Many parts of the aviation industry are striving to find ways to reduce their contribution to human-induced CO2 emissions. Aviation is estimated to contribute a relatively small amount of the overall total of the world’s human-induced CO2 emissions[1], but there is a reasonable expectation that the proportion will increase as other industries go through their own decarbonization processes while simultaneously aviation becomes more affordable as affluence grows in Africa and the Asia Pacific.
In part one, we delved into the question of why the aviation industry is moving to decarbonize, and in this article we are going to briefly examine SAF, the emerging short-term answer.
SAF works by replacing a proportion of fossil fuels used in aviation fuel with renewable alternatives including animal fat, household waste and cooking oil. When compared to conventional fossil-based aviation fuels, SAFs can reduce CO2 emissions by about 50-80% over their entire lifecycle.[2] It still releases CO2 when burned, but the sources used to produce SAF are renewable, so they can be replenished and are not depleted like fossil fuels. It is the lifecycle carbon emissions of SAFs that make them relatively sustainable in comparison with traditional jet fuel.
Taking the source of biomass feedstock that SAFs depend on into account is important, however. SAF production needs to be scaled up significantly to meet the vast demands of the aviation industry, a process that requires ample and sustainable feedstock resources. This could be achieved by replacing rainforests with palm oil plantations, but this would increase CO2 lifecycle emissions and defeat the sustainability goals. Equally, if SAF production relies on feedstocks that compete with food production or leads to increased land use, it could have negative impacts on food security and the environment. In short, it is crucial to strike a balance between SAF production and sustainable land use.
These challenges aside, the ease of implementation of SAF enables a relatively smooth transition from conventional aviation fuels to a more sustainable alternative. SAF doesn’t remove all of the CO2 from the aviation industry, but it is mostly compatible with the current generation of aviation hardware and existing airport infrastructure.
This makes it a reasonable half-way house that can be adopted today without significant investment. This is particularly important in the post-COVID-19 environment as the aviation industry works to get itself back onto an even keel financially. Adopting SAF will potentially give the industry the chance to ensure that longer-term solutions such as battery and hydrogen are rigorously tested and can be introduced gradually.
Despite the environmental advantages that SAF delivers, its relative price has so far suppressed demand. Historically SAF has cost up to twice as much as traditional jet fuel, although the gap is starting to narrow as more commercial production comes onstream.
The challenge at this point is that the market for SAF is trapped in an economic catch-22: The price of SAF is significantly higher than Jet A or Jet A-1 so demand is limited, and with limited demand investment won’t flow. Without investment, SAF production won’t increase to reach the levels necessary to deliver economies of scale, so prices will remain high. According to aviation trade body the International Air Transport Association (IATA), the quickest way for this cycle to be broken would be for governments to step in and implement policies that increase SAF production.[3]
Nothing is simple though, and governments need to be wary when intervening in the markets, even with the best intentions. For example, during COVID-19, some governments stepped in to support certain airlines as they struggled with the ramifications of the lockdowns. In some cases, support was offered on the proviso that the airlines moved away from short-haul routes where the railways offered a reasonable alternative.
This helped the particular government move towards its net-zero commitments and helped ensure the survival of the airlines in question, but short haul routes tend to be fulfilled by smaller aircraft and it is these smaller aircraft that are likely to be the quickest to adopt battery- or hydrogen-powered flight. As a result, a government that is trying to encourage people onto the rail network as part of its commitment to the environment paradoxically risks slowing the adoption of greener energy sources in the aviation industry.[4]
There are several projects in place globally that are looking to encourage the use of SAF across the aviation industry,[5] and according to IATA estimates, production of SAF tripled between 2021 and 2022.[6]
This additional capacity should start to bring the price down, but it’s also worth pointing out that increasing pressure from governments around the world is likely to see the price of traditional unadulterated jet fuel rise as individual governments strive to meet their decarbonization pledges. This means that it may not be too long before the price of SAF is falling at the same time as the traditional alternative is rising. Price parity may not be as far away as some have suggested.
The process of change is complicated but the cost of doing nothing is likely to be significant from a reputational, environmental, and a financial perspective. SAF offers a good short-term solution for the industry if it can get over its interlinked scaling and price challenges, while both battery and hydrogen powered flight could become the viable alternatives in the longer term.
From an insurance perspective, supporting the aviation sector as it moves towards SAF in the short-term is relatively simple. Replacing fossil-derived jet fuel with SAF does not particularly represent any additional risk, so long as the aviation authorities are comfortable and risk managers are given the information that they require at every step of the development process.
SAF is not a panacea if the long-term goal is a completely decarbonized industry, and there are several wrinkles that need to be ironed out before it becomes fully adopted across the industry globally, but it does have the potential to make a significant contribution to the aviation industry’s carbon reduction efforts.
WTW is committed to living up to its ESG responsibilities and supporting clients as they look to enhance the way that they work and reduce any negative impacts of their business activities. We work with several global legal and academic organizations that help us respond to client concerns about their climate-related legal risk measurement and management. If you would like to hear more about our ESG activities, please visit our ESG webpage. As part of this, the WTW Research Network is an active participant in the Towards Zero Carbon Aviation (TOZCA) project, spearheaded by the Air Transportation Systems Laboratory at the University College London. TOZCA is evaluating several technologies, including fuels, to work out which have the potential to help aviation achieve net-zero by 2050 globally, and has support from the aerospace industry, governments and regulators. The three-year project’s scenario analysis report is due to be delivered in Q4, 2024.
