Climate bill dissolution threatens green aviation fuel liftoff

© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect

By Laura Sanicola

(Reuters) - Last week's collapse of U.S. climate legislation could severely hamper the development of clean-burning transportation fuels, investors, lobbyists and analysts said.

The U.S. biofuel industry was banking on legislation that would boost investment in fuels like sustainable aviation fuel (SAF), made from animal fats, greases and oils, and produces fewer carbon emissions than traditional jet fuel.

U.S. fuel makers have been increasing output of cleaner-burning fuels for industries that are harder to electrify. Renewable diesel production is profitable due to state and federal financial incentives, but SAF is two to five times more expensive than jet fuel.

Last week, U.S. Senator Joe Manchin, a conservative Democrat from West Virginia, indicated he would not vote for a slimmed-down climate spending bill, effectively dooming legislation that has been through multiple iterations and would have included incentives to increase investment in SAF and other low-carbon transportation fuels.

"Companies that are already today producing SAF along with those producing road transportation fuels rely on this policy. ... If it lapses, we’ll lose the momentum that our industry has built to support the emergence of SAF," said Paul Winters, a spokesman for the Clean Fuels Alliance, an industry group composed of biofuel producers.

The White House wants to lower aviation emissions by 20% by 2030, with a goal of boosting SAF production to 3 billion gallons per year by 2030, and to meet 100% of aviation fuel demand of about 35 billion gallons a year by 2050. Only around 33 million gallons of SAF were produced last year globally, or 0.5% of the jet fuel pool.

The original $1.7 trillion Build Back Better proposal contained tax credits for SAF of between $1.25 to $1.75 a gallon, depending on the feedstock used, which would lower production costs for biofuels producers.

Last week, the Clean Fuels Alliance urged Biden to support bipartisan proposals to extend existing tax policies such as the biodiesel tax incentive, which was in the Build Back Better proposal.

Shares of renewable fuel producer Neste are down 24% in the past year, while low-carbon fuel producer Gevo (NASDAQ:GEVO) is down more than 55% in the same period, compared with an 8% drop in the S&P 500.

Major airlines, including United Airlines and Delta, have promised to use more significant quantities of SAF if the fuel is produced. The number of agreements between fuel producers and airlines to purchase and sell future SAF increased from an average of three a year since 2013 to 32 in 2021 and 2022 combined.

"Some airlines will pay the premium, but it will slow materially the adoption," said one SAF investor, adding that large corporations have an incentive to buy SAF to offset emissions.

Lobbyists and more optimistic investors say the tax credits may still end up in a bill by year-end, along with other energy credits, given their bipartisan support and buy-in from large airlines.

"I don't think this is materially going to slow down SAF momentum, especially with the major airlines," said Ed Hirs, an energy economist at University of Houston.