A push toward sustainable jet fuel is leaving investors with unanswered questions

The aviation industry still sees so-called "sustainable aviation fuel" (SAF) as the only viable way to meet its decarbonization targets, even as opposition and the potential for higher costs for passengers pose obstacles to the fast-growing sector.

A flurry of deals have been struck in recent months, from United Airlines partnering with major supplier Neste to provide SAF at Chicago O'Hare International Airport, to South Korea's target announced in late August for all departing international flights to use a mix of around 1% SAF from 2027.

Within its first month in office this July, the U.K.'s new Labour government set its own mandate for SAF to meet 10% of jet fuel demand by 2030, while pledging to support production through measures which include a revenue certainty mechanism for SAF producers seeking to invest in new plants in the country.

SAF is a broad term describing fuel that is burned by an aircraft engine, but instead of using kerosene is derived from more sustainable sources. That can include raw materials such as used cooking oil, feedstock, woody biomass, animal fat, crops or waste.

SAF still produces emissions, but proponents argue its greenhouse gas footprint is much lower over the product's life cycle – by up to 94%, according to one report, though that level is dependent on the source, production and its journey to the aircraft.

Airbus announced various SAF commitments at this year's Farnborough Air Show, one of the biggest dealmaking events in aviation held in the U.K. in July. The planemaker said it is collaborating with producer HIF Global on the development of methanol-based fuels, and investing in alcohol-to-jet fuel producer LanzaJet.

Buzz has been building for more than a decade over SAF's potential to reduce emissions from air travel. 

That is particularly because it can be blended with conventional fuel and used in existing aircraft engines and pipelines, and so has a relatively low barrier to entry; though regulators have set different levels for the percentage it can be blended.

United Airlines sees a transition to greater SAF use as one of the core parts of its sustainability agenda. The airline has been using it in its existing aircraft since 2016, but "the challenge is that there's simply not enough of it," the carrier's Chief Sustainability Officer Lauren Riley, told CNBC at the Farnborough Air Show earlier this year.

Other industry attendees also said SAF remained the most effective and realistic method for working toward net-zero carbon emissions from airline operations by 2050, the goal agreed by the International Air Transport Association (IATA) in 2021.

But IATA's own forecast for SAF production to triple in 2024 to 1.9 billion liters would cover just 0.53% of aviation fuel demand for the year.

United alone consumes around 4.25 billion gallons of fuel a year, according to Riley. 

Projects such as hydrogen-powered and electric aircraft are on United's longer-term radar, but SAF is the priority when it comes to short- and medium-term targets, she said.

Core challenges, according to those in the industry, are ensuring firm regulatory frameworks for SAF are put in place and securing both state and private funding — with the lack of the former holding back the latter.

Rick Nagel, managing partner at private equity firm Acorn Capital Management, told CNBC that the size of the SAF market had boomed from near-zero to roughly a billion dollars over recent years.

However, obstacles range from the creation of refineries and related infrastructure, to obtaining the biomass to go in them, along with regulatory cooperation, he said. 

"You've got this circular reference that occurs where you have demand created by industry goals and environmental mandates, government incentives that not everybody can always count on to plug the gaps and make this affordable, the years it will take to put all this infrastructure online, where you're going to put it — while the airlines still have to figure out how to maintain competitive pricing," he continued. 

"For investors to really get on board with it, there needs to be a clear path to how all that converges."

Clara Bowman, chief operations officer at Porsche-backed SAF firm HIF Global, told CNBC she was confident the money would flow into the sector as long as governments and regulators provided the necessary reassurances.

HIF Golbal brands its product as an "efuel," produced with renewable energy from recycled C02 and hydrogen. It currently has a plant in Chile and one planned for development in Texas.

"I think the financing is there, there's tremendous liquidity in the world that's looking to finance green solutions, the issue is having a well-structured project to be able to take advantage of that financing," Bowman said.

Regulatory certainty has been slower than she would have liked, but measures such as the European Union's Renewable Energy Directive and Japan's 2030 mandate for SAF to account for 10% of domestic airlines' jet fuel usage and its related subsidies are all encouraging, she said.

In the U.S., the Biden administration's Inflation Reduction Act signed in 2022 spurred "extraordinary" growth in SAF companies and startups, according to United's Lauren Riley. That in turn encouraged the airline to establish a $225 million SAF venture fund with partners including Boeing, Google, Embraer and other carriers.

Despite this progress, Riley said banks and investors continue to feedback that before they have confidence to fund shovels in the ground, policy needed to be more "durable," with tax credits running for decade-long periods.

However, Riley was confident SAF's momentum would withstand a change of leadership in the White House with a presidential election looming in November; a sentiment echoed by investor Rick Nagel, who said it was a "misconception" that one administration would U-turn on all the regulatory steps of the last.

"Although the rhetoric might say one thing, if there's a business case there then overall they are looking for infrastructure projects in America," he added.

One thing noted by many working on SAF projects is that it in the early days, it is going to be more expensive than conventional jet fuel. Consumers — particularly those in wealthier, less price-sensitive markets — are going to end up shouldering some of that cost through higher ticket prices, the industry also acknowledges.

"The truth is, it's going to be more expensive, you can't really sugarcoat that," said HIF Global's Clara Bowman.

"On the other hand, we're talking about a very small percentage of fuel that you need to really kickstart this industry and get it to be producing on a large scale. When you start producing plants on a large scale, you can see what happened in solar and wind and batteries, that's really the key to driving prices down," she continued.

"That manufacturing scale up around the world, it's something that's happening now. With the scale up comes lower prices, more investment, increasing the efficiency of this equipment, because that's where a real large part of our cost structure is today. And so we see that as that production scales up as it becomes more efficient."

There is also the cost of carbon emissions when it comes to fossil fuels, she noted. "If you take that into account, we think that over the short- to medium-term, taking into account the full cost, [SAF] will be competitive."