Calls grow to increase subsidies for production, use of sustainable jet fuel

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The government has been urged to take additional measures to mandate the use of sustainable aviation fuel (SAF) on all international flights departing from domestic airports.

As both oil refiners and airlines face the inevitability of higher costs to produce and use the jet fuel, made from used cooking oil and other renewable energy sources, calls are intensifying for the government to offer tax credits and expanded subsidies to companies working to lower carbon emissions in aviation.

In September, the government announced a minimum blending ratio of 1 percent SAF on all outbound flights beginning in 2027, with plans to raise the requirement to 3 to 5 percent by 2030 and 7 to 10 percent by 2035. At the same time, it promised several incentives and support measures to accompany the mandate.

The Ministry of Trade and Industry pledged to fund up to 25 percent of facility investment costs and up to 40 percent of research and development costs, while the Ministry of Land, Infrastructure and Transport committed to reduce facility usage fees by 500 million won ($353,000) at Incheon International Airport and 100 million won at other airports run by the Korea Airports Corp.

Airlines are also encouraged to offer upgraded perks such as lounge access or preferred seating if their passengers opt to pay extra to support SAF adoption.

However, industry insiders still demand more fundamental solutions to rising costs.

A Korean Air Boeing 777F is fueled with GS Caltex's sustainable aviation fuel, Sept. 5, 2023. Courtesy of GS Caltex

Tax incentives for SAF production

Lars Klesse, a biofuels analyst at Norwegian energy consulting firm Rystad Energy, noted that Korea's SAF mandate will have a targeted impact across multiple players in aviation and energy.

"Major refiners, including SK Innovation, GS Caltex, S-Oil and HD Hyundai Oilbank, will need to invest in SAF production and blending infrastructure to meet mandated volumes," he said. "Airlines operating international flights are required to uplift 90 percent of their fuel, which may significantly affect their fuel costs."

The Korea Petroleum Association, which represents domestic refiners, pointed out that constructing dedicated SAF production facilities requires enormous upfront investments, possibly exceeding 1 trillion won.

"For the government to advance the SAF mandate more effectively, the National Assembly should add SAF production to the list of sectors eligible for proposed tax credits supporting domestic manufacturing," an association official said.

Lawmakers have been working to pass the Korean version of the U.S. Inflation Reduction Act, a bill that would target tax credits for domestic production in fields like semiconductors and batteries. SAF production has yet to be included in the draft.

"With uncertain global demand and unstable supply chains, SAF production is a highly risky venture," the association official added.

Refiners initially saw SAF as a fresh revenue source and ramped up investment in eco-friendly fuel facilities.

However, prolonged economic downturns and a slowdown in the petrochemical sector have led to a combined 1.5 trillion won in operating losses for Korean refiners during the first half of this year, making further large-scale investment difficult.

"Despite expected earnings recovery, we still do not have enough capital for significant new investments," an official from a domestic refiner said.

LCCs consider higher airfares

Airlines say they have little choice but to pass costs on to passengers, pointing out that the transport ministry's 600 million won subsidy falls short, given that SAF costs four times more than conventional fuel.

Unlike the country’s two full-service carriers — Korean Air and Asiana Airlines — which already use SAF on select routes, low-cost carriers (LCCs) remain hesitant to transition to the eco-friendly alternative. Although some LCCs have signed memoranda of understanding with refiners to prepare for future SAF use, they have not concluded contracts to actually procure the fuel.

"Without direct government funding, small- and medium-sized airlines stand to suffer significant losses," a representative from a domestic LCC said.

In Europe, Lufthansa has imposed an environmental surcharge of up to 72 euros per ticket to cover the additional costs of using SAF on all flights departing from the European Union, United Kingdom, Norway and Switzerland. Air France-KLM has levied a SAF surcharge of 12 euros since 2022.

Lessons from US, EU, Japan

Experts say the government should consider incentives modeled on approaches taken by the United States, EU and Japan, which have led global efforts to cut aviation carbon emissions.

The U.S. offers SAF producers tax credits of $1.25 to $1.75 per gallon, while Japan provides a corporate tax break of up to 40 percent for SAF production. The EU grants airlines emissions allowances to help offset the higher cost of buying SAF.

"For Korea to lead the global SAF market, the government should offer tax credits and financial support for facility investments and SAF production," said Kim Tae-hwan, a research fellow at the Korea Energy Economics Institute. "Since the market is still in its early stage, the government should intervene with aggressive policies and systematic support."