SAFs, Credits in Demand as CORSIA Prepares for Take-off
Regulatory requirements for airlines are expected to further drive demand for emissions reduction solutions, presenting risks and opportunities to investors.
The global aviation sector is heavily dependent on sustainable aviation fuels (SAFs) and carbon offsets to reduce its greenhouse gas (GHG) emissions, but recent research has stressed supply challenges as mandatory requirements approach.
Separate whitepapers published by carbon market specialist EcoSecurities and data provider MSCI have highlighted steep hurdles to airlines’ adherence to targets set by the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
CORSIA aims to stabilise carbon emissions at 2019 levels, with there being two main ways for airlines to reduce their emissions: either through adopting SAFs or offsetting surplus or excess emissions through carbon credits. In particular, SAFs are expected to account for around 65% of aviation emission reductions.
From 1 January 2025, 129 states responsible for more than 75% of international aviation activity will voluntarily participate in CORSIA. The scheme’s first phase started earlier this year and will run until 2026. Participation becomes mandatory in its second phase, which will run from 2027-2035.
A number of countries are gearing up to make CORSIA compliance a legal obligation. This week, the UK issued a consultation on CORSIA, seeking feedback on the government’s proposed approach to implement its requirements, which will run until 10 February.
Ahead of CORSIA’s mandatory second phase, the demand for SAFs and CORSIA-compliant carbon credits are expected to ramp-up. “Due to the limited supply of SAFs, airlines could rely more on carbon credits to fulfil their obligations,” Guy Turner, Head of MSCI Carbon Markets, told ESG Investor.
Airlines face higher costs as they seek to comply with CORSIA, threatening margins and even business models.
EcoSecurities’ whitepaper noted that the supply of SAFs is expected to increase as production technologies advance. But it predicts the pace of growth will be insufficient to keep up with “rapidly increasing” demand, driving up prices and intensifying competition for high-quality SAFs.
MSCI’s whitepaper said this would also be the case for eligible CORSIA-compliant carbon credits, adding that near-term supply is likely to be constrained.
Regulatory role
Globally, the aviation sector contributes 2.5% of carbon emissions and 3.5% of all GHG emissions that contribute to climate change. Those emissions are expected to rapidly rise in the coming decades, as air traffic predictions soar, contributing as much as 16% of global CO2 emissions by 2050.
SAF production has increased sixfold from around 300 million litres in 2022 to 1.9 billion litres this year, and last week was forecast by the International Air Transport Association to further increase to 2.7 billion litres in 2025. But this would represent just 0.7% of total jet fuel production, with the association branding the development of SAF as “disappointingly slow”.
According to MSCI, airlines are expected to require 106-137 million tonnes of carbon credits during CORSIA’s first phase, costing airlines US$2-7 billion, and 502-1,299 million tonnes during its second, costing US$13-109 billion.
Turner said that while CORSIA provides a “solid foundation” for an international aviation carbon credit market, the next “crucial step” is for governments to enact legislation at the national level and clarify penalties for airline non-compliance.
“This would signal to the market that demand is more predictable, resembling a regulated compliance scheme,” he added. “While interest from investors is picking up, large volumes of capital are yet to be committed.”
Tidiane Doucoure, Director of Emerging Market Alternative Credit at asset manager Ninety One, said that regulation presents “both the biggest opportunity and challenge” for the development of the SAF market, both in developed and emerging economies.
Countries are typically taking a gradual approach. In August, the UK’s Labour government unveiled the SAF Revenue Support Mechanism Bill and introduced a SAF mandate. From 1 January 2025, 2% of total UK jet fuel demand must comprise SAFs, increasing to 10% in 2030 and 22% in 2040.
Meanwhile, under the ReFuelEU Aviation Regulation, fuel of flights departing from EU airports must now contain at least 2% of SAFs, increasing to 6% by 2030, 20% by 2035, 34% by 2040, and eventually 70% by 2050.
Incentivising investment
Regulation is expected to be a key driver in increased demand for SAFs and carbon credits, with the need to boost supply offering a lucrative opportunity for investors.
The Emerging Africa & Asia Infrastructure Fund (EAAIF), managed by Ninety One, is part of a group which invested US$141.9 million in a SAF facility in Pakistan earlier this month. This marks the fund’s first investment in Asia since its expansion in October.
“Given the key role that SAF will play in decarbonising the aviation sector, it is clearly an appealing investment for investors like us,” said Doucoure. “Any investor that has done their research on regulation related to SAFs clearly understands that there is an opportunity offering interesting risks and rewards.”
British renewable energy group Octopus Energy’s generation arm last week invested an undisclosed amount in sustainable fuels firm Nordic Generation Fuels, enabling it to develop two new fuel production facilities in Finland. These are expected to generate enough fuel to power almost 2,000 flights from London to New York a year.
“With the EU and UK mandates kicking in from 2025 and other countries worldwide implementing similar strategies, SAF’s growth trajectory is on the rise,” said Matt Setchell, Co-head of Octopus Energy Generation. “Given this sector is just getting started, we expect investment opportunities to increase over the coming years.”
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