Sustainable Aviation Fuel: Incentives, Mandates, and Growing Demand

Coauthored by Yuchen Hu

According to the International Energy Agency, the aviation sector accounted for over 2% of global energy-related CO₂ emissions in 2021. Most sector emissions come from the burning of conventional jet fuel. There are three potential routes for reducing emissions in this sector:

1. Replace conventional jet fuel with drop-in sustainable aviation fuel (SAF).
2. Replace jet fuel with hydrogen.
3. Electrify jet engines.

Hydrogen and electrification encounter technical difficulties that will likely continue to pose barriers over the next two decades. Replacing jet fuel with hydrogen would require complete airframe and fuel tank redesigns as well as new fuel storage and delivery infrastructure. Electrifying jet engines is hindered by low battery energy density and therefore increased weight, limiting applicability to flights under 1,000 kilometers. Increasing this distance would require a battery pack energy density of at least 800 Wh/kg, which is not likely to become available until at least the mid-2030s.

Drop-in SAF (typically a blend of around 50% pure SAF and 50% conventional jet fuel) is the most technologically mature and usable option for decarbonizing aviation. That said, it faces barriers as well—the main one being high cost.

How Government Comes into Play

Governments and international organizations are addressing the cost barrier through mandates and incentives. For example, the EU introduced a SAF blending mandate that starts at 2% in 2025 and reaches 63% by 2050. Meanwhile, the US Inflation Reduction Act includes a blending tax credit of $1.25 per gallon for SAF that reduces emissions by 50% over the base fossil-derived jet fuel, with an additional cent for every percentage point above 50%. China has included carbon emissions reduction per ton-kilometer in its 14^th Five-Year-Plan (2020-2025), with a goal to surpass 20,000 tons of domestically produced SAF consumption by 2025 with state support. Lastly, the International Civil Aviation Organization, or ICAO, launched its emissions reduction targeting scheme CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) in 2016. This scheme will make carbon offsetting mandatory for member states from 2027 onward.

With these policies, momentum for SAF is clearly on the rise—so much so that demand is likely to outpace supply for some time. Yet investors worry about the longevity of this momentum—especially with SAF as a new technology and alternative decarbonization technologies also developing and garnering recognition. If US and Chinese policies expire as scheduled without equivalent support to replace them, levelized fuel costs may still be too high to sustain demand and revenue. To combat regulatory uncertainty, the industry is forming buyers’ groups such as the Sustainable Aviation Buyers Alliance, or SABA. This group and others undergird long-term revenue generation requirements through offtake agreements.

Government Efforts Lead to Growth

With the combined efforts of governments, industry, and international organizations, global SAF utilization could reach over 45 billion liters by 2035—and could go significantly above that if the US blending credit is extended, China’s next Five-Year-Plan expands on SAF goals and state-led support, pressure on the private sector to lower its carbon footprint continues, and SAF prices fall relative to conventional jet fuel. With greater incentivization and support, theoretically, the sky’s the limit.

For more on the outlook for SAF, including revenue growth forecasts, pricing, market leaders, and breakdowns by region and technology, check out Guidehouse Insights’ latest Market Outlook for Sustainable Aviation Fuels report.