2024 Aviation Decarbonization Policy Deep Dive & Outlook

Feb 14

Stepping into the realm of aviation sustainability, one can't help but notice the resounding buzz on policy evolution, particularly on Sustainable Aviation Fuels (SAF). SAF is widely seen as the linchpin for an industry grappling with the formidable challenge of decarbonizing by 2050. As SAF production costs create a price gap with traditional jet fuel, policy becomes the driving force to bridge this divide, boosting supply. For example, new US state legislation is paving the way for substantial fuel volumes, and the prospect of additional states following suit unveils a clearer roadmap to reaching the US interim goal of 3 billion gallons by 2030. Simultaneously, the industry grapples with heightened emissions reporting regulations and international obligations, emphasizing the need for business aviation to actively engage in policy discussions. By navigating policy developments, the business aviation industry can harness benefits and further establish its role as a sustainability trailblazer.

US Federal Policy

2023 Recap

SAF Blenders Tax Credit: In 2023, SAF legislation witnessed significant strides at the state, federal, and international levels, marking a pivotal moment for the aviation industry's progress to decarbonization. Notably, the SAF Blenders Tax Credit (BTC), initially introduced in 2022 as part of the groundbreaking bipartisan Inflation Reduction Act during the Biden Administration, emerged as an exciting development of the United States' first major national climate legislation.

The tax credit, set at $1.25 per gallon of qualifying fuel, mandates a minimum 50% reduction in lifecycle greenhouse gas emissions for eligibility. Despite the law being in place for some time, the lack of clear guidelines from the Treasury Department and Internal Revenue Service triggered heated debates in the biofuel industry. Fuel producers eagerly awaited instructions on calculating emissions reduction, as various methodologies led to different fuels meeting or failing to meet the 50% reduction qualification. The guidance finally arrived in December 2023, shedding light on approved calculation methodologies. As expected, the guidance embraced the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) method and any similar method that meets certain requirements of the Clean Air Act, and also outlined safe harbors utilizing the Environmental Protection Agency's Renewable Fuel Standard (RFS) program.

Notably, the guidance emphasizing that the current Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model by the Argonne National Laboratory and other GREET-based models did not satisfy the applicable statutory requirements for the SAF credit. Instead, the Department of Energy committed to collaborating with other federal agencies to develop an approved GREET model in Spring 2024, that will likely be more supportive of US SAF sources to increase and diversify domestic SAF feedstock sources.

The significance of tax credits, including state-level incentives discussed later, lies in their role in providing consistent incentives for new supply. Reliable tax credit values, as opposed to floating credit prices, aid in project financeability while bridging the green premium cost between SAF and fossil jet fuel.

2024 Look Ahead

SAF Blenders Tax Credit – GREET Model: While significant strides have been made in understanding the implementation of the SAF BTC, the aviation and biofuel industries remain in anticipation of the upcoming GREET model scheduled for release March 1, 2024. The unveiling of this model is particularly crucial for ethanol SAF producers, who face challenges in meeting the credit requirements without specific life cycle considerations within the GREET methodology. The key impact of the new GREET model will be to provide updated life cycle analyses of SAF feedstocks and production pathways to evaluate a carbon reduction score for that SAF source.

In a sector where technology is still emerging and investments are capital-intensive, the lack of clarity regarding the life cycle carbon score for ethanol SAF in the new GREET model adds a layer of uncertainty. As we look ahead to 2024, industry stakeholders eagerly await insights from the updated GREET model, which will play a pivotal role in shaping the trajectory of SAF production and its alignment with regulatory requirements.

SEC Climate Disclosure: In March 2022, the Securities & Exchange Commission (SEC) introduced a draft rule mandating that public companies disclose aspects of their environmental footprint, creating new challenges for financial reporting within the United States. This proposal extends its reach to "all public companies with an existing SEC reporting requirement, including all non-US companies with US-traded shares." It would necessitate public companies to report, at a minimum, Scope 1 and 2 emissions, with larger entities mandated to report Scope 3 supply chain emissions. Furthermore, some companies will be required to develop climate risk disclosures.

In business aviation, this directive directly impacts corporate flight departments and managed aircraft, which serve as direct assets for large public companies. Moreover, any aviation operators currently or contemplating going public will also face the direct consequences of this proposal. The broader ripple effect extends to charter operators, brokers, fractional operators, and companies supporting corporate flight departments or managed aircraft for larger entities with the required disclosure of supply chain emissions. In addition, business travel is a significant source of indirect emissions, encompassing any use of private aviation, irrespective of its form. The final details will crystallize once the proposal undergoes amendments and gains approval, an anticipated milestone set for Spring 2024.

