On 18 August 2026, the Department of Climate Change, Energy, the Environment and Water ("DCCEEW") launched a consultation on the design of a demand mechanism, aimed at accelerating uptake of low carbon liquid fuel ("LCLF"), including sustainable aviation fuel ("SAF").1 The consultation seeks views on how to balance ambition against market and technological maturity, broad-based support against targeted incentives, and the need to apply sufficient pressure to create change, without placing undue stress on transitioning industries.
Under the proposed SAF mandate, obligated entities (essentially, relevant fuel suppliers) would be obliged to meet volumetric SAF requirements for a market formation period, spanning from 2029 – 2035 ("Phase 1"), before transitioning into compliance with carbon-intensity ("CI") targets. Under this phase ("Phase 2"), obligated entities would be granted greater flexibility as to how they meet their targets, with SAF options providing greater lifecycle emissions reductions being preferred. For any shortfall in SAF volume or CI reduction, an obligated entity would be required to either surrender carbon credits or pay a 'buy-out price' to the government, to discharge its unmet obligations.
The consultation considers whether, and how, this demand-side policy should be optimised and implemented. In particular, DCCEEW is seeking views on the appropriate target ranges, the level and adjustment of the buy-out price, credit-banking and credit-market features, implementation challenges and considerations when moving from volumetric to carbon-intensity targets, and certification requirements, which would impact both domestic recognition of imported SAF, and foreign recognition of Australian SAF exports.
The approach adopted following the consultation will have direct implications for emissions reductions, compliance costs, comparative bankability of projects relying on different SAF production pathways, and demand (internationally and domestically) for the SAF produced.
What does the consultation propose?
The consultation is seeking views on several core topics in relation to the proposed SAF mandate:
- Targets:
- Phase 1: DCCEEW has proposed two volumetric pathways (upper and lower) for Phase 1. Under each pathway, there will be a fixed, incrementally increasing, annual LCLF volume required, a portion of which must be comprised of SAF production. The SAF targets are as follows: on the lower volumetric pathway, 150 – 200 ML SAF (2030) to 850 – 1,200 ML SAF (2035); and on the higher volumetric pathway, 300 – 450 ML SAF (2030) to 1,700 – 2,400 ML SAF (2035). Contrastingly, both the EU's ReFuelEU SAF targets and the UK SAF Mandate targets are set as at more ambitious fixed proportions of total aviation fuel volume. DCCEEW's preference for a fixed volumetric approach is driven by a desire to maximise near-term market development, by crystallising the scale of demand, and incentivising entry into long-term offtake agreements.
- Phase 2: Post-2035, DCCEEW proposes conversion to a CI target (g CO2-e/MJ), with an annual carbon-intensity decline rate of approximately 1%-2.7% for LCLF generally. A different, yet-unspecified carbon intensity benchmark is to be applied to SAF, likely in deference to its greater abatement difficulty. By tying financial reward to emissions reductions, rather than production volume, Phase 2 intends to incentivise diversification and innovation in favour of higher-cost, but lower-emissions SAF. The EU and UK are also prioritising these same goals, but have done so by legislating specific sub-targets for the production of more advanced SAF.
- Buy-out prices: DCCEEW acknowledges the importance of setting the right price, but has not identified a clear proposal, and correspondingly, has not shed light on review cycles or trigger events for review, if any. The UK and EU take divergent paths here, with the UK imposing a fixed buy-out price (currently GBP 5,875 per tonne for SAF, and GBP 6,250 per tonne for e-SAF), and the EU requiring dynamic penalties, calculated as a multiplier of the disparity between the market cost for conventional jet fuel and SAF.
- Credit trading and banking: DCCEEW proposes an initial ban on credit banking in Phase 1, before allowing it in Phase 2, where greater volumes of early investment in advanced SAF production pathways align with desired policy outcomes. Comparator jurisdictions have well-established credit markets - the UK SAF Mandate allows credit trading and banking of up to 25% of the subsequent year's obligation. Conversely, ReFuelEU imposes a SAF uptake percentage, which decreases the amount of carbon credits that must be surrendered under the EU Emissions Trading System ("ETS", which requires purchasing "Aviation Allowances" or "aEUAs", for excess aviation emissions). aEUAs are bankable indefinitely.
