The dawn of 2012 ushered in the start of a new European Union emissions trading scheme (ETS) for jet fuels, and on Monday the next step was taken to bring airlines into compliance. Emissions from all domestic and international flights that arrive at or depart from an airport in Europe must now pay for the CO2 they emit or must adopt lower carbon advanced biofuels.

The U.S. commercial airlines fought hard against the EU ETS but now that it is in place, the airlines must comply and this creates a tremendous opportunity for the nascent American advanced biofuels industry to come into its own.

The new EU ETS for jet fuel, combined with the U.S. military’s strategic interest in moving away from petroleum, will be the final push that is needed to establish a robust advanced biofuels industry in the U.S.

Advanced biofuels are what is often referred to as “drop-in” biofuels. This refers to the fact these fuels, unlike ethanol, have the same chemical make-up as a traditional petroleum product which means they can be used in existing engines, storage tanks, and pipelines. The only difference is that these fuels are cleaner burning due to lower sulfur content and less particulate.

Advanced biofuels can be made from a wide variety of sustainable non-food feedstock including: waste products like municipal solid waste, agricultural waste, wood residue, and waste oils and fats; lignocellulosic biomass crops such as grasses and woods; and oily seed crops like camelina and jatropha.

The technology needed to convert these feedstock intro drop-in biofuels has rapidly matured over the past several years. These fuels have been officially certified for use in jet engines and in November, both United and Alaska airlines flew the first commercial flights on these advanced biofuels.

The U.S. military has flown some of its most sophisticated jets on these fuels. On Earth Day 2010, the U.S. Navy flew an F/A-18 Hornet on advanced biofuels faster than the speed of sound and the Air Force has done the same with its A-10 airframe.

So given all this progress, why does the advanced biofuels industry need something like the EU ETS to help it succeed? To date, the challenge has been that there are no commercial scale advanced biofuel plants in the U.S. that produce drop-in jet fuel (and other drop-in fuels of interest such as marine diesel). The only facilities that do exist are at a pilot or demonstration scale, which means they are unable to take advantage of economies of scale making the fuels they are producing expensive.

This leads to a classic chicken and egg problem. The technology companies can’t get financing to build commercial scale plants because they don’t have 10-plus year contracts locked in with buyers. And on the other side, the potential customers for these fuels — the commercial aviation industry and Department of Defense — have trouble committing to buy when these fuels aren’t yet being produced at a quantity or a price that they can write contracts around. 

Although DoD only buys about 15% of aviation fuels, it has been an important early adopter of advanced biofuels. The Department of Navy has committed to get 50% of its fuels from alternative sources by 2020 and the Air Force has committed to source half its fuel from biofuels by 2016 if the price is competitive.

DoD wants to move towards using more of these fuels because military strategists recognize that dependence on increasingly volatile petroleum is a major security vulnerability.

For the U.S. military, a $1 rise in the cost of a barrel of oil equals $130 million of budget shortfall. Last year’s increase of $38-per-barrel translates into $3 billion of budget uncertainty, which in most cases means that flying, sailing, and training hours are cut short, decreasing the readiness of our armed forces.

Even though DoD is clearly leading in this space, it can’t make a market on its own both because of its market share, but also because under the law, the military can only sign five-year contracts for fuel; and five years isn’t long enough for a company to be able to take to the bank to finance a new facility.

To date, commercial aviation, which uses 1.6 billion gallons of jet fuel per year, has shown some interest in the biofuels space. In addition to the Alaska and United flights last year, FedEx has set a goal that by 2030, it will be running on 50% biofuels and several airlines have signed loose agreements with biofuel producers referred to as “letters of intent.”

Although the commercial airlines have the same exposure to price spikes as DoD, without a forcing function they have proven too risk averse to take a leadership role in this space. But this is where the EU ETS comes in.

Now the airlines have an incentive to purchase biofuels to avoid paying a tax every time they fly to and from Europe. In the short-term, airlines may see passing on the cost of the ETS to the customer as the easy solution but this would be a very unpopular long term solution.

This new incentive combined with DoD’s demand for increased energy security will give the advanced biofuels industry the customers it needs to succeed.

Photo Credit: Wikimedia Commons