The Transition to Sustainable Aviation Fuel: Understanding Demand Response to Jet Fuel Price Changes

Sohyeon Ryu and Joe Janzen

farmdoc daily, 2024, vol. 14, issue 233

Abstract: Renewable fuels policy has linked agricultural markets to the demand for transportation. (Irwin, 2019) For example, the US renewable fuels standard (RFS) mandates blending specific quantities of ethanol (mainly derived from corn) into the US gasoline fuel supply. Setting and meeting these blending requirements has become complicated in an era when gasoline consumption growth has been limited. More recently, renewable fuels policy has turned its attention to aviation. Air travel using jet fuel is a major contributor to greenhouse gas emissions. As the number of air travelers has and is expected to continue growing, greenhouse gas emissions from the aviation sector have been rising. Traditional petroleum-derived jet fuel use has been the target of climate and environmental policy. Such policy aims to reduce emissions created by jet fuel use by encouraging a switch to lower-emission sustainable aviation fuels (SAF) made from plant biomass, vegetable oils, sugars, and alcohols including ethanol. For US agriculture, corn and soybean oil markets view SAF as a potentially significant source of future demand (Swanson, 2024). The success of SAF-focused policies in both reducing environmental damage and driving demand for feedstocks like corn ethanol or soybean oil depends in part on how airlines respond to market changes caused by such policies. Federal and state initiatives to encourage the shift from jet fuel to SAF include sales taxes on jet fuel and tax credit subsidies for SAF. For example, Illinois has a Sustainable Aviation Fuel Purchase Credit that gives favorable sales tax treatment to SAF relative to sales taxes imposed on jet fuel. Both taxes and subsidies aim to make SAF more attractive by increasing the price of jet fuel relative to SAF. With price as a policy instrument, the sensitivity of airlines and other jet fuel buyers to price changes is a crucial factor in achieving policy objectives. This article characterizes airlines’ responses to changes in jet fuel prices. Descriptive evidence suggests jet fuel demand is relatively unresponsive to price. The demand for aviation fuel may also respond differently to price increases compared to decreases and respond differently in the long run relative to the short run. Policies targeting aviation fuels, either by encouraging SAF use or discouraging jet fuel consumption, are likely to increase the overall price of blended aviation fuel. Understanding how airlines adjust their fuel consumption in response to price changes provides insights into the expected policy and market impacts.

Keywords: Agribusiness; Energy Markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ags:illufd:358374

DOI: 10.22004/ag.econ.358374

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