Sustainable aviation fuel and the price discovery problem
SAF pricing has come loose from crude. What sets it now is mandate and scarcity, and policy-set prices have a poor record of lasting.
The current dynamics between sustainable aviation fuel, crude oil prices and carbon markets reveal a fundamental shift in aviation fuel economics. Crude responds to supply and demand. SAF responds to mandate and to the limits of what can physically be produced. Those are different machines, and the premium between them persists more or less regardless of what crude does.
The disconnect
SAF is a drop-in fuel: it blends with conventional kerosene-based jet fuel, mostly Jet A-1, and runs through existing infrastructure and existing engines. That interchangeability is the whole basis of the sector’s decarbonisation plan, because it does not require new aircraft. It is also expensive. A 30% SAF blend more than doubles fuel cost against conventional jet fuel, and that differential holds through periods of falling crude.
The inelasticity comes from the mandates.
| Mandate | 2025 | 2030 | 2040 | 2050 |
|---|---|---|---|---|
| UK SAF Mandate | 2% | 10% | 22% | — |
| EU ReFuelEU Aviation | 2% | — | — | 70% |
These create guaranteed demand floors. Price follows the floor, not the barrel.
Production economics reinforce it. Conventional jet fuel benefits from scale and from infrastructure that was paid for decades ago. SAF faces feedstock constraints, a small number of processing facilities and complicated logistics. Costs have been rising rather than falling — notably in Asia, where domestic Chinese used cooking oil prices moved sharply through late 2024.
What the carbon price does, and does not, do
EU carbon permit prices fell to around €52 per tonne in early 2024, a 31-month low. The intuition is that this should matter for SAF, and it does — but less than it used to.
Carbon prices reach SAF indirectly. A higher carbon price raises the cost of conventional jet fuel and narrows the gap; a falling one widens it again. But as mandates displace market-based incentives, SAF demand becomes progressively insulated from the carbon price. The mandate does not care what an allowance costs.
The EU Emissions Trading System is still the cornerstone of European climate policy and, at almost 90% of global carbon market trading in 2020, the price that matters. It is a cap-and-trade system: authorities set a ceiling on total emissions from covered installations, and companies receive or buy allowances within it.
The relationships between oil, gas, electricity, equity and carbon prices are significantly time-varying. Research points to an inversion around 2016 — coinciding with pressure on the EU 20-20-20 targets, the signing of the Paris Agreement, and a round of EU ETS reform. Carbon price responses to their drivers became more pronounced after that point, with oil the most significant single influence.
Regional disparities
Production capability and pricing differ enough by region to create genuine arbitrage, and strategic advantage for anyone positioned across more than one of them.
In Asia, and particularly China, capacity came online through late 2024 and early 2025, timed against the ReFuelEU mandates starting in January 2025. Chinese producers have been offering materially below European levels:
| Assessment | Price |
|---|---|
| FOB China | $1,850–1,900/mt |
| Northwest Europe, December 2024 | $2,313.18/mt |
That differential is an invitation for SAF to flow from Asia into Europe.
The UK is going the other way, building domestic supply. The government has outlined a revenue certainty mechanism — potentially in place by 2026 — to give investors confidence in commercial-scale UK production. The mechanism is meant to lower the cost of producing SAF in the UK by providing price stability and reducing risk, and so lowering the cost of capital for UK plants. The stated target was five commercial-scale plants under construction by the end of 2025.
Running underneath all of this is book and claim: accounting systems that separate SAF’s environmental attributes from the physical molecules. That lets an airline anywhere buy into SAF regardless of whether any exists at its own airports. IATA’s position is that this is what makes one global SAF market possible, with equal access for every airline to meet its obligations.
Supply chain and blending
The chain has more stages than the price suggests, and each one adds cost.
Feedstock is sourced, then processed either into finished SAF or into an intermediate renewable oil that needs further refining elsewhere. Neste’s Porvoo plant in Finland, for instance, produces an intermediate closer to biodiesel, which then goes to different refineries depending on final destination.
