Sustainable Aviation Taking Off Thanks to Inflation Reduction Act

August 30, 2022

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by John Hebert (Third Way) When the Biden Administration announced the SAF Grand Challenge last year – an ambitious plan to increase the production of sustainable aviation fuels (SAF) to at least 3 billion gallons per year by 2030, reducing aviation emissions by 20%– it was clear that the challenge would require a new level of federal investment to quickly scale up production. SAF, a liquid fuel that can be used in today’s aircraft and achieves significant emissions reduction compared to fossil-based jet fuel, is widely expected to be one of the leading sources of aviation emissions reductions over the coming decades.¹ However, this will only be possible if we make the much-needed investments to expand feedstock production and build the infrastructure and supply networks to support SAF at scale.

On August 16, President Biden signed two critical policies into law that will help us do just that as part of the Inflation Reduction Act (IRA) of 2022: a new competitive grant program for SAF and a new combination of tax credits. These policies will be a game changer for the aviation industry and will help us not only meet the SAF Grand Challenge, but also get aviation on a path to net-zero emissions.

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Alternative Fuel and Low-Emission Aviation Technology Grants

The new Alternative Fuel and Low-Emission Aviation Technology competitive grant program is the first-ever large-scale grant program dedicated to scaling up the production of SAF in the United States. The IRA allocates $297 million over five years to the program, including $244.5 million for projects related to production, transportation, blending, or storage of SAF. Of the remainder, $46.5 million will go to projects related to low-emission aviation technologies, a broadly defined term that encompasses any technologies that improve fuel efficiency, increase the utilization of SAF, or reduce aircraft emissions; and $5.9 million will help cover program operating costs and oversight.

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New Tax Credits for SAF

SAF is currently 2-4 times more expensive than conventional jet fuel, making it cost prohibitive for airlines and other end-users without a tax incentive to help close the price gap.⁴ The IRA addresses this by making SAF eligible for two separate tax credits that can be redeemed sequentially. The first is a two-year SAF blender’s tax credit (BTC) based on the Sustainable Skies Act, a bill led by Reps. Brad Schneider (D-IL), Dan Kildee (D-MI), and Julia Brownley (D-CA) in the House and Sens. Sherrod Brown (D-OH), Maria Cantwell (D-WA), Raphael Warnock (D-GA), and Patty Murray (D-WA) in the Senate.

The bill creates a BTC starting at $1.25 per gallon for blenders that supply SAF with 50 percent or greater lifecycle emissions reductions compared to conventional jet fuel. Fuels that beat the minimum threshold are eligible for an additional $0.01 per gallon credit for each percentage point of emissions reductions over 50 percent. In this way, the BTC incentivizes the very cleanest alternatives to traditional jet fuel and will help us scale up the fuels needed to get aviation to net-zero emissions. The credit is otherwise technology- and feedstock-neutral, allowing for SAF made from biomass, waste streams, direct air capture, and other sources.

After the BTC sunsets in 2024, SAF will be eligible for the new Clean Fuel Production Credit until it expires at the end of 2027. Unlike the BTC, this tax credit is not exclusive to SAF, though SAF is eligible for a higher credit than other types of biofuels due to the amount of investment needed to make it cost competitive. The methodology for calculating the value of the credit is slightly more complex than the SAF BTC, but it is similarly based on a sliding scale that rewards cleaner fuels with higher credits ranging from $0.35 to $1.75 per gallon.

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“Decarbonising Aviation: Cleared for Take-Off." Deloitte and Shell, Sep. 2021, p. 79. https://www.shell.com/promos/energy-and-innovation/v1/decarbonising-aviation-cleared-for-take-off/_jcr_content.stream/1632757263451/e4f516f8d0b02333f1459e60dc4ff7fd1650f51c/decarbonising-aviation-industry-report.pdf
Chiaramonti, David, “Sustainable Aviation Fuels: the challenge of decarbonization.” Energy Procedia, Vol. 158, Feb. 2019, pp. 1202-1207. https://www.sciencedirect.com/science/article/pii/S1876610219303285
In addition, the IRA also reduces the federal cost share of the program from up to 90 percent to a flat 75 percent, except for awards to small hub or nonhub airports, which remain eligible for the 90 percent cost share. For a complete review of the program, see Sec. 40007 of the IRA.
“Incentives Needed to Increase SAF Production.” International Aviation Transport Association. 21 Jun. 2022. https://www.iata.org/en/pressroom/2022-releases/2022-06-21-02/