/>iIn April 2024, the UK Government published the details of its Sustainable Aviation Fuel Mandate (the UK SAF Mandate) and started a consultation on a proposed revenue certainty mechanism to attract private investment and enable sustainable aviation fuel (SAF) projects to be deployed at scale in the UK. Following the UK general election on 4 July 2024, the new UK Government has quickly affirmed its support for the development of SAF. The King’s Speech on 17 July paved the way for a Sustainable Aviation Fuel (Revenue Support Mechanism) Bill to be brought before Parliament. We have therefore looked at the current state of play for SAF and considered some of the issues that the new UK Government will be expected to address in relation to the UK SAF Mandate.
Sustainability of SAF
The emission levels from the combustion of SAF are comparable to fossil-based jet fuels. However, the majority of climate and environmental benefits of SAF come from the earlier stages in its life cycle. Therefore, when accounting for overall greenhouse gas (GHG) reductions achieved by a SAF, the industry is looking at emissions savings achieved by SAF over its entire life cycle. By way of example, looking at SAF produced from used cooking oil (UCO), which currently is one of the most common feedstocks for SAF (under the Hydrotreated Esters and Fatty Acids (HEFA) technology), the majority of carbon emission savings are achieved when the relevant vegetable crops grow in the field and absorb carbon dioxide. The amount of carbon thus absorbed offsets the amount of carbon emitted later when SAF is produced, transported, refined, processed, distributed at the airports and combusted during the flight[1].
Another example is SAF made from municipal solid waste (MSW) under the approved Fischer-Tropsch (FT) pathways. A large proportion of MSW is organic matter (food waste, paper, etc.). Here, in addition to carbon captured during the growth of the biomass, further savings are achieved when that biogenic content of MSW is diverted from landfill. This prevents the release of methane that would have occurred if those materials had been left to decompose in the landfill. Therefore, in principle, the higher is the biogenic content of the MSW feedstock used, the higher are the emissions savings[2]. Next, when sorting and preparing their feedstock, SAF plants may recover additional recyclable materials such as plastics and metals and if this is the case, further credits could be obtained for those emissions which are avoided due to additional recycling.[3] Finally, if the FT technology is combined with carbon capture and storage, net life cycle carbon emissions savings can exceed 100% and SAF becomes carbon negative.
Currently, however, the SAF markets are dominated by bioethanol[4] derived almost entirely from fermentation of sugar and grain crops (1G ethanol). There is a growing preference for 2G ethanol (derived from non-food (lignocellulosic) sources such as cereal straw given their lower GHG emission profile and relative availability. However, lack of policy and incentives distinguishing 1G vs. 2G feedstocks, has historically prevented 2G ethanol from being cost-competitive given its lower yield and complexity of process. However, country policies are increasingly favouring advanced biofuels which will lead to an expansion of 2G production. The International Civil Aviation Authority (ICAO) Council approved new sustainability criteria for SAF eligible under CORSIA; incentivizing aircraft operators to claim CO2 reduction benefits under offsetting requirements and boost SAF demand.
Inevitably, life cycle analysis of SAF includes a large number of variables. Critics of life-cycle carbon assessment methods point to gaps, uncertainties and factors which are not always possible to quantify or address in a comprehensive way. Nevertheless, it is generally accepted that in terms of their overall GHG emission levels, SAFs are able to achieve a significant reduction in GHG emissions as compared to conventional fuels.
The UK Plan
The UK SAF Mandate stipulates that from 2025 SAF must constitute 2% of the total jet fuel supplied in the UK, with the target increasing to 10% in 2040 and 22% in 2040. Thus, the UK SAF Mandate is expected to deliver greenhouse gas (GHG) emission reductions of 2.7 MtCO2e in 2030 and 6.3 MtCO2e in 2040[5].
The decisions set out in the UK SAF Mandate will be implemented by means of a statutory instrument using the UK Government’s powers granted by the Energy Act 2004. Therefore, the UK SAF Mandate is yet to undergo the parliamentary process and the intention has been for it to be signed into law and become effective from 1 January 2025. On this basis, it is likely that the revenue certainty mechanism would not be introduced until Q2 – Q4 2026 at the earliest.
