$1.45 trillion. That is the estimated amount needed between now and 2050 to finance the construction needed for the energy transition of the air transport sector. A huge sum! And while that number may seem daunting, it is far from insurmountable if we get the right support from the finance community, governments, and the energy sector.
I’ve just returned from the World Bank’s Annual Meeting in Washington, D.C., where the International Civil Aviation Organization (ICAO) made sure the financing challenge we face as an industry was part of the agenda. It was encouraging to see global financial leaders from the multilateral development banks recognising the role they will need to play in supporting this transition. The main challenge we face as an industry is the financing and scale up of sustainable aviation fuel (SAF), which forms the cornerstone of the sector’s net-zero strategy.
The large and growing size of the jet fuel market requires significant financial outlays for SAF production, and the cost of SAF is currently higher than petroleum-based jet fuel. The past two years have seen a surge in offtake agreements and new projects are pushing production capacity higher, but scarcity of supply, competition for resources, and lack of technological diversification are hurdles that need to be overcome for civil aviation to achieve its net zero goal by 2050. So, what then is the magic formula to get to the $1.45 trillion mark required to make this energy transition work?
The good news: the ingredients are there
The ingredients for the magic formula are already there, and despite the scale of investment required, there is reason to be optimistic. A survey of 20 major financial institutions shows that two-thirds have expressed a strong interest in SAF, with some already committing to investments. Global institutional investors hold an estimated $200 trillion in funds and increasing numbers of them are aligning portfolios with net-zero and Paris Agreement targets. Even a small proportion of investments by the private institutional sector can finance the outlays needed for the scale up of SAF.
To underscore the necessity for a close relationship between the financial and aviation sectors, ATAG, in partnership with BloombergNEF, has been hosting several symposiums with the finance community in London, New York, and Singapore this year. However, the realisation of the magic formula for SAF financing requires more than investor interest. It also demands a stable policy environment, concrete incentives, and risk mitigation. Just as important, governments and airlines have to show significant demand signals to purchase SAF.
Throw in a supportive regulatory framework and blended finance
Creating a predictable regulatory environment and implementing early-stage risk mitigation strategies, such as government-backed guarantees or mechanisms to ensure steady demand, are crucial for SAF financing. Many countries, especially in emerging nations, could become SAF production hubs, boosting energy security, creating new green energy sectors, and driving the creation of up to 14 million jobs globally.
It is ensuring that emerging economies can take advantage of the opportunity of SAF that led to our discussion in Washington, D.C.: the development banks are focused on ensuring Paris Agreement-aligned financing for developing nations. New, green energy, providing energy security and economic development are a perfect mix for these institutions.
Yet, SAF deployment faces varying levels of risk across different markets, with investment risks often higher in emerging economies. Here, blended finance, which combines public and private funding, could hold the key to reducing risk for private investors. This approach, often involving development finance or philanthropic funds, provides guarantees, credit enhancements, or other de-risking methods to make investments more palatable to the private sector. By leveraging public and philanthropic capital to offset risks, blended finance can attract private capital to SAF projects that might otherwise be seen as too speculative or challenging.
Multilateral development banks, donor countries, and philanthropic organisations are all likely to play crucial roles, particularly in helping emerging economies establish SAF production capabilities. Once the market matures, private capital and institutional investors can drive the sector forward, sustaining the industry’s growth over time.
Combining the ingredients to make the formula magic
Ultimately, the transition to SAF will reshape the aviation sector. For this shift to succeed and the magic formula to work, it requires a coordinated approach between the public and private sectors, a supportive policy environment, and innovative financing mechanisms like blended finance to address investment challenges across regions. As countries adopt SAF production, they not only support aviation’s path to net-zero but also pave the way for a more sustainable and more resilient global economy that balances energy security with long-term growth.