- CI and certification requirements: DCCEEW's proposal suggests that the minimum CI reduction threshold could be set at around 40-70% below the relevant fossil fuel baseline. The UK's SAF Mandate requires a minimum lifecycle emissions reduction of 40% compared to conventional jet fuel, benchmarked at 89 gCO₂e/MJ (effectively, a threshold of 53.4 gCO₂e/MJ), whereas ReFuelEU requires a 70% reduction against the EU fossil fuel transport comparator of 94 gCO₂e/MJ (effectively, a threshold of 28.2 gCO₂e/MJ). Depending on the 'relevant fossil fuel baseline' chosen, Australia's thresholds could align with international standards, allowing for physical exports, provided that feedstock and other certification requirements be met. However, the ETS does not currently accept foreign carbon offset credits – although discussion is underway for the EU to purchase 'high-integrity international credits' directly, presenting a parallel opportunity.
Three issues for SAF market participants
This consultation represents a critical turning point for the Australian SAF industry. Geopolitical instability has highlighted Australia's vulnerability to international fuel shocks; increased awareness of Australia's competitive advantage in SAF feedstock production has emphasized the opportunity to increase value via domestic SAF refinement as well as a combination of private and public sector commitments to emissions reductions have all stoked appetites for durable legislative change. The government has begun providing supply-side support, in the form of a decade-long $1.1 billion Cleaner Fuels Program, to support private investment in LCLF. However, in a market where SAF can command a five-fold cost premium over fossil kerosene, a dearth of private sector demand is likely to impact project bankability, and the SAF industry's development trajectory, overall. In the aftermath of the consultation, the question will be whether the policy levers can be set correctly, to catalyse the production and consumption of SAF, whilst also meeting national security and economic development goals.
1. Ambition and ability: goal-setting and growth trajectories
It is difficult to draw a direct numerical comparison between Australia's Phase 1 fixed volumetric mandates, and the EU and UK's volumetric mandates (pegged at a percentage of overall SAF production). Nevertheless, it is likely
It is difficult to draw a direct numerical comparison between Australia's Phase 1 fixed volumetric mandates, and the EU and UK's volumetric mandates (pegged at a percentage of overall SAF production). Nevertheless, it is likely that Australia's production mandates will constitute a lower percentage of overall SAF production, when compared to mandates overseas. Even assuming the highest end target in 2030 (450ML p.a.) and a very conservative annual domestic aviation fuel demand (7.7b liters p.a.), Australia's effective mandate as a percentage of overall SAF production would be 5.8%, which is under the UK's 10% mandate, and just below the EU's 6%. This less ambitious proposition is a concession to Australia's relative immaturity in the market – while the EU and UK already have 2% SAF mandates on foot, Australian demand has been driven by voluntary private sector commitments, and the nation currently has no commercial-scale domestic SAF production facilities. Overly aggressive goal-setting risks perverse outcomes. If the mandate is set higher than domestic production can support, the policy might unduly penalize obligated entities, by forcing them to purchase credits (which could be in short supply), pay buy-out prices, or rely more heavily on imported SAF, without effectively incentivizing growth in domestic production. Right-sized mandates are aimed at creating the demand required to render domestic manufacturing facilities bankable, without inflicting undue economic harm.
2. Volumetric mandates vs CI targets
The DCCEEW's biphasic approach seeks to leverage volumetric mandates for one purpose (capacity building / market formation), and carbon intensity targets for another (incentivizing SAF production pathway diversification). Each mandate type comes with tradeoffs. The primary benefit and shortcoming of the Phase 1 volumetric mandate is its simplicity. Volumetric mandate implementation, enforcement, and compliance is relatively straightforward, as it tells the market the exact demand to be fulfilled, and compliance can be tracked and evidenced by monitoring fuel volumes, without further calculations. However, in the long run, this is distortionary, as all SAF is treated equally, without differentiation between SAF with different levels of lifetime emissions reduction. This creates a race to the bottom – in essence, the incentive is to create the largest volume of the lowest-cost compliant fuel, rather than aiming to maximize emissions reductions per dollar of investment.