The UK SAF Mandate will introduce a tradeable certificate scheme under which aviation fuel suppliers will receive certificates in proportion to the amount of GHG emissions reductions they achieved in the previous year. These certificates can then be used to discharge a fuel supplier’s obligation under the UK SAF Mandate or be sold to other aviation fuel suppliers who may need additional certificates to meet their obligations.
In order to be rewarded with a certificate under the UK SAF Mandate scheme, a supplier’s aviation fuel must meet certain criteria. Firstly, it must meet relevant technical specifications as jet fuel and be certified for commercial flights. Secondly, it must also meet a number of sustainability criteria. One of the criteria the Government extensively consulted on was the threshold for minimum GHG emissions savings that SAF must achieve in order to qualify under the UK SAF Mandate. Following the consultation, the Government resolved that in order to be eligible for certificates, SAF will have to produce at least 40% fewer GHG emissions than conventional fossil fuel.
To meet the anticipated increase in demand for SAF, production facilities are being announced, planned and developed in the UK. There is currently one SAF facility in operation (Phillips 66 Humber Refinery) and a number of projects are being announced and planned, most of which have received public funding from the Department for Transport and its Advanced Fuel Fund[6]. The key details and proposed locations of some of the projects can be seen on a map produced by the UK Renewable Transport Fuels Association (RTFA)[7].
Approach of the EU/US
By introducing the UK SAF Mandate, the UK Government is broadly following the approach to decarbonizing aviation that has been adopted by the European Union. The EU SAF Mandate, introduced by the RefuelEU Aviation regulation in 2023, requires aviation fuel suppliers to supply an increasing proportion of SAF—starting with 2% in 2025, reaching 55% by 2030 and rising to 70% in 2050.
In the United States, the approach to supporting decarbonization of the transport and aviation industries is different in that the US government focusses on tax incentives, rather than mandates and obligations, which the EU and the UK have chosen to impose on their aviation fuel suppliers.
SAF producers and suppliers in the US benefit from tax credits, including at the federal level under section 45Z of the Internal Revenue Code. The tax credit is available for SAF produced and sold to an unrelated person from January 1, 2025 through December 31, 2027. Among other requirements, the SAF must have an emissions rate which is not greater than 50 kilograms of CO2e per mmBTU. The tax credit is equal to $1.75 (adjusted annually for inflation) per gallon of SAF (if the facility satisfies certain prevailing wage and apprenticeship requirements) multiplied by the fuel’s carbon emissions factor. If the facility does not satisfy the prevailing wage and apprenticeship requirements, the tax credit amount is reduced by 80 percent.
The world’s aviation industry has expressed its preference for the carrot of tax incentives over the stick of mandates and obligations. According to IATA, tax incentives help reduce the cost for SAF production, bridge the price gap between SAF and conventional fossil fuel and encourage R&D, innovation and better carbon intensity performance.[8]
On the other hand, the effect of SAF Mandates is mostly to create a demand for SAF. Critics of this approach in the form adopted by the EU, have pointed out that the “stick” does not work in the current circumstances when the supply-side is limited. Director General of the International Air Transport Association (IATA) recently stated: “There’s zero environmental benefit. If I look at France where they have a blending mandate which requires fuel companies to produce SAF to blend . . . the fuel companies aren’t doing it but they don’t care, because the financial penalties that they’re facing, they are just passing on to airlines, because they’re a monopoly supplier. We don’t have an option. [. . .] It’s done [. . .] absolutely nothing to improve production of sustainable fuel and it’s just, you know, merely added to the cost of operation which ultimately gets borne by the consumer.”[9]
It remains to be seen whether the airlines run the same risk with the UK SAF Mandate. In the EU, suppliers failing to meet their obligations must pay a penalty, however this does not relieve them from performing their SAF obligation as they must still compensate for the shortfall in the next obligation period. The UK SAF Mandate takes a less onerous approach: where the supplier is unable to meet its obligation, instead of a penalty there is an option to pay the Government a fixed “buyout price.” The supplier is then relieved from performing the obligation to the extent it has been bought out.
