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January 30, 2025All eyes on US regulatory shake-up, but European and Chinese developments continue to drive global SAF market
Regulatory milestones overshadowed by US government’s climate policy bonfire
Regulatory developments in Q4 2024 were mainly focused on preparations for implementation of key measures – the 45Z Clean Fuels Production Credit in the US and the RefuelEU Aviation and UK SAF mandates in Europe – in January 2025. But these major milestones were overshadowed by anticipation of the new administration in the US, and by uncertainty over its potential impact on SAF markets.
Initial signs are that the new administration aims to be true to its word in embarking on a wholesale revision of much of the previous government’s climate and energy-related policy. Executive Orders signed by President Trump on his first day in office included commitments to withdraw once more from the Paris Agreement, boost oil and gas production and to “terminating the Green New Deal”. The new government has a majority in both houses of the US Congress, giving it – theoretically at least – a strong chance of enacting its desired changes.
Specific to SAF, the 45Z Clean Fuel Production Credit theoretically took effect on 1st January, providing for tax credits of up to US$1.75 per gallon on US SAF production. Government guidance necessary for implementation (notably on product/feedstock eligibility and GHG emissions modelling) was released in the last days of the Biden administration. A key point of this guidance was the exclusion of imported Used Cooking Oil as an eligible feedstock for 45Z, due to concerns over potential mis-labelling and fraud in international UCO supply chains. The Treasury and IRS are to provide additional guidance on UCO imports during the year.
However, the January guidance was provisional, leaving the finalization of the scheme to the new government, therefore prolonging the uncertainty under which SAF and other low carbon fuel producers have been operating through 2024.
Inflation Reduction Act plans – scalpel or sledgehammer?
As noted in Q3, President Trump has repeatedly referred to the “Green New Scam” and committed to clawing back funds from the IRA, if not repealing it entirely. Language in Executive Orders such as “Unleashing American Energy” is certainly strong, ordering an immediate review of all regulations that may place an “undue burden” on domestic energy production, and immediately pausing the disbursement of funds through the Inflation Reduction and Infrastructure Investment and Jobs Acts. Overall, early signs pointing to a fundamental re-ordering of regulatory support for decarbonisation in general were bolstered by the issue on 27th January of a memorandum by the Office of Management and Budget (OMB) directing government agencies to immediately pause disbursement of Federal grants and loans, while they provided information on the extent to which funding contradicted the policy priorities outlined in the Executive Orders. Based on initial information regarding the questionnaire issued to government agencies, the 45Z credit is one of those to be paused. In theory, therefore, US SAF producers will be unable to access the credits for the time being. Furthermore, the OMB order appears to encompass grants to SAF producers under the Fuelling Aviation & Sustainable Transition (FAST) program, although whether this includes grants already approved (but not yet paid out) is unclear.
However, some factors may balance the outlook, at least for SAF and other biofuels. In the immediate term, the OMB-ordered pause to funding disbursement has been temporarily blocked
by a Federal judge in response to a lawsuit brought by a group of stakeholder organisations. In addition, the memo states that the pause is intended to give the government time to assess funding measures, and that the pause could be as short as one day.
At a higher level, the Unleashing American Energy Executive Order specifically includes biofuels in its list of domestic energy resources on which “undue burden” must not be imposed. The explicit instruction in the Order that “global” concerns (for which read GHG emissions) be decoupled from domestic considerations also implies that US biofuels may well face less onerous requirements on life-cycle emissions performance to benefit from government support.
Furthermore, the new government’s majority in the House may be too narrow to support the revocation of key measures such as 45Z or RIN credits. These are significant economic benefits to heavily Republican leaning agricultural economies in the US Midwest, and Representatives from these areas would face challenges in giving such measures their support. These factors may well support an approach to IRA revision closer to that suggested by Republican House Speaker Mike Johnson of using “a scalpel and not a sledgehammer”.
