The Inflation Reduction Act (IRA) of 2022, signed by President Biden, targets inflation and supports domestic clean energy. Notably for aviation, the IRA incentivises sustainable aviation fuels (SAF) production through grants and tax benefits, aiming to reduce aviation emissions.
This guide aims to explore the IRA’s specific impact on aviation covering:
- What is the Inflation Reduction Act?
- How does the Inflation Reduction Act work?
- Who does the inflation Reduction Act apply to?
- What are the main objectives of the Inflation Reduction Act?
- Benefits of the Inflation Reduction Act on Aviation
- IRA and SAF Timeline
- Europe’s response to IRA and the acceleration of SAF in the US
What is the Inflation Reduction Act?
The Inflation Reduction Act of 2022, signed into law by President Biden, is a comprehensive legislation that aims to address various aspects of the U.S. economy, including deficit reduction, energy security, climate change, and healthcare. The act covers new and reinstated tax laws that affect individuals and businesses, including various credits and deductions.
Additionally, it allocates resources towards clean energy initiatives, climate mitigation efforts, and resilience programs. One of the significant provisions of the act is the focus on SAF to reduce emissions from the aviation sector.
The act includes a new grant program and tax credit incentives to incentivise SAF production, which is a liquid fuel that can be used in today’s aircraft and achieves significant emissions reduction compared to fossil-based jet fuel. The act aims to reduce carbon emissions by 40% by 2030 and is considered a powerful first step to incentivise companies across the aviation industry and the fuel supply chain to move aggressively to shift toward a low-carbon future.
The act will also help meet the SAF Grand Challenge, an ambitious plan to increase the production of SAF to at least 3 billion gallons per year by 2030 and reduce aviation emissions.
How does the Inflation Reduction Act work?
The IRA works through various provisions and incentives to address inflation, support economic growth, and promote clean energy and affordable healthcare initiatives.
In relation to the aviation sector, the IRA provides tax incentives and grants to boost domestic manufacturing, create good-paying jobs, and build more resilient supply chains. One of the significant provisions of the act is the focus on SAF to reduce emissions from the aviation sector.
The IRA and Aviation Grants:
The IRA includes several grants and incentives to support the aviation sector’s transition to SAF and low-emission aviation technologies such as:
- Section 40007 Grant Program: The IRA directs the Secretary of Transportation to implement a competitive grant program for eligible entities to carry out projects located in the United States that produce, transport, blend, or store sustainable aviation fuel, or develop, demonstrate, or apply low-emission aviation technologies. The program provides $244.53 million for projects relating to the production, transportation, blending, or storage of sustainable aviation fuels, $46.53 million for projects to develop, demonstrate, or apply low-emission aviation technologies, and $5.94 million for program oversight.
- Fueling Aviation’s Sustainable Transition through Sustainable Aviation Fuels (FAST-SAF) and Low-Emission Aviation Technology (FAST-Tech) Grant Programs: The Department of Transportation (DOT) is preparing to execute two new grant programs specified in the IRA, FAST-SAF and FAST-Tech, which will provide funding for advancements in sustainable aviation fuels and low-emission aviation technologies. The IRA provides $297 million over five years to the program, including $244.5 million for projects related to production, transportation, blending, or storage of sustainable aviation fuel.
- Alternative Fuel and Low-Emission Aviation Technology Grants: The IRA allocates $297 million over five years to the Alternative Fuel and Low-Emission Aviation Technology competitive grant program, the first-ever large-scale grant program dedicated to scaling up the production of SAF in the United States. The program provides $244.5 million for projects related to production, transportation, blending, or storage of SAF.
These grants and incentives aim to promote the development and use of sustainable aviation fuels and low-emission aviation technologies, helping to reduce carbon emissions from the aviation sector.
The IRA and Aviation Tax Credits:
- Sustainable Aviation Fuel Tax Credit: The SAF Credit, introduced by the Inflation Reduction Act (IRA), offers a tax incentive for sustainable aviation fuel. This credit is granted to taxpayers who sell or use a qualified blend of U.S.-produced sustainable aviation fuel and kerosene in aircraft. The credit is applicable during the initial two years of the program, and its value varies based on the proportion of sustainable aviation fuel in the mixture.
Functioning as a blenders’ credit, the SAF Credit is determined by multiplying the gallons of sustainable aviation fuel added to a kerosene-based mixture (Qualified Mixture) by the credit amount per gallon. Specifically, the SAF credit is set at $1.25 for each gallon of sustainable aviation fuel in a qualified mixture.