The US policies stimulating SAF production and supply, in combination with the EU/UK policies largely stimulating demand for SAF, may create a regulatory landscape that favours the US producers over those based in the EU/UK. This approach appears to be at odds with the EU’s ‘Fit for 55’ which was designed, amongst others, to strengthen innovation and competitiveness of the EU industry while ensuring a level playing field vis-à-vis third country economic operators. In addition, there is a difference in the minimum GHG reduction thresholds between the US, UK and the EU that may also have an effect on the international SAF market. In the UK, SAF must produce at least 40% fewer GHG emissions than conventional fossil fuel, to benefit from the UK SAF Mandate. This is below the US equivalent, which is set at 50% GHG savings required for their SAF to benefit from tax incentives under the IRA. The EU threshold (65% for biofuels-based SAF and 70% for “power to liquids” SAF) is higher than that adopted by the US. The difference in these thresholds could ultimately result in stimulating imports of US-produced SAF into the UK, especially where the product is below the EU threshold.
Lessons for the UK From the Existing Biofuels Market
Another sector of the green economy where demand for the product is supported by a mandate with a tradeable certificate scheme is the production and supply of renewable road transport fuels.[10] The UK Renewable Transport Fuel Obligation (RTFO) has been in place since 2008. A closer look at issues facing domestic producers of biofuels may provide useful insight for those working to shape the emerging regulatory landscape for SAF.
In March 2024, Argent, a European company with two UK-based biodiesel production facilities, reported that it had entered into consultations on its plans to close down one of its facilities, located in Motherwell, Scotland. Argent referred to severe economic pressures on its business. In particular the company said that the following factors have “weakened the environment for biodiesel producers” across the UK and the EU:
- Approvals by HMRC for major UK fuel suppliers to utilise Inward Processing relief and avoid the normal 6.5% duty for imported biodiesel.
- The removal of trade defence measures by the UK after Brexit on renewable diesel from the USA, that competes with UK biodiesel. This has resulted in an increase of imports of subsidised US-made product of nearly half a million tonnes.
- Unprecedented competition from imported Chinese biodiesel that benefits from state economic support and subsidies.
Firstly, in relation to inward processing (IP) relief, the IP relief allows those fuel suppliers who have the requisite authorisation from HMRC, to effectively import biodiesel with a 0% rate of import duty compared to 6.5% that would normally be levied on those without an authorisation. HMRC issued a number of such authorizations to fuel companies. Following complaints raised by the RTFA, HMRC completed an economic test to analyse the impact of those IP authorisations and concluded that this measure adversely impacted the essential interests of UK producers. HMRC found clear evidence that the use of IP relief allowed IP authorization holders to undercut UK producers by significant margins (a minimum of 6.5%). The review also reportedly found that depressed biodiesel prices in the UK encouraged domestic producers to export feedstocks and fuels in an attempt to compensate for their losses. The demand created by RTFO was satisfied by imports including those 0% duty biodiesel imports, and the UK biofuels industry had not been able to significantly expand its production capacity and benefit from the RTFO. In April 2024 HMRC notified the industry that biodiesel IP authorisations would be revoked and the standard 6.5% import duty would be reinstated.[11]
Argent’s second point relates to a legacy EU import duty introduced by the European Commission to protect domestic producers against imports of subsidized biofuels from the US and Canada. This anti-dumping (or “countervailing”) duty applied to the US-produced hydrogenated vegetable oil (HVO). It was designed to level the playing field for European biodiesel producers in light of the significant tax incentives granted to biodiesel producers and sellers by successive US governments. Following Brexit, the UK “inherited” this duty and continued to apply it after the transition period. However, the Trade Remedies Authority (TRA) initiated a review of this duty in August 2020. TRA concluded that dumping of HVO would be likely to occur if the duty were no longer applied, but it nevertheless found that discontinuing the duty would cause no injury to domestic manufacturers as there is no HVO production in the UK. RTFA and the UK producers argued that HVO directly competes with the type of biodiesel produced in the UK fatty acid methyl ester (FAME). Yet the review resulted in the duty being revoked and imports of the US-produced HVO biodiesel into the UK were further facilitated.