US State Policy

2023 Recap

Washington SAF Tax Credit: In May 2023, Washington state enacted a tax credit aimed at promoting SAF production locally. Mirroring the Federal SAF Blenders Tax Credit, this legislation introduces a per-gallon incentive for SAF, requiring a minimum 50% reduction in lifecycle greenhouse gas emissions compared to traditional jet fuel. Despite no current SAF production in Washington, the incentive dictates that the tax credit cannot be claimed until a local facility can produce at least 20 million gallons annually. Anticipation surrounds emerging producers like Twelve and SkyNRG, poised to kickstart the implementation of this incentive.

Minnesota SAF Tax Credit: In a major development for sustainable aviation fuel (SAF) in 2023, Minnesota unveiled a dual initiative: a state SAF Tax Credit and the Minnesota SAF Hub. The credit, set at $1.50 per gallon, targets blenders and producers meeting specific criteria; emphasizing production or blending within the state and utilization in aircraft departing from Minnesota airports.

Illinois SAF Purchase Credit (SAFPC): In June, Illinois joined the SAF movement by introducing a state tax credit, the SAF Purchase Credit (SAFPC), set at $1.50 per blended gallon through 2032. Diverging from SAF tax credit models in Federal law, Minnesota, and Washington, the SAFPC uniquely targets air common carriers operating within the state, offering the credit as a rebate against the fuel use tax for domestic flights. This distinctive approach places the incentive later in the supply chain, marking a nuanced departure from conventional SAF tax credit structures.

California Climate Disclosure Laws: In October 2023, California passed three impactful climate disclosure laws affecting large companies operating within the state. The Climate-Related Financial Risk Act (SB 261) and the Climate Data Corporate Accountability Act (SB 253) mandate the disclosure of Scope 1, 2, and 3 emissions along with climate risk disclosures. Meanwhile, the Voluntary Carbon Market Disclosures Act (AB 1305) has implications for businesses selling to California-based customers using carbon offsets for environmental claims. Despite their California origin, these laws have a broad reach, affecting companies beyond the state's borders. With low applicability thresholds, including merely operating in or doing business in California and meeting annual revenue criteria, these laws may impact a wide range of businesses.

If a business aviation entity qualifies, these laws will require participation in annual or biannual reporting and at the very least aggregating new information to ESG teams, depending on the law. Non-compliance carries the risk of fees and penalties, emphasizing the need for thorough adherence to these new regulations.

2024 Look Ahead

California’s Proposed Jet Fuel Exemption Elimination in the Low-Carbon Fuel Standard: California is poised for a potential shift in its low-carbon fuel standard (LCFS), a crucial element in the state's efforts to reduce transportation fuel carbon intensity. Governed by the California Air Resources Board (CARB), the LCFS employs a credit-based system where lower carbon fuels generate credits and higher carbon fuels accumulate deficits. Currently, SAF garners credits within this system, but petroleum-based jet fuel is exempt from generating deficits. In late March 2024, CARB will evaluate eliminating this exemption, slated to take effect in 2028; however, the removal of the exclusion will apply only to intra-California flights.

Other State Low Carbon Fuel Standards: In a growing trend, several states are exploring or amending Low Carbon Fuel Standards (LCFS) to incentivize cleaner transportation fuels. Washington is set to initiate a rulemaking process, intending to include SAF in its existing Clean Fuel Standard (CFS) within the next year.

Illinois is eyeing a carbon fuel standard with a focus on reducing on-road transportation emissions by 20% by 2038, allowing SAF to generate system credits while exempting petroleum-based Jet-A from deficit generation, mirroring California's original approach. If approved, this would complement Illinois' existing SAF tax credit, aligning both policies to tackle the green premium.

Other states contemplating similar standards in 2024 include New Mexico and New York, reflecting a nationwide effort to provide policy support that advances sustainable and low-carbon fuel initiatives.

Washington State SAF Mandate: In a groundbreaking move, Washington State introduced Senate Bill 6114 in January 2024, potentially marking the first SAF supply mandate in the United States. The bill proposes that local airport operators must supply SAF with a minimum 10% blend for part 91 aircraft operators by July 1, 2028. This Bill seems to be in support of the Port of Seattle’s goal to use a 10% blend of SAF from local sources. Similar to the Washington SAF Tax Credit passed in 2023, the Bill currently stipulates that the mandate will not go into effect until a local facility can produce at least 20 million gallons annually. The aviation industry, particularly business aviation, is keenly observing this development, awaiting further clarification and insights into the potential implications of this pioneering SAF mandate.

