“We’re terrified” was the response an aviation specialist gave me when I blurted out the words “EU ETS” at him during the Aviation Carbon conference in October. His remarks were echoed by a very senior manager of a European airline who told me that “carbon pricing may kill us”. So, what gives? Is there any merit to this pervasive sense of urgency, and can changes to EU and global carbon pricing schemes really put an end to the aviation industry?
To understand the airline industry’s angst around carbon pricing, it is important to first understand how emissions from the aviation industry are calculated, regulated, traded, and mitigated. Globally, there are two schemes of interest.
The first is the CORSIA scheme which is organised by the International Civil Aviation Organization (ICAO), a UN body. CORSIA’s mission is to keep emissions from aviation at 2019 levels. It largely depends on airlines from signatory countries to purchase emission credits and offsets to compensate for any growth in CO2 emissions vis-à-vis 2019 levels. As with any large international agreement under the auspices of a United Nations body, some compromise was needed in order to make CORSIA palatable. Perhaps unsurprisingly, this resulted in stark criticism from a wide range of industry, national, and non-governmental actors. To be fair, CORSIA is a monumental achievement in that 107 states, including numerous developing countries, have signed up and agreed to implement this global market-based measure. However, CORISA can be considered ‘toothless’ when compared to the European Union’s Emissions Trading Scheme (ETS) in its future form.
The EU ETS, established in 2005, is the world’s largest carbon trading scheme which, like CORISA, seeks to provide a financial incentive for companies to pollute less. However, unlike CORISA, the ETS sets an upper limit on the amount of carbon a company can pollute via a currency known as “allowances”. Initially, free allowances were too plentiful resulting in a low carbon price and a largely ineffective scheme. Moreover, by virtue of the “uniqueness” of, or successful lobbying by, the aviation industry, flights within Europe were exempt from the ETS until 2012. Since then, most intra-EU flights have been covered by the ETS and, for reasons that are beyond the scope of this article, but are mostly due to “significant grievances” from the Americans (and others), international flights beyond the EU remain exempt from the ETS.
Importantly, since 2012, 500 EU airlines have been allocated free allowances on an efficiency benchmark which was set at 0.6422 allowances per 1,000 verified tonne-kilometres flown in 2010. Consequently,it was anticipated that airlines would receive around 210,400,00 allowances between 2013-20.
However, as part of the European Union’s Fit for 55 legislative package of measures under the Green Deal (perhaps you have heard of it?!), the European Commission has proposed that free allowances be reduced entirely by 2027. The European Parliament, however, voted 479 for, to 130 against, and 32 abstentions, to achieve full auctioning by 2025. The first trialogues took place in September 2022, and regardless of how long the EU institutional negotiations take, the elimination of free carbon allowances for Europe’s airlines is seemingly written in the sky.
So, what does this mean? For starters, it means that airlines, and by extension passengers, will have to pay for carbon emissions in the next 5 years or so.
How much will this cost? Assuming that ETS allowance costs €80 per tonne, and that a one-way flight between London Heathrow and Frankfurt emits 12.31 tonnes of CO2e (calculated by multiplying the total fuel burn of that flight , 3895.6 KG, by 3.16) , the airline will be liable for an additional €984 in direct operating costs, per flight. Divided by all 180 passengers, and each passenger can expect an additional €5.46 in costs.
Sure, an extra fiver in costs does not sound like much, but when you consider that the average fare at a low-cost airline like Ryanair stood at just €27 in 2022, the situation does seem alarming. Moreover, should load factors decrease on our LHR to FRA flight to 61.6%, the average Lufthansa Group passenger load factor in 2021, and that €984 in total carbon allowance expenditure would result in a €8.86 in extra costs per passenger (111 seats filled out of a potential 180). Across the wider European airline industry, ETS compliance costs are estimated to reach six billion euro by 2025 according to the airline trade group, A4E.
Will carbon pricing kill the aviation industry? Maybe… European airlines, unlike their North American cousins, rarely see double-digit profit margins as they face higher labour, fuel, and operational costs than across the pond. Moreover, whilst some European giants like Ryanair, Lufthansa, IAG, and Air France might be able to offset increased compliance costs with premium fares, ever more streamlined operations, ancillary revenues, and investments in sustainable aviation fuels, smaller, regional airlines, and those which focus on leisure routes or charter flights, might see their tight budgets further constrained, and their days numbered.
What do you think? Will carbon pricing really kill off the European airline industry? Will intermodal air-rail agreements help airlines overcome the relatively high carbon compliance costs of short-haul flights? Should flying be banned altogether? Let us know your thoughts in the comments or send us your op-ed via email at hello@ibexpub.media
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