There is a rapid expansion of renewable diesel production capacities in the US[12] and domestic feedstock suppliers are reporting that this is pulling feedstocks such as UCO and tallow from the EU and the UK markets. At the same time imports of the US-produced HVO into countries which have no countervailing measures in place, such as the UK and Norway, continue to rise.
Finally, in relation to biodiesel imports from China, the European Commission is currently over five months into their investigation of unfair trade and dumping allegations[13] made by a European biodiesel industry association, the European Biodiesel Board. The probe may take up to 14 months with a possibility of provisional measures being taken already in summer 2024. This side of the English Channel, following an application submitted by RTFA on 5 June 2024, the UK Trade Remedies Authority (TRA) also started an investigation into biodiesel originating from China.[14] TRA’s final recommendations are to be published in June 2025.
The examples above show that even in a sector supported by government mandates, other incentives, trade defences and policy measures may be needed to create the environment that would allow domestic production to thrive.
Other Challenges
In a further sign that the biofuels industry is facing headwinds, a major global energy company recently announced that it is to suspend the construction of its large scale HEFA biofuels plant in Rotterdam, the Netherlands. When completed, the facility was due to produce 820,000 tonnes of biofuels (including biodiesel and SAF) per year. The company said that the purpose of the suspension is to “address project delivery and ensure future competitiveness given current market conditions.” This news came soon after bp published its plans to scale back investment in new SAF and renewable diesel projects at its sites in Germany and the US.
According to ICAO, the UK has 14 SAF projects in different stages of development, from initial announcement, to front end engineering design, to those operating and producing SAF. A large proportion of these projects use waste-to-SAF technologies. These projects have higher capital expenditures than HEFA facilities and therefore, need to achieve higher carbon intensity in order to compete with the cheaper HEFA SAF.
In addition, some of these waste to fuel projects require access to the carbon capture, usage and storage (CCUS) infrastructure to improve their carbon credentials and become commercially viable. This presents a challenge for those projects which are in more advanced stages of development as CCUS requires growth in capacity and based on existing CCUS development plans, access cannot be guaranteed until several years into their operation.
In 2023, the UK Government committed to having “at least 5 commercial SAF facilities under construction by 2025.”[15] However the Government’s SAF Revenue Certainty Mechanism is not expected to be introduced until end of 2026. As some of those early players in the SAF market are approaching their planned financial investment decision dates, they are reporting that banks wish to see revenue certainty measures implemented before assuming the risks of funding SAF projects.
The revenue certainty mechanism being developed by the Government will have a critical role in enabling investment into the sustainable fuels sector. However interim measures may be needed to further support the emerging UK SAF sector. Once in place, revenue certainty mechanisms may also need combining with robust policy decisions, trade remedies and investments into infrastructure, for example CCUS, to ensure that clean fuel participants and producers are able to compete both at home and globally.
[1] To what extent can Sustainable Aviation Fuels (SAF) mitigate the environmental impact of flying? | ICF. Accessed on 5 June 2024.
[2] Please see para 2.6 of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) Supporting Document “CORSIA Eligible Fuels_LCA_Methodology” (icao.int).
[3] For an example of how LCA calculations are made, please see para 6.1 and 6.2 of ICAO document 07 - Methodology for Actual Life Cycle Emissions - March 2024.pdf.
[4] Bioethanol is a feedstock in the alcohol-to-jet process used as a drop in fuel in producing SAF.
[5] Aviation fuel plan, GOV.UK (www.gov.uk).
[6] Advanced Fuels Fund (AFF) competition winners – GOV.UK (www.gov.uk).
[7] UK SAF plants – planned and operational – Google My Maps.
[8] The US Approach and Policy Outline to Stimulate SAF (iscc-system.org).
[9] Please see the video interview at IATA – SAF Production to Triple in 2024 but More Opportunities for Diversification Needed.
[10] Please see Figure 20: Feedstock mix of top 10 suppliers for 2022 at Renewable fuel statistics 2022: final report – GOV.UK (www.gov.uk).
[12] US Renewable Diesel Fuel and Other Biofuels Plant Production Capacity (eia.gov).
[14] Biodiesel from China – Trade Remedies Service – GOV.UK (trade-remedies.service.gov.uk).
[15] New measures to support sustainable aviation fuel industry – GOV.UK (www.gov.uk).
