It’s often said that where there’s muck there’s brass, and recycling companies are much in vogue with investors nowadays.

One of the less well-known firms is Velocys (VLS:AIM), previously known as Oxford Catalysts, which makes sustainable fuel from waste items.

Its products are aimed at the heavy transport and aviation markets which are integral to the global economy but at the same time difficult to ‘decarbonise’.

Velocys’ niche is in making compact, commercially ready reactors which use a chemical reaction to take carbon monoxide and hydrogen from household and forest waste residues and turn them into advanced biofuels like diesel and jet fuel.

The end products are high-quality versions of existing fuels and don’t require any changes to engines or infrastructure, they simply burn cleaner, cutting exhaust pollutants and reducing greenhouse gas emissions.

Last September, Velocys won a grant from the UK Department for Transport under the ‘Green Fuels, Green Skies’ initiative to develop a project jointly with British Airways to convert hundreds of thousands of tonnes of residual waste into sustainable aviation fuel.

On the back of this grant, British Airways’ parent company International Consolidated Airlines (IAG) signed a deal to take 73 million gallons of sustainable aviation fuel from the firm’s Bayou Fuels project in Mississippi for 10 years starting in 2026.

The deal counts for a third of the facility’s planned output, with Southwest Airlines (LUV:NYSE) taking the remaining two thirds of production over a 15-year period from 2026.

The Southwest deal, which covers the purchase of 219 million gallons of sustainable aviation fuel, ‘has the potential to generate multi-billion revenues over the life of the contract’ according to Velocys, as each gallon is expected to generate tradeable greenhouse gas credits which Southwest has guaranteed to buy at a minimum price.

Recent US climate legislation included in the 2022 Inflation Reduction Act has allocated $369 billion to expand production and use of domestic clean energy and reduce emissions.

The inclusion of sustainable aviation fuel tax credits as part of the Act, along with incentives to develop advanced fuel technologies, represents a major source of additional income for Velocys in future US projects.

Given the firm is currently loss-making, pays no dividends, and isn’t expected to become cash-flow positive until 2024, this is a high-risk investment and is only suited to investors who have a long-term perspective.

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