Today, the European Commission unveiled its Sustainable Transport Investment Plan (STIP), which addresses one of the major barriers in decarbonizing the aviation and marine sectors: financing the next generation of low-GHG sustainable aviation fuels (SAFs) and marine fuels.

Recent ICCT research highlights why these advanced fuels—particularly synthetic fuels—are essential for decarbonizing both maritime shipping and aviation. However, it also identifies that high upfront capital costs and market uncertainties continue to delay final investment decisions. For example, our recent report on SAFs found these to be the main barriers still holding back fuel production. Without targeted support, Europe risks falling short of its 0.7% synthetic SAF target by 2030.

With the STIP, the Commission aims to tackle investment barriers with revenue certainty measures. To understand what’s at stake—and how far these measures might go—it’s worth revisiting the scale of the challenge.

E-fuels are necessary for long-term aviation and marine decarbonization

Synthetic fuels, which include e-fuels made from renewable electricity, water, and carbon dioxide, are a key focus of aviation and marine decarbonization efforts. This is due in part to a lack of viable alternatives. Second-generation biofuels produced from solid waste or cellulosic feedstocks can have very low GHG emissions, but their long-term contribution is constrained by resource availability. For aviation, hydrogen and battery powered aircraft face significant technology barriers and will be slow to displace aircraft used for the long-haul flights that generate the bulk of emissions from the sector. In contrast, e-fuels are scalable solutions, in the form of e-kerosene for the aviation sector and e-ammonia or e-methanol for the marine sector.

So, why do so many e-fuel and second-generation biofuel projects in Europe struggle to reach final investment decisions despite clear demand signals through the EU’s FuelEU Maritime and ReFuelEU Aviation regulations?

Let’s take a look at the aviation sector’s challenge with synthetic SAF, or e-kerosene, to understand.

The case of e-kerosene

Despite numerous project announcements, the largest e-kerosene plant operating in Europe produces approximately 2,000 tonnes of SAF per year, only 0.4% of what will be required in 2030 by EU and UK policies. Other projects have been cancelled or postponed, highlighting the challenge of going from project announcement to steel in the ground.

Our report helps explain why. Despite the synthetic fuel sub-mandates and significant non-compliance penalties, the future market price for synthetic SAF is difficult to predict. And with e-kerosene facilities requiring US$1–2 billion in construction costs, it may take decades to break even. Thus, the risk that pioneering facilities fail to cover costs due to policy shifts or low market prices is too high for most investors, particularly providers of debt capital.

To mitigate these risks, project developers typically turn to offtake contracts with airlines, but these are no panacea. Airlines with famously thin margins are in no hurry to lock in high fuel costs when competitors might be able to secure synthetic SAF at a lower cost in the future.

It’s a similar story for shippers. Bunker fuels are usually purchased on short contracts. But without these contracts, most synthetic fuel projects cannot raise money for preliminary engineering studies, let alone construction. And if construction doesn’t begin in a timely manner, there might not be enough synthetic fuel to meet ReFuelEU’s 2030 requirements, forcing policymakers into the uncomfortable position of penalizing jet fuel providers for not supplying fuel that doesn’t exist.

How the STIP can help

Luckily, there is a policy option. ICCT’s research shows that revenue certainty mechanisms—which allow the government to set a fixed long-term price, offering producers the predictability needed to secure investment—are the most effective way to unlock financing for first-of-a-kind fuel producers. Such mechanisms have been highly successful in the case of offshore wind projects, which face similar challenges of long payback periods and high levels of capital investment.

The STIP signals that the Commission recognizes the need for revenue certainty. In the case of SAF specifically, the STIP states that the Commission could extend the SAF allowances mechanism within the EU Emissions Trading System (ETS), which covers a certain percentage of the price gap between SAF and fossil jet fuel. While such a measure would reduce the cost of SAF for airlines, ICCT’s research suggests that additional revenue certainty benefiting SAF producers directly would also be key to bringing new production online.

Thus, the STIP proposes additional measures to support low-GHG marine and aviation fuels. The Commission will launch pilot projects, including one that sets up a double-sided auction for e-SAF. This double-sided auction will establish a “market intermediary” that connects SAF suppliers and consumers, offering long-term contracts to provide revenue certainty to fuel producers as well as short-term contracts on the offtake side. The Commission also commits to assessing the feasibility of an EU-wide double auction to support both aviation and marine sustainable fuels. If designed and implemented quickly, such measures could provide the certainty needed to get today’s advanced SAF and marine fuel projects off the ground and accelerate progress toward fulfilling ReFuelEU and FuelEU Maritime targets.

A critical opportunity for Europe

The estimated near-term production costs for e-fuels and second-generation biofuels are high, but there aren’t obvious alternatives to decarbonizing aviation and marine. Some are skeptical that deep cost reductions can be achieved and have rightfully argued that there is lower-hanging fruit for decarbonization in the near-term. However, failing to invest in the technologies necessary for long-term decarbonization risks meaningful delays in achieving cost reductions and locking in emissions growth from these non-road sectors. The EU’s ReFuelEU and FuelEU Maritime regulations offer a critical opportunity to move these technologies forward, and the STIP’s measures to provide revenue certainty would help ensure this opportunity is not missed.

A previous version of this article was published in ICCT’s EU newsletter, The Turning Point. Subscribe to receive future editions here.