To qualify for the SAF Credit, the sustainable aviation fuel must exhibit a minimum 50% reduction in lifecycle greenhouse gas emissions compared to petroleum-based jet fuel. An additional credit of one cent per percentage point exceeding this 50% reduction is available.
Moreover, the producer or importer of sustainable aviation fuel must be registered with the IRS under Section 4101 of the Internal Revenue Code (IRC) to be eligible for the SAF Credit. Registration with the Secretary of the Treasury under Section 4101 of the Code is a prerequisite for accessing the credit.
Taxpayers have the flexibility to claim the SAF Credit through the excise tax system or as a nonrefundable general business credit, which must be included in income. This credit is applicable for qualified sales or uses of sustainable aviation fuel in the calendar years 2023 and 2024.
- Income Tax Credit for Blending SAF: The IRA allows for an income tax credit for blending sustainable aviation fuel into regular jet fuels, or “Jet A,” in U.S. airports. This tax credit is intended to support the production and use of sustainable aviation fuels and promote the decarbonisation of the aviation industry.
These two tax credits work in conjunction to provide financial incentives for the production, blending, and use of sustainable aviation fuels, contributing to the overall goal of reducing carbon emissions from the aviation sector.
Who does the Inflation Reduction Act apply to?
The IRA applies to various sectors and aims to provide benefits to different groups.
Some of the key areas to which the IRA applies include:
Clean Energy Economy: The IRA provides tax incentives to ensure all Americans benefit from the growth of the clean energy economy. It modifies and extends the clean energy Investment Tax Credit and Renewable Energy Production Tax Credit, driving investment in clean energy projects.
Medicare Beneficiaries: The IRA includes provisions to lower prescription drug costs for people with Medicare, improve access to affordable treatments, and strengthen the Medicare program.
Aviation and Transportation: The IRA also includes provisions to support the clean energy transition in the aviation and transportation sectors, providing funds for the costs of providing direct loans for reequipping or expanding.
The key aviation stakeholders impacted by the IRA include:
- Airlines: The IRA provides airlines with incentives and subsidies for SAF production. This proactive approach enables airlines to reduce their greenhouse gas emissions, align with sustainability goals, and contribute to the overall environmental objectives of the industry.
- Airports: Recognised as essential infrastructure providers in the aviation industry, airports play a pivotal role in the IRA’s scope. The act can influence airports through the development of SAF infrastructure and facilities. Additionally, it engages airport stakeholders in the SAF production and deployment process, fostering a collaborative effort towards sustainability.
- Manufacturers and Suppliers: Manufacturers and suppliers of aircraft and aviation equipment are crucial players in implementing SAF technologies and infrastructure. The IRA’s explicit focus on SAF and low-emission aviation technologies can significantly impact their research and development endeavours, driving innovation in line with environmental objectives.
- Government Authorities: The IRA’s influence extends to government authorities, including the Federal Aviation Administration (FAA) and the Department of Transportation (DOT). As regulators and overseers of the aviation industry, these entities are pivotal in ensuring compliance with evolving standards and regulations related to SAF production and deployment.
What are the main objectives of the Inflation Reduction Act?
The Inflation Reduction Act (IRA) is a US law designed to address inflation and promote domestic clean energy production.
Its key objectives include:
- Greenhouse Gas Emissions Reduction: The IRA targets a substantial reduction of 1 gigaton of greenhouse gas emissions by 2030, surpassing the climate impact projections of any previous legislation.
- Affordable Green Energy: The IRA aims to make green energy more affordable by providing rebates and tax credits to expedite the transition to clean energy sources.
- Healthcare Cost Reduction: To lower healthcare expenses, the IRA enables Medicare to negotiate drug prices with pharmaceutical companies, establishes an inflation cap on drug prices, and reduces out-of-pocket costs for Medicare recipients.
- Increased Government Revenues: The act raises the minimum tax on large corporations to 15%, imposes a 1% excise tax on stock buybacks, and allocates additional funds to enhance IRS collection and enforcement, thereby boosting government revenues.
- Promotion of Domestic Manufacturing: The IRA encourages the procurement of critical supplies domestically or from free-trade partners, aiming to stimulate investments in domestic manufacturing capacity.
The main objectives of IRA in terms of the aviation sector are as follows:
- Promotion of SAF: with tax incentives and grants to boost domestic manufacturing of SAF, create good-paying jobs, and build more resilient supply chains in the aviation sector.
- Support for the SAF Grand Challenge: The IRA aims to help meet the SAF Grand Challenge, an ambitious plan to increase the production of SAF to at least 3 billion gallons per year by 2030, reducing aviation emissions by 20%.
