Addressing the aviation sector’s climate impact is complex. Air travel is international by nature. For many people, it is required for work or to see family and friends. For others, it is about escapism and a chance to experience different environments and cultures. This makes it tricky to tackle the environmental, climate and equity challenges the sector presents.

But the sector is also responsible for around 2.4% of global CO2 emissions, and when non-CO2 effects are considered, the sector accounts for up to 5% of global warming. Any incremental improvement made to reduce emissions in aviation is being vastly outpaced by the sector’s unmitigated growth. Without positive action, it could take up 25% of the limited global carbon emissions budget by 2050.

Altiorem’s key takeaways

Carbon budget risk: Aviation could take up 25% of the global carbon budget by 2050. Investors must finance decarbonisation efforts now to avoid future regulatory risks and increased carbon costs.

Focus on sustainable aviation fuels (SAFs) investments: E-fuels offer up to 98% CO2 reductions but need scaling. Investors should prioritise funding high-integrity SAFs like e-fuels over less sustainable biofuels and ensure there is a diversified alternative fuel market.

Active stewardship: Investors should engage with aviation companies to accelerate the adoption of alternative fuels, demand reduction strategies and supporting policies to enable these measures, aligning the sector with net-zero goals.

All in this together? How do we start to tackle aviation emissions

While we presume that everyone loves to fly, and that this growth is coming from across all of society, 80% of people globally have never set foot on a plane. In fact, 50% of aviation emissions are caused by just 1% of the population. These staggering figures are important to remember when we look at how to decarbonise aviation. It is imperative to acknowledge the inequalities and inherent privilege this sector represents when it comes to examining the possible solutions.

Whether the aviation sector can reach its net-zero commitment will depend on a range of factors (Figure 1). This includes the deployment of demand reduction and management measures alongside operational efficiency improvements. But we also need to scale the uptake of alternative fuels and the production of zero-emission aircraft — those which produce little to no emissions through use of hydrogen and battery-electric technologies. Critical to the success of these solutions will be sustainable finance.

Figure 1: Forecast by Transport & Environment of the contribution of various measures to the decarbonisation of aviation in EU27+UK up to 2050. Source: Transport & Environment, 2022

A closer look at “Sustainable aviation fuels” – more accurately, alternative fuels

We know that the investment sector will be critical to driving the introduction, scalability and availability of alternative fuels, commonly termed “sustainable aviation fuels” (SAFs). But what are these fuels and where should investments be focused?

In Europe’s RefuelEU mandate, SAFs are distinguished as drop-in aviation fuels. This can mean: advanced biofuels or biofuels produced from the feedstock in line with sustainability criteria, recycled carbon fuels or synthetic fuels.

For ease of differentiation, they are further refined into:

• Biological origin, which can include fuels like HEFA (hydroprocessed esters and fatty acid fuels), advanced biofuels and ‘sustainable’ biofuels, or, as a sub-category of SAF;
• Non-biological origin, which can also be referred to as ‘e-fuels’, ‘e-kerosene’, ‘synthetic fuels’ or ‘power-to-liquids’ (PtL).

See Climate Catalyst’s Sustainable Aviation Fuel infographic

For aviation to be on the pathway to net-zero emissions we know we need to quickly move away from conventional kerosene jet fuel. But not all of the alternatives are created equally. And right now, the majority of investment in these fuels is going into unsustainable and unscalable biofuels. We need to diversify investment and ensure we are considering a variety of options (as well as other levers), with the highest integrity fuels in mind.

What should we be looking for when it comes to sustainable finance?

One of the primary challenges is the availability and sustainability of SAF feedstocks. As we can see, SAFs can be produced from various sources, including waste oils, agricultural residues, municipal solid waste, and even CO2 captured from the air. This choice of feedstock has profound implications for the environmental integrity of a SAF. Using food crops as a feedstock, for example, could lead to land-use changes, with predicted equity and environmental implications on food security and biodiversity. 

E-fuels, meanwhile, are projected to result in lower emissions overall than biofuels – depending on their feedstock and production pathway – with less environmental implications. E-fuels are not without their challenges. Their production will rely heavily on renewable energy, which is in high demand while supply still grows, and some form of carbon capture, which is currently in development and not yet on the market. But from an environmental perspective, they remain the highest-integrity fuel available and should be the focus as we scale up production.

In Europe, however, the opposite is happening. Potential SAF production capacity is currently estimated to be a maximum of 0.24 million tonnes – only 10% of the amount of SAF required to meet the proposed mandate by 2030. Most of this short-term supply is expected to come from new players who predominantly produce bio-based SAF. Meanwhile, higher-integrity pathways are still waiting to reach commercial scale. Of the ~56 e-fuel plants awaiting construction in Europe for example, none have achieved a Final Investment Decision (FID). This means SAFs with the greatest emissions reduction potential (which for e-fuel can range between 75 – 98% CO2 decrease compared to conventional fuel) are yet to be readily available. 

See case study on an e-fuel financed project (page 10)

The nascency of the SAF market – particularly the e-fuels market – means continued risks for potential fuel plant investors. For example, there is no established reference price for these

fuels, making it difficult for investors to access and manage the risk associated with SAF production.

On top of this, the technology for large-scale SAF production is still in its infancy, with many projects facing hurdles related to permits, licensing, and engineering, procurement and construction (EPC) processes. Access to high volumes of cheap, renewable energy—critical for the production of certain types of SAF, particularly e-fuels, is another significant challenge, with competition for these resources likely to intensify as the green energy transition accelerates.

What can investors do to mitigate these risks and be a part of the solution?

With all of this in mind, there is a particularly pertinent role for sustainable finance as a key part of the aviation decarbonisation solution. For early stage venture capital there is a need to activate new technologies, first-of-a-kind (FOAK) projects and solutions. For institutional investors and financial institutions, engaging with their aviation portfolio companies to ultimately ensure airlines, OEMs and aviation fuel providers (oil and gas companies) are facilitating an integral shift to alternative aviation fuels, and other important levers, such as demand management, policy change and more.

As key drivers of our economy who have a strong influence on heavy emitting companies and policy makers, investors and financial institutions can work to ensure these measures to decarbonise aviation are activated and viable for the near and long term in a just and equitable way, through facilitating finance and investment for key solutions and advocating for enabling policy positions to mitigate risk and ensure sustainable returns.

Read Climate Catalyst’s full report with investor insights and actions. Link to report under Relevant resources section below.

Climate Catalyst has also curated a list of resources on everything decarbonising aviation which you can find here!

Stay tuned for Climate Catalyst’s upcoming briefings on just transition, equity and environmental considerations for the aviation fuels transition, and a white paper on the role of energy players.