A Flight Path to Sustainability

Welcome to the second edition of "The Governance Connect", your monthly dose of corporate governance & sustainability updates, presented in a simplified manner, with the intent to serve as an informational and educational medium for audiences interested in the domain.

In this edition, we will explore the context of Sustainable Aviation Fuels or SAFs in relation to the ESG goals of the airline industry, their challenges, and the status of sustainable aviation, specific to India.

The aviation industry accounts for nearly 2.5% of global CO2 emissions and significantly impacts climate change. It is one of the most difficult spaces to chase net-zero emission targets and in ESG parlance, it is a hard-to-abate industry sector.

Before we segue deeper, here's a quick explainer of what ESG is all about:

ESG Goals: Aviation Industry

For airlines, ESG goals include reducing greenhouse gas (GHG) emissions, improving fuel efficiency, investing in innovation and technology, enhancing safety and security, promoting diversity and inclusion, supporting social causes, and ensuring good governance and transparency.

The airline industry has committed to achieving net-zero emissions by 2050, in line with the Paris Agreement & the Science-Based Targets Initiative (SBTi).

According to the International Air Transport Association (IATA), the global aviation industry has committed to three targets:

• ?Improving fuel efficiency by 1.5% per year from 2009 to 2020
• Capping net aviation CO2 emissions from 2020 (carbon-neutral growth)
• Reducing net aviation CO2 emissions by 50% by 2050, relative to 2005 levels

To achieve these targets, airlines must adopt a combination of measures, such as fleet renewal, operational improvements, carbon offsetting, and?SAFs. If you look at the snapshot of IATA's net-zero strategy, SAFs are at the core.

Among these measures, SAFs have the potential to reduce the life cycle carbon emissions of jet fuel by up to 80%

All about SAF

SAF or Sustainable Aviation Fuel is made from "feedstock" like plants, energy crops, solid waste (paper, wood, textiles, food scraps), non-palm waste oils etc. Now because the source of this fuel is primarily plants/crops, using SAF results in a massive reduction in CO2 emissions compared to traditional ATF.

SAFs are known as a 'drop-in' fuel which means they can be mixed with Aviation Turbine Fuel (ATF). Chemistry-wise it is very similar in its molecular structure to traditional ATF and can be blended (up to 50%) with ATF without requiring any changes to the aircraft engines. This is a huge plus for the industry and should result in higher adoption.

Over 300,000 commercial flights have been operated globally on SAF since 2011

Challenges:

Despite their environmental benefits, SAFs face several challenges that limit their widespread adoption and scale-up:

• Availability: The current production of SAFs is very low compared to the demand for ATF. According to IATA, SAFs account for less than 0.1% of global consumption. This is due to the lack of feedstock supply, production capacity, and distribution infrastructure for SAFs. SAFs are not available at all airports globally
• Cost: SAFs are 2X-5X expensive compared to traditional ATF. The production cost of SAFs is significantly higher, due to the high capital and operating costs of SAF plants, the low economies of scale, and the competition for feedstock with other sectors.
• Policy: The regulatory framework for SAFs is not harmonized across countries and regions, creating uncertainty and complexity for producers and users of SAFs. There is also a lack of consistent incentives and mandates for SAFs that can stimulate demand and investment in SAFs.

Industry Initiatives & Solutions

• Book & Claim Mechanism: This provides a solution to the logistical challenge of bringing SAF to market. It allows airlines to buy SAF credits when they cannot buy the fuel due to unavailability at an airport.
• Technological advancements: Boeing has announced its intention to deliver aircraft that can fly on 100% SAF by 2030
• Responsible Investing: A growing number of private equity firms are including ESG as an investment philosophy. With financial institutions looking to establish more environmentally responsible portfolios, investment along SAF production supply chains can result in a win-win scenario.
• Partnership with Passengers: Making the passengers aware of the carbon footprint and offering them an option to pay a surcharge to offset carbon emissions throughout the booking chain, is a strategy some operators have undertaken.

Another element of de-carbonizing aviation is compensating for residual emissions throughout the value chain, which cannot be avoided. This can be done by purchasing carbon offsets or insets which are essentially projects that reduce/ remove emissions elsewhere.

Airlines can support forest conservation, renewable energy, or community development projects that have verified climate benefits.

However, offsetting should not be seen as a substitute for emission reduction, but rather as a complementary measure

Status of Sustainable Aviation in India

India is one of the fastest-growing aviation markets in the world, with a projected annual growth rate of 9.2% until 2024. India's passenger traffic is expected to cross 850 million by 2030.

However, India also faces significant environmental challenges related to air pollution, waste management, and climate change.

According to World Economic Forum, India also generates about 62 million tonnes of municipal solid waste per year, of which only about 43% is collected and treated properly.

SAFs can offer a solution for both these challenges by converting waste into valuable fuel that can reduce emissions from aviation. Apart from this scaling the SAF industry has larger macro-economic benefits like:

India has taken several steps to promote the development and use of SAFs in its aviation sector. Some of these steps are:

• In 2018, India's first test flight using a blend of 25% SAF derived from jatropha plant oil was conducted by SpiceJet.
• In 2019, India's first commercial flight using a blend of 10% SAF derived from used cooking oil was operated by SpiceJet.
• In 2020, The Hon' Ministry of Civil Aviation (MoCA) launched an expression of interest (EOI) for setting up an integrated supply chain for SAF production.
• In 2021, MoCA announced a target of achieving 10% blending of SAF with conventional jet fuel by 2030.
• In 2021, Indian Oil Corporation, the country's largest fuel retailer, signed an MoU with LanzaJet, a US-based SAF producer, to build a commercial-scale SAF plant in India.

In May 2023, India’s first commercial passenger flight using an indigenously produced SAF blend was flown. Air Asia flight (I5 767) flew from Pune to Delhi powered by SAF blended aviation turbine fuel (ATF) produced by Praj Industries Ltd by using indigenous feedstock, supplied by Indian Oil Corporation

These initiatives indicate that India has the potential to become a leader in the global SAF industry, given its access to feedstock, low-cost solar energy, and a growing aviation market.

Here's a highly recommended read on the topic, published by the World Economic Forum: " The Clean Skies for Tomorrow Initiative "

The Clean Skies for Tomorrow initiative brings together the know-how and influence of private and public institutions from across the value chain to lead emissions reductions in the aviation sector.

In Conclusion:

While India continues to make positive strides toward sustainable aviation, the larger problem of solving for the economics, mandates industry stakeholders, government policy, and financial institutions to come together to make the green skies of the future a possibility!

The next time you take to the skies... you could be flying on a green-powered aircraft.

References:

weforum.com

Investindia.gov.in

McKinsey.com

news.aa.com

bp.com

IATA.org

Disclaimer: The information contained in this article is for general informational purposes only and is not intended to be a substitute for professional legal advice or strategy. The data referenced within the article has been researched and sourced from various sources, listed under the references section. The author of this article makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information contained in this article. Any reliance you place on such information is strictly at your own risk. In no event will the author be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this article.