- Decarbonisation of the Aviation Industry: through support and incentives to accelerate the production and adoption of SAF, contributing to the overall goal of reducing carbon emissions from aviation.
Benefits of the Inflation Reduction Act on the Aviation Sector
The Inflation Reduction Act offers several benefits to the aviation sector, particularly in promoting SAF and reducing emissions.
Some of the key benefits include:
- Tax credits for SAF: The IRA allows for an income tax credit for blending SAF into regular jet fuels, enabling airlines to claim tax credits parallel to other road transportation fuel companies, users, and blenders of fuels. This is expected to lower the cost of SAF, making it more accessible for airlines.
- Increased SAF production: The IRA is anticipated to incentivise higher production of SAF, which can lower CO2 emissions by up to 80% and contribute to around 65% of the reduction in emissions needed by airlines to hit net-zero.
- Grants for SAF and low-emissions aviation technologies: The IRA allocates $297 million for new grants to advance SAF and low-emissions aviation technologies to reduce emissions from aviation and address the climate crisis.
- Support for research and development: The IRA includes a competitive grant program for SAF and a combination of tax credits, which will help fund research and development in the aviation industry.
- Reduced reliance on traditional carbon offsets: Airlines like United are planning to increase the usage of SAF in their flights as part of their plans to reduce emissions and achieve net-zero emissions by 2050. Overall, the IRA aims to support the aviation sector’s transition to more sustainable practices and reduce its environmental impact, in line with the Biden administration’s goals of combating climate change and promoting clean energy investments in the US.
IRA and SAF Timeline
This timeline highlights the significant steps and initiatives taken to promote the development and use of sustainable aviation fuels in the United States, culminating in the passage of the Inflation Reduction Act and the establishment of the Section 40007 grant program to support the SAF Grand Challenge goal.
- September 2021: The White House announced the SAF Grand Challenge, which aims to supply 3 billion gallons of SAF per year by 2030 and 100 percent of expected domestic commercial jet fuel use by 2050.
- November 9, 2021: Transportation Secretary Pete Buttigieg announced the United States 2021 Aviation Climate Action Plan, which sets a goal of net-zero greenhouse gas emissions from the aviation sector by 2050. The plan aims to foster innovation and drive change across the entire U.S. aviation ecosystem, including airlines, manufacturers/suppliers, airports, energy companies, airline customers, and various levels of government.
- August 2022: The IRA was passed in a 51-to-50 vote by the United States Senate. The legislation is a $739 billion spending package that directs $369 billion towards energy and climate-related funding, making it one of the largest ever government investments in climate mitigation.
- December 2022: A briefing was held on the IRA Section 40007 FAST-SAF and FAST-Tech Grant Program, which is aimed at achieving the SAF Grand Challenge goal of 3 billion gallons of domestic SAF production and use by 2030. The program, directed by the Secretary of Transportation, is a competitive grant program for eligible entities to carry out projects located in the United States that produce, transport, blend, or store sustainable aviation fuel, or develop, demonstrate, or apply low-emission aviation technologies.
Europe’s response to the IRA and the acceleration of SAF in the US
The European Union (EU) has responded to the United States’ IRA by unveiling the “Green Deal Industrial Plan,” which aims to support the transition of European industry toward climate neutrality and the development of net-zero technologies necessary to achieve the EU’s climate targets.
This plan is based on several key pillars, including a predictable and simplified regulatory environment, the promotion of EU strategic projects, and the scaling up of manufacturing capacity for net-zero technologies.
One of the initiatives under this plan is the “ReFuelEU Aviation” initiative, which aims to ensure a level playing field for sustainable air transport and reduce the environmental impact of aviation, including the use of sustainable aviation fuels.
Another initiative is the “Net-Zero Industry Act,” which aims to ensure that EU manufacturing capacity is sufficient to meet the needs of clean technologies and equipment, such as those for solar or wind power, batteries, and fuel cells. These efforts demonstrate the EU’s commitment to maintaining its competitiveness in green industries, including aviation, in response to the IRA and advancing its climate goals.
The IRA is a pivotal U.S. legislation, that emerges as a transformative force in the aviation landscape, particularly in its dedicated focus on SAF. Beyond its immediate financial implications, the IRA propels domestic manufacturing, stimulates job creation, and fortifies resilient supply chains.
Engaging key stakeholders such as airlines, airports, and manufacturers, the IRA’s impact reverberates globally, positioning the United States at the forefront of sustainable aviation practices. Moreover, the European Union’s response underscores the IRA’s influence, as it aligns with international efforts to shape a collective, environmentally conscious aviation future.