Explosive new ICCT report says “offsets” will dominate “alternative fuels” in aviation

“Bulk of aviation emissions reductions will be achieved through carbon offsets,” not fuels, writes ICCT

• Slow scale-up foreseen for biofuels
• Challenges in feedstock costs
• Carbon pricing too little, too late
• The fatal distortion lies in petroleum markets

In Washington, the International Council on Clean Transport reports that “it is likely that the bulk of aviation emissions reductions will be achieved through carbon offsets and efficiency improvements,” and not through the development and deployment of aviation biofuels.

In the report, Alternative Jet Fuel Development and Deployment in North America (which you can download here) lead author Nikita Pavlenko writes that “the fuel pathways that can supply the steepest GHG reductions are constrained by feedstock availability, cost, and time it would take to commercialize an advanced AJF industry. In addition, using these feedstocks in AJF may reduce opportunities to abate emissions in other economic sectors, such as the heavy-duty road sector.”

The CORSIA problem

The problem in part is one of design. Cheap offsets, that is. “The high expense of AJFs relative to the low projected cost of offsets in the near future make it unlikely that CORSIA alone will drive high levels of fuel switching,” says the ICCT report.

It adds, “the plan’s delayed transition from collective, industry average to individual offset responsibility greatly reduces the incentive for any individual airline to rely on AJFs to mitigate emissions, particularly in the early years. Estimates of the value signal of CORSIA suggest that direct offsetting costs are unlikely to exceed 5% of fuel costs by 2035 without substantially higher offset prices. Robust policy support would be necessary to spur AJF deployment at the scale needed to make a substantial contribution to CORSIA commitments.”

What is CORSIA, anyway?

This is the Carbon Offsetting and Reduction Scheme for International Aviation, which is the International Civil Aviation Organizations’s ICAO’s primary policy tool for reducing the international aviation sector’s emissions.

CORSIA offers a phased implementation; the first two phases (the pilot phase, 2021–2023, and Phase 1, 2024–2026) are voluntary, and Phase 3 (2027–2035) is mandatory to most aviation traffic. Both Canada and the United States have committed to the voluntary phases of CORSIA.

The size of the opportunity

ICCT concludes that by Canadian and U.S. international carriers would need to offset 250 Mt of CO2 by 2035, based on expected growth and fuel efficiency gains.

In practical terms, the industry would need to use 50 billion gallons of fuel, by 2035 (that’s a cumulative figure, not an annual production) to reach those numbers with a fuel that cut emissions by 50%.

So, think 3.3 billion gallons per year, in the US and Canada, starting in 2020. Alternatively, 5 billion gallons starting in 2025 will do the trick.

The math outlines the challenge. Right now, advanced biofuels refineries that can make jet fuel are planned in the 10-75 million gallon per year range, and Wall Street isn’t exactly falling over itself to invest in them, and airlines have taken a very proactive position on signaling intent to purchase, so long as it doesn’t cost any more in dollar terms. Minimally, we’re looking ta 35 refineries, maybe more. Needed soon.

The problem of course continues to be the old one.

1. The improved performance of these fuels is in carbon, not mileage (there’s a very modest 1% or so fuel efficiency gain from switching to biofuels — not enough to justify the expense of fuel-switching).

2. The value of every bio-based feedstock grown at scale far exceeds its energy value. For growers, switching from existing customers to fuel customers requires a higher price they are not seeing.

3. The lone exceptions are bio-based waste residues and wood — there’s not enough of the former, and energy prices are too low for the latter.

4. Petroleum-rich land and sea areas are generally sovereign-owned, while bioenergy land is generally in private hands, and the value of sovereign-owned land is not subject to market forces, which would substantially raise the cost of petroleum.

Liquid fuel itself is traded in the most dynamic, competitive and fungible market of all — the oil market — and it gives the illusion that free-market forces are at work. Which makes libertarians wary of intervention to secure free markets. Ironically, government actions are labeled as market-distorting, rather than liberation.

The hard data on petroleum leasing price distortion

In December 2016, CNBC reported that the “average price for the three most expensive deals in the Midland Basin this year was nearly $49,000 per acre, compared with an average of $38,300 per acre for the top three purchases in 2014.”

So, that’s the free market. Now, let’s look at the sovereign market. The Washington Post reports:

“For decades, the minimum bid to lease public land for fossil fuel production has been just $2 an acre. Annual rental fees, which companies pay to hold and explore federal lands before production, are just as low. And the royalty rate for oil and gas produced onshore has remained at just 12.5 percent since 1920.” (Note to readers: these are per-year lease costs, not one-time).

It’s not an inconsiderable amount of fuel coming on to the market with completely distorted costs. Again, the Post report that “oil, gas and coal from public lands – including offshore leases – still account for 25 percent of total U.S. fossil fuel production.” And American Progress reports that 34.5 million acres are leased this way.

An example from everyday life

Imagine buying a condo down the street, to generate a little rental income, for $200,000.  And renting it for 64 cents per month. That’s the same economic structure as petroleum leasing.

First of all, you’ll never get a mortgage on that deal. Second, you’d be crazy to do it, you can earn 250 times as much holding the money in a CD at a federally-insured institution, with absolutely no risk, no hassle at all.  Only the federal government would take such a deal, since they didn’t pay for the land and want to keep gasoline prices cheap.

By contrast, a farmer has to pays $325 per acre to lease land. That was in in 2016, according to our friends at the University of Illinois at Champaign-Urbana.

So, that’s why you pay more for biofuels than petroleum, in a nutshell. And why the ICCT sees problems for airlines ahead in buying alternative jet fuels.

Next steps for aviation

Leaving aside the problem of land-value distortion, for which the solution is a better market-making mechanism that raises revenues for royalty owners rather than setting a goal of giving away land to keep gasoline prices artificially low, what’s ahead for the aviation industry?

Option one is setting a carbon price that levels the playing field. ICCT likes that it is seeing in Canada.

Canada’s proposed Clean Fuels Program provides a solid foundation for incentivizing the most effective AJFs because it uses an LCFS structure that rewards fuels in proportion to their carbon intensity. However…a blending mandate or other aviation sector– specific target would help to create a market for AJFs in the absence of a strong value signal from CORSIA.

The Bottom Line

Given the lack of a free market in petroleum based land, an offsetting mechanism in carbon is a must. The ICCT sees promise in the LCFS model.

We do need change. Right now, we’re leasing public land at absurdly low rates so that consumers don’t pay high fuel prices. Now we want airlines to switch from subsidized fossil fuels. So we set up carbon offsets to be cheaper than alternative fuels. So airlines buy offsets instead of fuel-switching, pass along the cost of carbon in the form of higher ticket prices,. Net result, we’ve increased fossil fuel prices, and we don’t reduce carbon.

Exactly the opposite of our policy goals.