This is particularly problematic when considering international standards. Australia's agro-industrial competitive advantage is most evident in the availability of cost-competitive primary feedstocks, such as canola oil and tallow. As such, the most cost-efficient SAF production (by volume) is likely to leverage such feedstocks. Some estimates suggest that local feedstock supply is adequate to produce up to 117% of the jet fuel currently consumed domestically, leaving capacity for export. However, SAF derived from virgin canola oil is excluded from being counted in the UK SAF Mandate and ReFuelEU. ReFuelEU also places strict caps on how much SAF derived from tallow can be counted towards the required SAF volume (amounting to a few percent, depending on the category of tallow), with similar restrictions being imposed in the UK, from 2027 onwards. In both cases, this restriction seeks to disincentivize diversion of erstwhile food stocks to fuel, and indirect land use changes ("ILUC"). A purely volume-maximizing mandate would therefore restrict Australia's ability to export SAF in the long run.
By contrast, the CI targets are more effective at capturing and pricing CI reduction, rather than focusing on volume as an imperfect proxy for this social good. Critically, this incentivizes obligated entities to optimize for carbon emissions reductions, through supply chain improvements, diversification into advanced production methods and using more sustainable feedstocks (such as agricultural byproducts, rather than fuel crops). Additionally, unlike the sub-targets for synthetic fuel adopted by the UK and EU, which requires the government to attempt to 'pick winners' and forecast feasible technology adoption rates, this approach is technology agnostic. However, this mechanism brings significant administrative complexity. CI reduction pricing requires calculation of lifecycle emissions, and the calculation methodology can be highly contested. For example, byproducts and residues, such as tallow, often benefit from zero ILUC values by default, whereas fuel crops are heavily penalized. In a country where the two major exported feedstocks are tallow and canola, determination of the calculation methodology could become heavily politicized.
CI targets also create less certainty around the exact amount of fuel required to meet mandatory targets, which could impact investment certainty and complicate offtake agreements. However, when implemented well, CI targets can also open pathways to revenue generation via compatibility with international emissions trading markets. While the EU and UK have rejected accepting standalone foreign carbon credits for the purposes of the ETS and SAF Mandate (i.e., carbon credits without physical delivery of the SAF in question), the EU has flagged that it will allow 5% of its 2040 climate target to be met through purchasing 'high-quality' international credits. In practice, it has been proposed that this would require the EU to buy up to 260 million credits, between 2036 and 2040, aligning well with DCCEEW's proposed conversion to CI targets post-2035.
3. Buy-out price: applying the right amount of pressure
One area that remains largely subject to consultation is the determination of the buy-out price, which will be of critical importance to ensure that the mechanism as a whole stimulates demand as intended. The buy-out price effectively acts as a price ceiling, and a cost-containment mechanism, by setting the maximum price that the obligated entity will have to pay, if it is unwilling or unable to comply with the SAF mandate. However, if the buy-out price is set lower than the cost of complying with the SAF mandate, the economically rational response would be for obligated entities to eschew physical compliance – that is, building out the infrastructure required, and producing the SAF as the policy intended – in favor discharging their obligations by paying the buy-out price. This would not achieve the goals of the policy, as it would simply be a tax on conventional jet fuel, without incentivizing the development of domestic SAF production capacity. Conversely, if the buy-out price is set too high, then in the event of a SAF and/or SAF credit shortage, the financial penalty on the obligated entity could be overly burdensome. Without transparency as to the mechanism for setting the buy-out price, and escalation rates or review policies, it will be difficult for market participants to calibrate their expectations and enter into long-term offtake agreements.
Next Steps
The consultation is open until 15 September 2026, with DCCEEW expected to publish its response thereafter and implement any changes by 2029.
The proposals form part of a broader policy package aimed at driving demand for LCLF more generally, through the same biphasic approach, starting with volumetric mandates, followed by carbon intensity targets post-2035. Given the potential feasibility considerations, cost implications, and compliance obligations, SAF market participants may wish to consider engaging with the consultation process to help shape a framework that is practicable, efficient, and profitable.
Jessica Xia (White & Case, Associate, Melbourne) contributed to the development of this publication.
1 https://consult.dcceew.gov.au/securing-australias-cleaner-fuels-industry-consultation
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