Although the auto industry gets a lot of attention when it comes to climate change, the aviation industry also contributes a good chunk of planet-warming emissions. But unlike electric cars and buses, electric planes are a long way from becoming a broadly commercial reality.
Enter sustainable aviation fuel, or SAF. This alternative fuel is made with non-petroleum feedstocks such as food and yard waste, used cooking oil, soybean oil and ethanol from corn. Although burning the finished fuel emits a similar amount of greenhouse gases as traditional petroleum-based fuels, carbon emissions over the SAF lifecycle can be significantly lower. Proponents say that’s because the CO2 emitted during an aircraft’s flight is re-absorbed by the biomass used in SAF production. SAF is interchangeable with conventional jet fuel, meaning it is compatible with existing aircraft and airport infrastructure.
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On April 30, the U.S. Treasury Department and the Internal Revenue Service clarified tax rules for SAF makers, using a carbon accounting method that counts corn and soybean fuel feedstock produced using certain environmentally friendly farming methods.
“The new Treasury guidelines are a positive development for U.S. SAF producers, providing clearer regulatory frameworks and potential financial incentives, which should enhance domestic production capabilities,” says Ricky Gomulka, managing partner with aircraft charter company JetLevel Aviation.
Current subsidies provide between $1.25 and $1.75 per gallon of SAF that reduces greenhouse gas emissions by at least 50% for the whole lifecycle of the fuel. It’s all part of the Biden administration’s goal to incentivize domestic production of SAF to at least 3 billion gallons a year by 2030, compared with the 24.5 million gallons consumed in 2023. The SAF tax credit was originally established by the Inflation Reduction Act in 2022.
Big companies are getting on board. Last month, the Sustainable Aviation Buyers Alliance said close to 20 corporate aviation customers, including Meta Platforms Inc. (ticker: META), AstraZeneca PLC (AZN), Morgan Stanley (MS) and Netflix Inc. (NFLX) had committed to buying $200 million in SAF credits over a five-year period.
Major airlines have been buying the fuel, but its adoption is just a drop in the bucket — or fuel tank — of all commercial airline flights because SAF costs more than traditional jet fuel. Hence, the Biden administration’s subsidies.
What About Green Hydrogen and Electric Planes?
A long-term risk for SAF producers is that planes powered by green hydrogen or electricity might come into wide commercial use, but that possibility is a long way off.
“Electric and hydrogen propulsion technologies are either too far out or not feasible for long-haul travel, leaving the world’s current 28,000-plus aircraft fleet in need of a solution for a combustion engine that provides meaningful emission reduction, and that can only be SAF,” says Yevgeniya Levitin, head of aviation with Natixis Corporate and Investment Banking Americas.
Although electric or hydrogen aircraft would more drastically reduce the carbon footprint of the aviation industry, SAF is a necessary transitional solution because of its compatibility with current technology and infrastructure, Gomulka says.
“It allows for significant emission reductions with current aircraft technology, serving as a bridge while zero-emission alternatives are developed and commercialized,” he says.
Small SAF Producers Taking the Lead for Now
As with other nascent industries, the SAF world is populated by small startups, meaning that publicly traded pure-play SAF producers are hard to come by.
Although Big Oil is getting interested in sustainable aviation fuel production, much of the development is being done by smaller companies.
“In general, we are not seeing the big oil companies taking the lead in this space, with some exceptions, at least not yet,” Levitin says. “Most of the heavy lifting and innovation is coming from startups dedicated to alternative rather than petroleum fuel production.”
Once SAF demand really takes off, some of the largest companies interested in SAF, such as Shell PLC (SHEL) or Exxon Mobil Corp. (XOM), might want to buy some of the smaller public or private companies involved in SAF. That would probably be good for shareholders in smaller publicly traded companies involved in SAF because the big oil companies would likely have to pay a premium.
“We expect large fuel manufacturers to be watching and waiting,” says Patrick Gruber, CEO of SAF producer Gevo Inc. (GEVO). “We expect them to acquire things once large traction is developed.”
That’s already happening. In 2022, Shell bought EcoOils, a business that recycles waste oil into feedstock that can be used to make SAF. Shell, along with Suncor Energy Inc. (SU) and others, has invested in privately held SAF maker LanzaJet.
“While large fuel manufacturers like Exxon are indeed likely to play significant roles in scaling up SAF production due to their existing infrastructure and capital, the clarity and incentives provided by the Treasury may encourage the emergence of more pure-play SAF companies,” Gomulka says. “This sector-specific focus can drive innovation and efficiencies potentially overlooked by larger, more generalized firms.”
SAF Stocks to Consider Now
Investors who want exposure to the SAF market outside of Big Oil stocks can consider the following four companies:
Gevo Inc. (GEVO)
In addition to SAF, Colorado-based Gevo makes renewable natural gas from dairy farm manure and high-protein animal feed from non-edible corn. It has contracted demand for about 350 million gallons per year of SAF, more than five times the capacity of a plant it is developing in South Dakota.
Neste Oyj (OTC: NTOIY)
This Finland-based company makes renewable diesel, marine fuel that uses less crude oil, and bio-based carbon for plastics producers, in addition to SAF. The company sells SAF to airlines including Delta Air Lines Inc. (DAL) and American Airlines Group Inc. (AAL), and cargo carriers including DHL Group (American depositary receipts for Deutsche Post AG trade under DHLGY).
Calumet Specialty Products Partners LP (CLMT)
This company makes oils, solvents and other products including fuels and asphalt. Its Montana Renewables subsidiary produces about 30 million gallons of SAF each year.
Aemetis Inc. (AMTX)
This company is developing renewable diesel and SAF from oils, fats and tallows available in California. It makes low-carbon ethanol from wood waste, and corn and renewable natural gas from dairy cow methane. It also builds carbon capture and sequestration systems.
Potential Upcoming SAF IPOs
Publicly traded SAF options may expand in the future. NEXT Renewable Fuels Inc. still plans to go public even though a blank-check deal fell through in 2023 because of a downturn in the special-purpose acquisition company, or SPAC, market. And XCF Global Capital Inc. said in March that it plans to go public through a SPAC deal with Focus Impact BH3 Acquisition Co. (BHAC).
“At XCF, we see tremendous growth potential from SAF and renewables, and we are very bullish on the sector,” XCF Global CEO Mihir Dange said in a press release announcing the deal with Focus Impact. “We are in the very beginning stages of SAF in the United States, and XCF is committed to being a leader in this space.”
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