Blending is its own stage. In California, SAF is typically blended at 30% at the production facility. Where a facility has no access to conventional jet fuel or blending infrastructure, the SAF has to move to a terminal to be blended and stored. What matters operationally is that SAF arrives at the airport already blended — that is what lets the existing infrastructure and the existing expertise do the work, and keeps operational overhead out of the price.
The UK mandate also shapes what kind of SAF counts. A HEFA cap limits hydroprocessed esters and fatty acids from 2027, and a power-to-liquid obligation arrives in 2028:
| Provision | 2030 | 2040 |
|---|---|---|
| HEFA cap (share of SAF demand) | 71% | 35% |
| PtL obligation (share of total jet fuel) | 0.5% | 3.5% |
The PtL obligation starts at 0.2% in 2028. Both are there to make room for the advanced fuels that long-run compliance depends on.
Correlation, and what it signals
Carbon and energy markets have usually been analysed separately, but the relationships carry information.
Studies of EU carbon futures find that sensitivity to oil, gas, electricity and equity prices shifts over time. Before 2016 carbon prices were more sensitive to these drivers in the short run; after 2016 the response to equity moved out into the mid and long term. Post-Paris, carbon prices became more responsive generally, with oil the strongest influence.
On oil specifically, the headline correlation with EU allowance prices is weak, but the type of shock matters: oil supply shocks push EUA prices up, oil demand shocks push them down. The magnitudes are small — cross-price elasticity below 0.3 in absolute terms for all oil shocks.
The clearest recent illustration of the decoupling came from a disruption. In November 2024 a fire at Neste’s Rotterdam refinery sent hydrotreated vegetable oil prices up 38% over three months. The incident hit renewable diesel rather than SAF directly, but over that period:
| Change | |
|---|---|
| Fossil jet fuel | +3% |
| SAF | +24% |
Two fuels that go into the same wing, moving four to eight times differently.
What it means for each party
Airlines face the cost directly. Two flights of identical distance, fuel load and block hours can now cost materially differently because of SAF content. That has to go into pricing, and it may need hedging strategies specific to SAF rather than borrowed from jet fuel. Book and claim may help by decoupling the obligation from physical delivery.
Fuel suppliers have to comply while managing supply they may not be able to secure. The UK buy-out sits at £4.70 ($5.90) per litre; in the EU, missing the minimum obligation draws a fine of at least twice the price difference between SAF and conventional jet fuel. Those numbers are large enough to make securing supply the dominant commercial priority.
Investors in production capacity may find the risk more manageable than the volatility suggests. The UK’s proposed revenue certainty mechanism — a guaranteed strike price, or a buyer of last resort — is designed precisely to take price volatility out of the investment case and stabilise returns.
Policymakers have to reconcile the target with the supply. The UK mandate’s own cost-benefit analysis puts net present value anywhere between −£178 million and +£4.9 billion, depending entirely on feedstock availability assumptions. That spread is the argument for aligning trajectories with credible supply projections rather than with ambition.
Price discovery, and whether it holds
The disconnect between SAF, crude and carbon is a restructuring of aviation fuel economics. The forces that historically set jet fuel prices are being superseded by mandate, and the premium persists regardless of what crude does. Our reservation is straightforward: artificial pricing mechanisms driven by policy rather than by markets have rarely proved sustainable themselves.
That said, the regional disparities are real and create positions worth taking. Supply chain complexity makes pricing non-linear as blend percentages climb, which is an argument for investing in infrastructure and logistics rather than only in production. And the correlation patterns between carbon and energy markets carry signal, even if the relationships are complex and move over time.
For anyone in this ecosystem, the work is understanding how regulatory requirement, production economics and market structure interact. It is arguably the largest change in aviation fuel markets since jet fuel itself arrived. Despite the constraints on capacity and the cost differential, the regulatory momentum points fairly clearly towards long-run growth, and towards opportunities that we take to be underpriced.