Decarbonizing Aviation: Scale-Up Costs Biggest Challenge to Progress

SAF adoption is central to IATA’s Net-Zero 2050 roadmap, which focuses on achieving net-zero CO₂ emissions by 2050. SAF solutions are expected to provide the largest share of aviation’s carbon abatement through to 2050, while offsets will also continue to play an important role. Decarbonizing aviation requires international cooperation and alignment. Yet policy, still in its initial stages, remains fragmented, with significant differences in approach and ambition across regions. Although policymakers initially focused on placing a carbon price on emissions from flights, they have more recently shifted efforts to include more direct incentives for SAF uptake. 

Europe is leading the way in terms of ambition and progress on policy adoption. Domestic (intra-EU) aviation emissions have been part of the European Union Emissions Trading System (EU ETS), a cap-and-trade framework designed to regulate and reduce greenhouse gas (GHG) emissions, since 2012. Under this system, airlines are required to monitor, report and verify their emissions. 

More recently, European legislators have shifted focus to more directly supporting SAF adoption. Their strategy is based on a “stick” approach, which relies on imposing SAF incorporation mandates, coupled with high penalties for noncompliance. In the European Union, the flagship ReFuelEU Aviation (RFEUA) SAF policy took effect in January 2025. Aviation fuel suppliers are required to include a minimum share of SAF in the aviation fuel supplied at EU airports. The mandate starts at 2% SAF in 2025 and increases in a stepwise fashion every five years (see figure below) to reach 70% in 2050. There are also Renewable Fuels of Non-Biological Origin (RFNBO) and electro-sustainable aviation fuel (e-SAF) subtargets starting at 1.2% in 2030 and steadily rising to 35% by 2050.

The UK SAF Mandate, also in its infancy, has a more conservative trajectory that gradually increases to 22% by 2040, and is underpinned by a certificate trading scheme, capital expenditure (capex) grant funding and an upcoming revenue certainty mechanism. In addition to the main obligation, there is a separate Power-to-Liquids (PtL) subtarget and a cap on the contribution of hydroprocessed esters and fatty acids (HEFA) from segregated oil and fat feedstocks. This aims to incentivize the development of novel SAF production technologies. 

Suppliers can meet the main obligation and PtL obligation by supplying the required fuel or purchasing certificates to meet a shortfall through a certificate trading scheme. Certificates are awarded in proportion to energy content and GHG footprints, allowing suppliers to reduce their obligation by supplying SAF with lower GHG intensities. Alternatively, suppliers may buy out of their obligations by paying the buy-out price, although its level is prohibitive at £5,875 per metric ton for the main SAF obligation and £6,250 per metric ton for the PtL obligation. All eyes will now be on how the UK SAF market evolves and what lessons can be brought to the European Union’s first review.

In North America, the landscape for SAF policy has been characterized by fragility and uncertainty, particularly regarding supply versus demand dynamics that are increasingly influenced at state and provincial levels. In the US, the 2022 Inflation Reduction Act introduced the Clean Fuel Production Credit, or 45Z, which initially offered credits ranging from $1.25 to $1.75 per gallon for SAF. However, delays regarding implementation led many fuel producers to abandon their SAF projects in favor of renewable diesel (benefiting from existing federal and state mandates) or even fossil diesel. This uncertainty deterred investors, as the renewable fuels market faced low margins and volatile feedstock costs.

At both US federal and state levels, various legislative efforts are underway to promote SAF. Illinois, Nebraska, Minnesota and Washington have introduced or are implementing tax credits to incentivize SAF production. California’s Low-Carbon Fuel Standard (LCFS) program currently provides greater incentives to produce renewable diesel than to produce SAF, although treatment of SAF is developing in other state LCFS programs. Meanwhile, in Canada, British Columbia has set mandatory blending requirements for renewable fuel in jet fuel, aiming for a gradual increase through 2030. Canada’s Clean Fuel Regulations program also incentivizes SAF. Both the US and Canada are signatories to the CORSIA agreement, although the US's commitment is uncertain following shifts in political leadership and policy direction.  

Other markets are also witnessing the development of regulations and policies that support the adoption of SAF. Countries in Latin America and Asia are beginning to set SAF targets, although these remain modest compared to levels in Europe. In Latin America, Brazil instated a 1% emissions reduction mandate for aviation by 2027, while Chile and Colombia launched SAF roadmaps to achieve a 50% SAF blend rate in 2050. Several Asian countries are targeting 1% SAF within the next two years, notably Thailand, Singapore and Indonesia by 2026, and India and South Korea by 2027. Some have set more ambitious SAF blend targets for international flights by 2030, with Singapore aiming for 3%-5%, Taiwan targeting 5% and Japan striving for 10%. Several other Asia-Pacific markets, such as Malaysia and Australia, are approaching demand-side measures with more caution but are expected to communicate their plans soon. Lastly, China has set a SAF consumption target of only 50,000 metric tons by 2025.

