A European response to US subsidies and the resulting distortions of competition for European companies is in the making. This is a reality check, not creeping protectionism: Europe risks losing the increasingly aggressive clean energy race to the US and China.
The success of the European aviation industry’s ambitious decarbonisation path, as laid out in the Destination 2050 Roadmap and supported by certain elements of the Fit for 55 package will significantly depend on the use of new energy sources: sustainable aviation fuels (SAF) and hydrogen.
The industrial policy flight has left the European Union airport. Europe will likely be the first continent with initiatives such as a SAF blending mandate, which will set a mandatory level of SAF to be used by airlines or the first hydrogen aircraft to take to the skies. But more is needed. One area where this is particularly the case is on financing. As it stands, a level playing field will be missing, in terms of equal access for all EU countries to funds that will support key industries in their decarbonisation efforts.
SAF production in Europe is still negligible and the supply of SAF remains limited. This is partly because SAF is considerably more expensive than kerosene, due to their high production costs. This is where an industrial policy approach comes in. In the US, loan guarantees, grants and tax support for Carbon Capture and Storage (CCS) and green bond investments has created the most advantageous area of the world to produce and use sustainable fuel. This jeopardises the EU’s sustainable fuels ambitions, especially when you consider that it is already competing with the US for access to feedstock for SAF and on transcontinental routes in the airline business.
The European Commission – DG MOVE and DG GROW – has recently started to change the narrative on industrial policy by initiating the Alliance for Zero Emission Aviation (AZEA) and Renewable and Low-Carbon Fuels Value Chain Industrial Alliance (RLCFA).
SAF blending mandates, as currently foreseen in the EC’s ReFuel EU proposal, provide immense market certainty to investors, significantly reducing market and policy risk for a SAF refinery. If fluctuations in carbon pricing can lead to uncertainty and risks, fluctuating revenues from the US tax schemes can also lead to uncertainty and risks. This means that the EU SAF mandate can bring certainty in terms of volume of demand and feedstocks, something vital for SAF investors. Conversely, the lack of this certainty in the US could make it a riskier market for entrepreneurs in the long run.
We often hear about the carrot and the stick approach to changing behaviour. Despite it’s almost cliched status, it is still a useful analogy when we look at EU regulation. Unfortunately, Europe is leaning more on its sticks than carrots when it comes to SAF. While this does provide market certainty, it does not remove the risk for early innovators. For the first 5-10 years, effective mechanisms like the IRA will help the sector grow. More price gap support and grants for to scale up new technologies would mitigate the price impact.
Dedicated support for SAF/hydrogen production and use in the planned Net Zero Industry Act announced by Commission President Ursula Von der Leyen would be a first step. One of measures could be an expansion of a system of ETS allowances for SAF. The mechanism, currently under discussion by the co-legislators, appears comparable to the measures in the IRA. It could cover part of the price differential between SAF and kerosene from 2024 onwards. However, its scope is likely to be limited and not comparable to the IRA provisions. In addition, the sustainability criteria for the raw materials used to produce European SAF are more stringent, thus increasing production costs in Europe.
Failure to act will ultimately increase SAF costs in Europe compared to the US due to higher costs of production, SAF uplift, but also inability to secure the necessary feedstock for production. It would reduce EU airline competitiveness due to cost disadvantages, and impact air transport costs for passengers and cargo due to higher SAF costs. Finally, it would create risks of missing climate targets.
There is an opportunity to accelerate the development of a sustainable aviation industry in Europe. Let’s not miss it. At stake is Europe’s ability to preserve its energy sovereignty and maintain a competitive European aviation industry.