The Transition to Sustainable Aviation Fuel: Understanding Demand Response to Jet Fuel Price Changes

December 27, 2024

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by Sohyeon Ryu and Joe Janzen (farmdoc daily) ... Such policy aims to reduce emissions created by jet fuel use by encouraging a switch to lower-emission sustainable aviation fuels (SAF) made from plant biomass, vegetable oils, sugars, and alcohols including ethanol. For US agriculture, corn and soybean oil markets view SAF as a potentially significant source of future demand (Swanson, 2024).

The success of SAF-focused policies in both reducing environmental damage and driving demand for feedstocks like corn ethanol or soybean oil depends in part on how airlines respond to market changes caused by such policies. Federal and state initiatives to encourage the shift from jet fuel to SAF include sales taxes on jet fuel and tax credit subsidies for SAF. For example, Illinois has a Sustainable Aviation Fuel Purchase Credit that gives favorable sales tax treatment to SAF relative to sales taxes imposed on jet fuel. Both taxes and subsidies aim to make SAF more attractive by increasing the price of jet fuel relative to SAF. With price as a policy instrument, the sensitivity of airlines and other jet fuel buyers to price changes is a crucial factor in achieving policy objectives.

This article characterizes airlines’ responses to changes in jet fuel prices. Descriptive evidence suggests jet fuel demand is relatively unresponsive to price. The demand for aviation fuel may also respond differently to price increases compared to decreases and respond differently in the long run relative to the short run. Policies targeting aviation fuels, either by encouraging SAF use or discouraging jet fuel consumption, are likely to increase the overall price of blended aviation fuel. Understanding how airlines adjust their fuel consumption in response to price changes provides insights into the expected policy and market impacts.

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Complex characteristics of airlines’ response to the jet fuel price changes make it difficult for policymakers to anticipate the possible impact of policies to decarbonize the aviation sector. However, descriptive analysis suggests airlines’ fuel use might be relatively unresponsive to price changes. Levels of responsiveness differ depending on the direction of price changes, going up or down. Moreover, in the long-run, higher prices might spur investment in fuel efficiency and end up increasing consumption, or at least increasing it relative to what it would have been in the absence of fuel efficiency improvements. From the perspective of carbon emissions reduction efforts, these characteristics of aviation fuel usage may result in modest reductions in the short term.

Policies that encourage a shift from petroleum-derived jet fuel to SAF will increase the demand for feedstocks like corn ethanol and soybean oil, but the extent of this increase also depends on airlines’ responsiveness to fuel price changes. Price-unresponsive demand creates more opportunity for high-cost fuel producers than if fuel users would drastically cut use in response to higher prices. However, feedstock suppliers may face trade-offs between producing SAF and other products, such as food for humans and feed for livestock. The impact of the varied set of policies regarding SAF cannot be anticipated without understanding the direction and extent of airlines’ responsiveness to fuel prices.

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