Europe / UK

2023 Recap

European Union Corporate Sustainability Reporting Directive (EU CSRD): The EU Corporate Sustainability Reporting Directive (CSRD) is making waves in the European business aviation scene. Launched in January 2023, this directive requires EU Member States to embed its provisions into national law by July 2024. Notably, Member States are prohibited from reducing the specified requirements during this process, although they can introduce additional provisions. Mandatory reporting obligations are set to start as early as fiscal year 2024.

For business aviators, CSRD demands reports on social and environmental impacts, blending financial and non-financial considerations. The directive's direct impact extends to aviation operators currently or potentially going public. Indirectly, it affects entities providing aviation services, including charter operators, brokers, fractional operators, and other service providers supporting companies who must report their emissions. This is due to the CSRD's requirement for disclosure of supply chain and indirect emissions, encompassing business travel facilitated through private aviation.

Covering around 49,000 European companies, CSRD aims for transparency and accountability in the aviation arena. This commitment has the potential to foster stakeholder trust and contribute to a more environmentally and socially responsible future.

ReFuelEU: The ReFuelEU is a regulation that is part of the EU’s Fit for 55 package, aiming to slash net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. This regulation will primarily impact fuel suppliers, as it establishes the obligation on the fuel supplier to blend in an increasing share of SAF to EU airports that meet certain traffic thresholds.

Starting in 2025, a minimum of 2% of aviation fuels at Union airports must be SAF. This percentage climbs every five years, to reach 6% in 2030, 34% in 2040, and 70% in 2050. Synthetic fuels are also mandated to represent a certain portion, starting at 1.2% in 2030 and gradually escalating to 35% in 2050. The ReFuelEU initiative also tackles fuel tankering practices, wherein aircraft load more fuel than necessary for a particular flight due to lower costs at the departure airport than at the destination airport.

While fuel suppliers are the obligated party, all aircraft operators, including those based outside the EU, conducting over 500 flights annually from Union airports must submit information related to their fuel uplifted. Under ReFuelEU, aircraft operators are obligated to report data concerning aviation fuel uplifted, required aviation fuel, non-tanked quantity, SAF purchases, and other pertinent information by March 31 of each reporting year. The initial reporting deadline is March 31, 2025, for the 2024 reporting year. Fuel suppliers must also report data on fuel supply, SAF supply, conversion technology, feedstock origin, lifecycle emissions, and fuel characteristics.

Additionally, the regulation introduces a voluntary environmental labelling scheme for flights using SAF, aiming to empower consumers to make informed choices and promote greener flights.

European Union Emissions Trading Scheme (EU ETS) Aviation Revision: Also out of the EU last year were significant updates to the EU ETS aviation legislation through the Directive (EU) 2023/958, published on May 10, 2023. These changes mark a new chapter in the EU ETS system's evolution. Changes applicable from January 1st, 2024 include:

Aircraft operators with 2023 reporting requirements may be eligible to receive a free allocation of emissions allowances for the years 2024 and 2025. The amount of free allowances will be reduced by 25% in 2024, 50% in 2025, and 100% in 2026, with all allowances fully auctioned from 2026.
An additional 20 million EU ETS allowances will be allocated to operators within the EU ETS scheme for free from 2024 to 2030, aiming to promote the adoption of SAF and offset the price difference between SAF and conventional jet fuel.
Flights from the Outermost Region of one Member State to a different Member State will be added to reporting requirements.
Flights between an aerodrome in an Outermost Region and an aerodrome in the same Member State will be exempted from reporting requirements.

United Kingdom Emissions Trading Scheme (UK ETS) Aviation Reform: The UK ETS Authority is also tightening the reins on emissions starting 2024, bringing new limits for industrial, power, and aviation sectors. This move aligns with the UK's ambitious goal of achieving net-zero emissions and expands the emissions cap to include sectors like domestic maritime transport and waste management.

In a significant development, the UK ETS Authority has announced the phased elimination of free allocations for aviation in 2026. To facilitate a smooth transition, the entitlement to free allocation will continue as planned in 2024 and 2025 until 2026, allowing aircraft operators to prepare for this change.

2024 Look Ahead

Vote on EU Green Claims Directive: The EU Green Claims Directive is a European Union regulation aimed at preventing greenwashing and ensuring that consumers receive reliable, accurate, and verifiable information about the environmental impact of products and services. The directive applies to all companies operating in the EU, except for companies with fewer than 10 employees and less than €2 million in revenue.

