Demand for Aviation Biofuels Grows as Green Regulations Loom

 | Jun 18, 2016 | 6:00 PM EDT
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The market for aviation biofuels is likely to grow as airlines try to get in front of changing carbon dioxide emission standards. Finding biofuel producers with a commercially scalable product, however, could be an challenge.

In the last few weeks, at least two major airlines flew commercial flights using renewable jet fuels from small biofuel companies. Alaska Air (ALK) had two flights with Gevo's (GEVO) renewable alcohol-to-jet fuel while Cathay Pacific and Amyris (AMRS) announced a two-year program of flights between Toulouse, France, and Hong Kong using Amyris' renewable jet fuel.

Gevo and Amyris may not be companies most people are familiar with. Shares of both companies trade well below $1 and the market cap of Gevo is $22 million, while Amyris' market capitalization is $107 million. In addition to its small market cap, Gevo warned last month that it retained Cowen & Co. as its financial advisor as it explores strategic alternatives.

"One of the challenges of biofuels is just making it -- having a producer who can make a commercial volume at cost parity," Carol Sims, Alaska Air's director of environment regulation, said in a phone interview with Real Money Wednesday. "The other challenge is having it delivered to the airport, having it blended and putting it in the aircraft." 

Representatives from Cathay Pacific, Gevo and Amyris did not immediately respond to requests to comment for this article.

Airlines are finding themselves in the somewhat difficult position of trying to get ahead of environmental regulations even though there may not be enough readily available resources for them to meet new standards.

Members of the International Air Transport Association (IATA), which represents 260 airlines and 83% of total traffic, signed an agreement in 2009 in which they pledged to reduce carbon dioxide emissions by 1.5% per annum through 2020 and reduce net aviation carbon dioxide emissions by 50% by 2050 -- relative to 2005 levels. So far, airlines have been able to hit targets on their 2020 goals.

But IATA represents the airlines self-regulating, stricter regulations are coming.

"The airline industry knows that they need to do something," Gevo CEO Pat Gruber told Real Money in an interview last week. "Their carbon emissions are a problem, they're going to be held accountable for it and, in fact, they're holding themselves accountable for it because they're trying to forestall being regulated piecemeal."

In the U.S., the Environmental Protection Agency issued an "Advanced Notice of Proposed Rulemaking" in June 2015, which was tied to creating a process for "setting an international CO2 emissions standard for aircraft." The EPA indicated that it usually sets standards equivalent to those set by United Nations' International Civil Aviation Organization (ICAO).

Earlier this year, ICAO announced that its CO2 standard is "one step closer to final adoption." The proposed measures would affect new aircraft designs as of 2020 and also "in-production" aircraft designs for 2023.

With the announcements of demo flights and partnerships with biofuel companies, airlines are trying to see what they can do today to meet upcoming standards. The demo flights are also done to "raise awareness and help kick-start a new biofuels industry," according to Sims.

"Carbon emissions are a global problem, more than a local air quality issue," Sims said. "A big concern of airlines is having different emission reduction schemes, such taxes or offsetting programs in different countries. Although it may not be the best option for everybody, airlines prefer a single emission reduction scheme that is applied globally."

Unfortunately, people Real Money spoke with and available research suggest there isn't a silver bullet when it comes to biofuels, which is why innovation is needed.

"Our problem is, we don't have a scale production capacity big enough to make a difference for anybody right now," Gruber told Real Money. "We're at a demo-plant scale for our jet fuel."

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