Ravi Shanker: Decarbonizing Aviation

As airlines scramble to decrease their carbon footprint by 80% before 2050, can sustainable aviation fuel lead the charge?

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Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's freight transportation and airlines analyst. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the path to decarbonization in aviation. It's Thursday, July 13th at 2 p.m. in New York.

The global aviation industry emits roughly 1 billion tons of CO2 per year - comparable to the emissions of Japan, the world's third largest economy, and aviation emissions are estimated to double or even triple between 2019 and 2050 in a business-as-usual scenario.

In order to reach net-zero emissions by 2050 and align with the goals of the Paris Agreement, the global aviation industry needs to reduce its CO2 absolute footprint by 13% by 2030, and 80% by 2050. We think the industry has three solutions for doing so. One, change its fleet mix towards more fuel efficient aircraft. Two, scale other modes of propulsion such as electric/hybrid engines and hydrogen. And three, change their jet fuel mix towards more sustainable aviation fuel.

Based on currently available technologies, we see the third option, sustainable aviation fuel or SAF, as the most realistic pathway for the airlines industry to meet its 2030 decarbonization goals. SAF is a biofuel used to power aircraft that has similar properties to conventional jet fuel, and can be dropped into today's aircraft and infrastructure. SAF is derived from non-fossil sources called feedstock, such as corn grain, oilseeds, algae, oils, fats and greases, forestry residues, and municipal solid waste streams. There are currently various certified SAF production procedures, all of which make fuel that performs at levels operationally equivalent to jet A1 fuel.

Replacing conventional jet fuel with SAF can mitigate CO2 materially. The challenge, however, is that SAF accounts for less than 1% of the fuel used in global aviation, and for the aviation industry to meet its decarbonization targets SAF supply needs to scale materially. The key constraints around wide adoption of SAF are cost, feedstock availability, impacts to nature and biodiversity, and, finally, the capital required to produce SAF at scale.

That said, support for SAF has improved materially over the last two years. In 2021, President Biden's climate agenda outlined a goal of producing 3 billion gallons of SAF per year by 2030, roughly 10x the current global SAF production. And in 2022, the Inflation Reduction Act extended and bolstered incentives for SAF. Since then, new capacity has been announced and multiple airlines have committed to using more SAF through long term offtake agreements. Meanwhile, more than ten global airlines target to replace at least 10% of their jet fuel demand with SAF by 2030. In addition, several U.S. state jurisdictions are adopting clean fuel standards or are exploring similar programs. The EU, UK and Japan have also put in place various incentives and targets since 2021. While these developments are highly encouraging, more widespread support and long term certainty are needed to scale SAF production to the levels required to meet the 2030 targets.

Is this achievable? We will continue to monitor developments and bring you updates as we make progress along the path to decarbonizing aviation.

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