Originally proposed in March 2023, now the directive must be considered by the European Parliament and Council, a process that is expected to take at least 18 months, likely coming into effect no earlier than late 2024 or early 2025.

The directive requires that any green claims made by businesses must be specific, quantifiable, based on reliable scientific evidence, and not mislead or confuse consumers. It does not stipulate a single method for the assessment of these claims, but it does require that they be verified and certified by a third party. It also sets requirements for how to communicate these claims and introduces rules on compliance. Non-compliance can result in significant penalties, including fines up to 4% of a company's profits, confiscation of profits, and exclusion from public procurement for up to 12 months.

For aviation operators, this directive means that any environmental claims they make about their operations, including fuel efficiency, carbon offsetting, or use of sustainable aviation fuels, must meet the requirements of the directive. This could have significant implications for how these operators market their services and communicate their environmental impact to consumers.

Global

New CORSIA Baseline: The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is an initiative by the International Civil Aviation Organization (ICAO) to offset and reduce CO2 emissions from international aviation. The CORSIA baseline, which is the level of CO2 emissions against which an airline's total emissions in a year are compared, has been adjusted for the period from 2024 onwards.

Originally, the CORSIA baseline was agreed to be an average of 2019 and 2020 emissions. However, due to the COVID-19 crisis causing a significant drop in demand for air transport in 2020, the ICAO Council agreed to use 2019 emissions only as CORSIA’s baseline for the period of 2021-2023.

During the 41st ICAO Assembly in October 2022, an agreement was reached to set 85% of 2019 emissions as the CORSIA baseline for the first and second implementation phases covering the period from 2024 to 2035. In contrast to the Pilot phase of CORSIA (2021-2023), this will establish a higher baseline and reduce the likelihood of operators having offsetting obligations in the upcoming First phase (2024-2026). Due to the slow global recovery of commercial aviation from COVID, there were no offsetting obligations for the pilot phase. However, traffic projections indicate expected offsetting obligations for operators during the First phase.

What else should business aviation keep an eye on?

The conversation around contrails and non-CO2 effects is only expected to grow. Non-CO2 effects, often overlooked, are estimated to contribute to two-thirds of aviation's climate impact. So far, these effects have received limited attention from both industry and policymakers, but now the EU ETS is taking charge. The revised EU ETS Directive has initiated a consultation on monitoring, reporting, and verification (MRV) of aviation's non-CO2 impact on the climate. The goal is to measure non-CO2 effects for every flight, with operators needing to buy allowances for non-CO2 emissions by 2028. Aircraft operators may be mandated to monitor and report on non-CO2 aviation effects, encompassing oxides of nitrogen (NOx), soot particles, oxidized sulphur species, and effects arising from water vapor, such as contrails. The required data and compliance process will be provided by late 2024.

While the EU is currently taking the lead in addressing aviation's non-CO2 effects, measures like this may also arrive stateside. Business aviation operators worldwide should keep a keen eye on these developments, as compliance may become a shared global responsibility, influencing practices far beyond European skies.

Conclusion

The future holds major shifts in policy for SAF, including in ways that will impact business aviation. Transparency regulations are also on the rise, demanding businesses prepare for verifiable climate claims. Business aviation operators need to enhance their capabilities, align with their ESG teams, and embrace that environmental compliance will be part of future operating requirements.

Consider actively supporting state tax credits or other policy advancements in 2024 by reaching out to local representatives. And never lose sight of 4AIR's PolicyWatch tool, your go-to source for the latest updates shaping the policy landscape for business aviation entities.

Sources:

1. Waypoint 2050 : Aviation: Benefits Beyond Borders (aviationbenefits.org)

2. Aviation Climate Action Plan | Federal Aviation Administration (faa.gov)

3. FACT SHEET: Biden Administration Advances the Future of Sustainable Fuels in American Aviation | The White House

4. Sustainable Aviation Fuel Credit | Internal Revenue Service (irs.gov)

5. Battle brews over climate law credits for aviation biofuels - E&E News by POLITICO (eenews.net)

6. Treasury, IRS issue guidance on Sustainable Aviation Fuel Credit | Internal Revenue Service

7. SEC.gov | SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors

8. SEC Reporting Impacts on Business Aviation — 4AIR

9. New Washington Law Incentivizes Local Sustainable Aviation Fuel Production | Port of Seattle (portseattle.org)

10. Sustainable Aviation Fuel Credit | Minnesota Department of Revenue (state.mn.us)

11. FY 2023-23, New Sustainable Aviation Fuel Purchase Credit Enacted (illinois.gov)