Use Contracts for Difference to encourage development of sustainable aviation fuel in the UK
Zero emission flight, using hydrogen fuel cells or clean electricity, is still in its infancy for short haul flights and is unlikely to be viable for larger planes or for long haul before 2050, so Sustainable Aviation Fuel (SAF) will be necessary for aviation decarbonisation, particularly in the near term. The type of SAF that offers the highest emissions reductions is power-to-liquid, however this requires green hydrogen, which is not yet commercially available. In the meantime, SAF made from waste materials can be deployed relatively quickly and, while it still produces emissions when burnt, offers lifecycle carbon savings of around 70% compared to kerosene.
The UK government is mandating that at least 10% of aviation fuel comes from sustainable sources by 2030. Many other countries around the world also have a SAF mandate. However, without further policies to attract investment to create more SAF production, global demand will significantly outstrip supply, risking higher prices for UK passengers.
A Contracts for Difference (CfD) scheme should be established for SAF, where SAF producers compete for fixed-price, long-term contracts for their product when selling to airlines, with the government paying the difference between a volatile wholesale price and a fixed strike price. The wholesale price would need to be determined by the DfT and Treasury, but it could either be a global SAF price or the global kerosene price. This will initially require subsidy as SAF is more expensive than kerosene, and the global price of SAF fluctuates. This cost should not be borne by taxpayers, but by the aviation sector. Linking the CfD to the global SAF price would minimise the costs of the scheme, but the subsidy level would be more volatile.
The government should use increased revenues from aviation’s purchasing of permits under the UK Emissions Trading Scheme (ETS) to fund this CfD. The ETS free allowances allocated to airlines should be phased out and, to ensure long-haul flights not covered by the ETS also contribute, the government could look at expanding existing taxes.
A CfD scheme would bring down the cost of SAF by derisking the investment and so reducing the cost of capital for building SAF plants. The auction would encourage competition between SAF plants, further lowering costs. The creation of a domestic SAF industry would also bring in investment to the UK and create an estimated 6,500 jobs. Without support from the government, there is a real risk that these jobs could be lost to other countries that are seizing this opportunity. The US, for example, has recently passed the Inflation Reduction Act, which introduces tax credits for SAF with further financial benefits if it is produced domestically.
The current CfD scheme for low-carbon electricity runs different auctions for different clusters of technology based on their maturity. Less mature tidal power, for example, has a ring-fenced funding pot, so it doesn’t have to compete with more mature offshore wind in the auction. A similar approach could be applied to SAF, so the most sustainable, lowest emission types of SAF could be incentivised, even if currently more expensive. The initial auctions will inevitably focus on waste-based SAF, but like with tidal in the power sector, there should also be a smaller, ring-fenced auction for nascent, zero-carbon SAF made from green hydrogen and CO2 (power-to-liquid fuels). SAF CfDs should set requirements for lifecycle carbon emissions to ensure significant climate benefits are achieved.