the book and claim concept when it comes to offsetting the cost of SAF, said Nora Lovell Marchant, vice president of global sustainability for American Express Global Business Travel.
Alaska Airlines is working with tech companies to offset the cost of SAF, said Scott Coughlan, the airline’s director of sustainability. “We're fortunate in Alaska to be based on the West Coast with more technology companies,” he said.
Meanwhile, airlines and SAF producers also will continue to push for the expansion of state-level incentives that can be laid on top of the federal tax breaks.
“We really can't place SAF right now in a state that doesn't also have a stackable incentive,” said Marykate O’Brien, a senior sustainable fuels consultant for Southwest Airlines.
Starting this year, airlines that buy SAF in Illinois are eligible for a tax credit of $1.50 a gallon, with a limit on the amount that can be made from soybean oil. A tax credit enacted recently in Washington state will be worth $1 to $2 a gallon.
Other states, including California and Oregon, have low-carbon fuel standards that also can promote the use of SAF.
Southwest is investing in a facility that will use technology developed by the National Renewable Energy Laboratory to produce ethanol from corn stover at a Kansas facility. The ethanol will be converted to SAF by LanzaJet.
The European Union has taken a much different approach to SAF by simply mandating its usage, much as the Renewable Fuel Standard has done for motor fuels in the United States. The EU’s SAF mandate starts at 2% of aviation fuel in 2025.
SAF usage has become a matter of “survival for the industry, the survival of the company,” said Elise Roc, director of new energies for Air France KLM Group. France has already had a mandate, coupled with penalties on airlines that fail to meet it.
Air France KLM was able to levy a surcharge on tickets to recoup the cost of SAF but Roc conceded that likely won't be feasible in the United States.
Whether it's financial incentives, usage mandates, or policies that impose a price on carbon, assistance from governments will be critical to getting airlines to sign long-term agreements with SAF producers, said David Jerez Antoni of PGGM Investments, a Dutch pension fund investor.
"Somebody needs to be able to help these projects get to commercial scale and bear some of the startup risk," he said.
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