Despite the scheme being in place for over four years, restrictions related to credit eligibility limit its feasibility. S&P Global Commodity Insights forecasts credit demand for the current phase to reach 155 million metric tons of CO₂ equivalent (mtCO₂e), against a current supply of only 16 million mtCO₂e from the eligible Guyana REDD+ project, a mitigation effort that reduces emissions from deforestation. Moreover, our in-house forecast for Phase I eligible supply indicates that a volume of credits sufficient to cover demand for 2024–26 would only materialize after the end of the compliance deadline. Availability of suitable credits is one of the main issues that airlines face when trying to comply with the scheme, notably because the price divergence between CORSIA-eligible credits and alternative fuels would make the former a more attractive decarbonization option.

The average Platts CORSIA-Eligible Credits (CEC) price assessment was $20.97/mtCO₂e in the first half of 2025, peaking at $22.25/mtCO₂e in June. This is much higher than other credits in the VCM, which averaged $14.98/mtCO₂e for afforestation and reforestation projects. However, CORSIA-eligible credits are still lower than achieving reductions using SAF, given current prices.

CORSIA is enforced at the state level, meaning that participating countries are responsible for establishing compliance rules and penalties for airline operators that fail to comply. In most cases, these penalties have not yet been set, with Brazil and the UK being notable exceptions. The discretionary nature of penalties introduced by member states poses significant risks of noncompliance. If countries like China and India (which are not participating in Phase I) do not create regulations to enforce compliance in Phase II, the effectiveness of CORSIA could be significantly undermined. 

Importantly, the European Union’s position on CORSIA could threaten the future viability of the scheme. The EU ETS currently covers intra-European flights, with CORSIA to cover any flights from an EEA country to a third country (and vice versa). While this distinction was initially introduced to address fierce international opposition to coverage of all flights under the EU ETS, by July 2026, the European Commission will have to report to the EU Parliament and the European Council on CORSIA's environmental integrity. If the commission finds CORSIA inadequate for addressing international aviation emissions, the ETS may be extended to include flights departing from the EEA to third countries. This could potentially prompt other countries to withdraw from the scheme.  

According to Platts (part of S&P Global Commodity Insights), SAF prices in Europe lost 39% of their value in 2024, falling from near $3,000/metric ton at the beginning of the year to under $1,716/metric ton in May as production increased but new demand failed to materialize. Such a price move may be helpful for airlines and their customers, but it directly impacts production margins and investments, with construction of several facilities canceled or paused, citing “challenging market conditions.” So far in 2025, SAF prices have fallen to record lows, with the global SAF market oversupplied, which is a notable shift for a market where lack of availability is a long-term theme. Over the second half of 2025, prices have rebounded as we head toward the first European compliance deadline, with outright prices reaching $2,260 per metric ton in September, more than three times the value of jet fuel.  

Managing price risk is an intrinsic part of most commodity markets, but for new markets such as SAF, this can pose unique challenges. A large majority of sustainable aviation fuel is priced at a significant premium to jet fuel. This results in pricing a fuel typically produced from a biogenic feedstock versus a fossil fuel. The result can be a volatile premium, a particularly challenging scenario when contracts are being priced as jet fuel plus a fixed premium and may require break clauses when prices fluctuate outside a set range. 

The SAF market is currently very small, estimated at only 1.1 million metric tons (MMt) in 2024, which is less than 0.5% of global jet fuel consumption. Demand for SAF is primarily driven by policy incentives and voluntary commitments by airlines, with a significant concentration in Europe and North America, which together accounted for almost 90% of global consumption in 2024. Nearly 60% of that was consumed in Europe, where countries like Sweden, Norway and France had SAF mandates in place, and the largest local airlines have committed to replacing 10% of their jet fuel with SAF by 2030. 

SAF production capacity is also increasing, and S&P Global expects it to reach 4.3 MMt by the end of the year, with about 25 dedicated SAF plants (plants designed to produce mostly SAF) in operation globally. There is additional SAF produced as a by-product of renewable diesel (RD) or from plants with a more balanced RD/SAF yield. Regional capacity/demand imbalances are already emerging and could be an indicator of future trade patterns. More than half of the existing dedicated SAF capacity (2.3 MMt) is in Asia, despite low levels of demand in the region, while only about 1 MMt is in North America (600,000 metric tons) and Europe (400,000 metric tons), the largest markets. 

S&P Global expects strong growth in the SAF market over the coming decades, with demand projected to increase tenfold by 2030, to above 11 MMt, and then rise exponentially to almost 80 MMt by 2050. SAF is expected to account for 18.6% of the world’s aviation fuel in 2050. Europe will be the main driver, especially in the short to medium term. The high SAF mandates in the European Union and the UK will support SAF adoption in Europe, where demand is forecast to reach close to 5 MMt in 2030 and almost 28 MMt by 2050.  

In Asia, SAF consumption will be slow to take off and initially will be driven by airlines and modest SAF blend mandates in a couple of markets. Consumption is thus expected to reach just 3.6 MMt in 2030 and be concentrated in OECD markets and aviation hubs. After 2030, demand growth will accelerate as mainland China and India significantly ramp up their SAF blends, bringing regional volumes to 30 MMt by 2050. Similar to Asia, SAF uptake in the US will be slower until the 2030s, due to weak policy support. In the longer term, demand will rise as state-level incentives expand alongside clean fuel programs, but North America will fall behind Asia and Europe, with demand expected to reach only 12.7 MMt by 2050. Adoption in other regions will remain limited.   

