Aviation's Green Transition: Analyzing the Impact of E-Kerosene and SAF on Industry Costs and Consumer Prices

Aviation’s Green Transition: Analyzing the Impact of E-Kerosene and SAF on Industry Costs and Consumer Prices

Aviation, notorious for its substantial carbon emissions, faces a challenging path towards achieving carbon neutrality. Current zero-emission aviation technologies are still decades away from commercial viability, making the quest for alternative solutions more pressing.

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A promising solution is e-kerosene, produced from green h2 and captured CO2. This fuel is nearly identical to traditional jet fuel and compatible with existing aircraft engines. It stands as a potential carbon-neutral alternative alongside sustainable aviation fuel (SAF) derived from biomass.

However, the World Economic Forum highlights a significant investment need in clean hydrogen for hard-to-abate sectors like aviation to achieve net-zero emissions, estimated at nearly $5 trillion.

The cost implications of these alternative fuels are a crucial consideration. The International Energy Agency’s report, “The Role of E-fuels in Decarbonising Transport,” outlines the economic aspects. It states that the best-case production cost for e-kerosene currently stands at about $80 per gigajoule or $3,500 per tonne. This price is significantly higher than conventional jet fuel, which ranges from $750-1,000 per tonne.

By 2030, advancements in electrolyser and renewable energy technologies could reduce e-kerosene costs to around $50 per gigajoule or $2,150 per tonne. Despite this reduction, e-kerosene would remain substantially more expensive than traditional jet fuel but could become competitive with current biomass-based SAF prices, ranging between $1,500-3,000 per tonne.

Renowned engine manufacturer Rolls-Royce, a leader in hydrogen jet engine development, predicts that hydrogen-powered planes are at least 20 years away from reality. Meanwhile, the IEA foresees a potential for a 10% e-fuel blend in jet fuel by 2030. This blend could increase the aviation industry’s fuel expenses by 15%, translating to an additional $75 billion cost.

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Fuel costs, which constitute 25-30% of total flight expenses, imply that ticket prices might only need a 5% hike if these increased costs are evenly distributed among customers. Interestingly, consumer demand for air travel has shown resilience to price hikes. Reports indicate that a 1% rise in jet fuel price leads to only a 0.02-0.03% drop in demand in developed OECD countries and a 0.04-0.05% decrease in emerging markets.

Airlines often mitigate fuel price volatility through hedging in the derivatives market, though it’s uncertain if this approach could apply to renewable hydrogen-based fuels.

The IEA notes that consumers’ direct exposure to jet fuel costs is limited compared to other fuels like gasoline and diesel. Nonetheless, a 5% increase in ticket prices could potentially reduce travel demand by 0.5-0.8%. Airlines might opt to pass these costs disproportionately to higher-paying segments, like business class, where the demand elasticity is lower, thus minimizing the impact on overall revenues.

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