Finally, state-level initiatives continue to drive decarbonisation on the ground. Notably, California has stepped up its LCFS program, and signed an agreement with airlines targeting 40% SAF use by 2035. While these and other state measures may be challenged by Federal government, this would likely be a more complex procedure than the signing of Executive Orders.
Longer-term, shift may focus weight of SAF capacity growth in US towards ETJ, but domestic UCO and oilseed crops could benefit in the short-term if 45Z is maintained
While unpredictability is likely to be a watchword of the new government, and its ability or willingness to completely dismantle the IRA remains unclear, the support for SAF represented by the 45Z credit is likely to be maintained in some form, even if immediate functioning of the measure is disrupted by the OMB-ordered funding pause. However, the focus of this support can be expected to shift further towards energy security and away from Carbon Intensity, potentially along the lines of the September 2023 Farmer First Fuel Incentive Act put forward in September, which sought to limit 45Z support to fuels from US-produced feedstocks.
Whether or not imported UCO is eventually permitted, the new government is likely to ease requirements on Climate Smart Agriculture for corn-to-ethanol-to-SAF, and to enhance support for US-grown crop feedstocks in general. This would provide increased impetus for new Ethanol-to-Jet capacity in the coming years. However, in the short-term, there is insufficient ETJ capacity to take advantage of any refocusing of 45Z towards ethanol, and US UCO and oilseed crops would be the most likely immediate beneficiaries (as well as domestic and imported tallow, which is not barred by the January 45Z guidance).
For US SAF producers, this is a period of major uncertainty. Most immediately, the status of many Federal grants and loans for capacity investment is unclear, while the immediate ability to access 45Z credits depends on whether the government confirms that the measure does not contravene its new policy priorities, principally as expressed in Unleashing American Energy, and on how long the process of confirmation takes.
Meanwhile, in the short-to-medium term, much depends on the outcome of Treasury/IRS deliberations on the requirements for “appropriate substantiation and recordkeeping requirements” that they decide on for UCO, and whether UCO becomes a tool in any impending trade friction between the US and China. Executive actions in the first days of the new
government did not yield the promised bumper crop of tariffs on foreign exports, but with UCO imports from China having climbed dramatically since the implementation of the previous IRA tax credits, restrictions may well play into the wider focus of the new administration on the USA’s trade position with other countries.
Meanwhile, in the rest of the world…
The attention given (understandably) to the new US government’s pronouncements has overshadowed several major – and indeed, market shifting – developments elsewhere. Most notably, January saw the implementation of the first stage of the EU’s RefuelEU Aviation mandate, obligating member states to blend 2% SAF in 2025. At the same time, the UK’s own SAF mandate, with the same requirement for 2025, also came into force. The achievement of these mandates will necessitate a clear step-change in SAF consumption during the year, and with both excluding fuel from crop-based feedstocks from eligibility, a consequential likely jump in demand for UCO.
Meanwhile, the Chinese government moved in December to cancel a longstanding 13% rebate on UCO export duty in December, denting the competitiveness of the exports that have become an important support to the scaling up of global SAF capacity, but improving the prospects of its own burgeoning SAF sector (Q4 also saw four new projects coming on stream with estimated capacity of almost 700 ktpa). The move reflects the government’s wider strategy of pivoting the Chinese economy away from low value exports and towards serving domestic consumption – thereby further supporting expectations of a Chinese SAF mandate at some point, as discussed in Q3 update – and on higher value exports. The immediate effect of the rebate cut was a sharp reported drop in Chinese UCO prices, with an attendant jump in European price. Reports also indicated that increased domestic supply is being sought by the numerous new or almost completed Chinese HEFA plants.
Spurred by somewhat relaxed feedstock availability, increasing Chinese production will presumably be funnelled towards meeting growing European demand for the time being. A degree of friction can be expected as European SAF producers hope for sufficient low-cost UCO to ensure growth and maximum profitability, while China encourages its own producers to scale up. However, this pressure is reduced by the US’ step-back from imported UCO, for the moment at least.
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