One of the key challenges the industry faces is expanding capacity to meet this level of demand. S&P Global tracks RD and SAF plants and projects and has identified over 190 new dedicated SAF projects announced worldwide. If all of these projects come to fruition, SAF capacity could grow almost tenfold to more than 40 MMt by 2030. Most projects are in North America (15.8 MMt), Asia (13.4 MMt) and Europe (7.2 MMt). However, only a fraction of them, equivalent to 7.3 MMt of SAF capacity, have reached a final investment decision (FID), with 28.5 MMt of capacity still awaiting approval. With the world needing 80 MMt of SAF by 2050 according to S&P Global estimates, the scale of the task is significant. 

Ramping up SAF capacity has its challenges. Nearly two-thirds of the planned capacity by 2030 (25.3 MMt) is HEFA. While this is a commercially mature and cost-effective SAF production technology, it is constrained by lipid feedstock availability. Biofuels mandates and decarbonization requirements are being extended beyond road transport to other transport modes (rail, shipping and aviation) and off-road sectors (heating, etc.). They are also being progressively rolled out and bolstered in developing countries. The growing cross-sectoral appetite — and increasing global demand — for these same feedstocks is expected to exacerbate the feedstock supply conundrum.  

Other options beyond HEFA exist, but they will need to be developed for supply to meet projected demand. One fifth (8.4 MMt) of announced capacity by 2030 will rely on the Alcohol-to-Jet (ATJ) pathway, and the rest on Fischer-Tropsch (FT), Methanol-to-Jet (MTJ) and other newer pathways. However, these pathways are more nascent and costlier, and only a few have reached FID. Of the approximately 110 non-HEFA bio-SAF projects announced globally, the vast majority (105) are “speculative,” that is, currently in the feasibility or pre-FEED stage and have yet to reach FID. They face structural headwinds, namely technical challenges with integrating multiple early-stage conversion processes, high capex and production costs, reliable feedstock supply chains, and demand and price uncertainty. 

Finally, Power-to-Liquids (PTL) is touted as the answer to these issues and the long-term solution to decarbonizing aviation. However, the e-SAF sector is also facing headwinds, with most planned projects yet to reach FID. The main hurdles are related to policy uncertainty, technology risks, reliance on other key value chains and project financing. Most e-fuel pathways are currently at a low level of technological maturity, with facilities only operating at pilot or demonstration scale. There remain technical risks associated with integrating multiple conversion technologies in a single process at full industrial scale. Moreover, limited visibility on long-term prices and penalties (particularly under RFEUA) results in challenges in attracting buyers willing to commit to long-term offtake contracts, which are crucial for developers to secure project financing. Lastly, e-fuel production requires a source of green hydrogen and captured CO₂. While electrolysis and CO₂ capture technologies are mature, projects and supply chains have yet to develop to the level required for large-scale e-fuel production.

The cost of decarbonization could ultimately threaten airlines’ credit quality, particularly in Europe, where regulations are the tightest. Airlines are already heavily investing in newer, more fuel-efficient planes (with new narrow-body aircraft able to deliver fuel improvements of about 20%-30%), while also facing rising costs from tightening environmental taxes and regulations and mandates to use more expensive SAF. 

We think higher-rated airlines are best positioned to cope with rising carbon costs and should be able to pass on much of these costs to passengers via higher airfares, albeit with a time lag, at least in the short term. Airlines have shown a strong ability to pass on a substantial proportion of volatile fuel costs historically. Some airlines have introduced explicit environmental surcharges on certain routes. Airlines may receive branding benefits by pledging to commit to environmentally friendly practices and targets, if these are perceived as genuine and not “greenwashing.”   

Within Europe, we see the gap in operating performance between the leading European airlines and the weaker airlines as likely to widen, particularly those with thin operating margins, weaker brand strength and route networks, and aging or less fuel-efficient fleets. We expect that an airline's ability to pass carbon costs onto passengers will become an increasingly important competitive advantage. Elsewhere, there is generally less pressure to reduce carbon emissions, but this could change over time.

Decarbonization of aviation is a costly business, especially as it remains a fast-growing industry. Global passenger volumes are forecast to grow by an average of 3%-4% per year, which may outpace average efficiency gains and SAF uptake. Offsets will play a key role if the industry is to achieve its decarbonization targets, but regulations and related costs remain uncertain. 

SAF mandates will continue to rise and will require billions in capital expenditure. The aviation operating environment remains uncertain, and the appetite for investments in further SAF capacity has slowed down over the last year. Supply is constrained, policy support is uncertain, and concerns around cost competitiveness — with even the more affordable SAF pathways and feedstocks costing about three times the price of conventional jet fuel — remain a growing issue. If the industry is to ramp up SAF production considerably, more costly technologies (such as 2G-ATJ and PtL) will be needed. 

We will continue to closely monitor developments at both the sector and rated issuer level. 

Contributors: Nicola Koutsoumbi, Brianne Paschen and Angela Long