Jens Flottau, Helen Massy-Beresford With a fuel tax, SAF quotas and emissions-trading changes, "Fit for 55" adds up to higher airline operating costs.
Jens Flottau, Helen Massy-Beresford
Sustainable aviation fuels are forming a key part of Europe’s emissions-reduction plans. Credit: Eric Piermont/AFP/Getty Images
With a Europe-wide aviation fuel tax, changes to emissions trading and a sustainable aviation fuel (SAF) mandate, airlines are digesting the broad-ranging content of the European Commission’s proposed new “Fit for 55” sustainability legislation. One thing is certain: The new rules will mean higher operating costs.
Airlines fear the new rules may put them at a competitive disadvantage versus their competitors in other regions, and they have also warned that some parts of the planned legislation may be counterproductive in the bid to reduce aviation’s contribution to climate change.
The new “Fit for 55” legislation package presented July 14, which aims to reduce greenhouse gas emissions by 55% by 2030 compared with 1990 levels, is in itself part of the 2050 European Green Deal climate pledge to achieve carbon neutrality by 2050. It includes changes to its Emissions Trading Scheme (EU-ETS), quotas for sustainable aviation fuels and a fuel tax for intra-European flights, all part of a package that goes far beyond the aviation sector, but which will have a huge impact on carriers in the years to come.
Europe’s airlines are still in the thick of the COVID-19 crisis, with a short-haul recovery offset by ongoing obstacles limiting the much-needed pickup in long-haul demand. It is understandable, therefore, that any measures likely to put further pressure on costs and profitability will receive close scrutiny from the industry.
However, the conditions attached to the multibillion-euro aid packages Brussels approved for many carriers to help them weather the COVID-19 crisis made clear that sustainability in aviation would be in much sharper focus post-crisis, so airlines knew that changes to the rules were inevitable.
“Aviation is committed to decarbonization as a global industry,” says International Air Transport Association (IATA) Director General Willie Walsh. “We don’t need persuading, or punitive measures like taxes to motivate change. In fact, taxes siphon money from the industry that could support emissions-reducing investments in fleet renewal and clean technologies.”
Walsh says governments should be focusing on delivering reforms to the Single European Sky program, which airlines have long argued would be a straightforward way to improve European aviation’s emissions record, as well as on introducing policy incentives to boost SAF use.
In fact, the role of sustainable aviation fuels will be “essential,” the commission wrote as it set out the new Fit for 55 measures, including ReFuelEU. It noted that “the aviation sector is particularly difficult to decarbonize due to its exclusive reliance on fossil energy, the limited technological options available for reducing its emissions and the long lifespan of aircraft.” It expects SAF use and offsets to contribute 75% to emissions savings by 2050.
The commission described three scenarios for increased SAF use needed to reach its long-term climate targets. The first puts SAF use at 4% in 2030, rising to 68% in 2050. The middle path sees SAF reaching a 5% share of total consumption by 2030 and 63% by 2050, while a third possible road map is for 8% in 2030 and 63% in 2050.
The gradual introduction of SAF would lead to increased fuel costs for airlines (currently as much as 25% of their operating costs), the commission said. In a bid to avoid an increase in distortive practices such as tankering (taking on more fuel than necessary at airports where fuel costs less), it said it seeks a uniform obligation for fuel suppliers to provide the alternative fuels.
“It is the sustainable fuels regulation, ReFuelEU, which may in the long term have the biggest impact,” transport-focused lobbying group Transport & Environment (T&E) said.
The proposed regulation also includes a submandate for synthetic fuels to reach 0.7% in 2030 and 28% in 2050, less ambitious than the 2.5% in 2030 target a group of industry signatories including T&E, Lufthansa Group and Schiphol and Copenhagen airport operators had been calling for before the package was made public.
“Setting a subtarget for e-kerosene is crucial, as it is the only green fuel with the potential to be scaled up to meet the sector’s demands,” says T&E’s transport manager, Andrew Murphy. “However, that target should be set even higher to really drive down emissions from flying.”
The commission also wants to progressively introduce a tax on fuel for intra-European flights over a transitional period of 10 years.
Sustainable aviation fuels and electricity would have a tax rate of zero for 10 years. Cargo-only flights are to be exempt from fuel taxes, although member states can decide to impose these anyway on domestic flights or if bilateral or multilateral agreements with other EU countries can be reached. Flights to and from destinations outside of the EU are exempt.
“Axing jet fuel’s tax exemption in Europe is a vital step toward ending decades of subsidized pollution, which even included fuel for private jets,” Murphy says. “But by not removing the tax exemption for flights outside of the EU, it still lets the majority off the hook.”
In separate changes to the rules governing the EU-ETS, the commission wants to phase out free emission allowances for aviation over time and align that policy with the Carbon-Offsetting and Reduction Scheme for International Aviation (Corsia). “As airlines increase their use of SAF in the years to come as a consequence of ReFuelEU Aviation, this means that the volume of allowances needed by the aviation sector will decrease over time,” the commission argued.
The proposed measures would cut the current level of free allowances by 25% annually starting in 2024, thus eliminating them completely by 2027. But that, along with the other proposals, will add to airlines’ operating expenses.
Bernstein analyst Daniel Roeska wrote in a July 15 research note that Wizz Air looked most favorably positioned in the context of the proposed new rules, with its fuel costs likely to increase by the smallest amount thanks to its young fleet and low current level of free allowances. EasyJet faces the biggest threat to its earnings because of its higher level of free allowances and slower fleet transition, while Air France-KLM will also be badly affected, hamstrung by lower margins. Roeska sees International Airlines Group, Lufthansa and Ryanair falling somewhere in the middle in terms of potential impact.
“The presented proposals could increase EU airlines’ operating costs by 5-8.5% by 2030,” Roeska wrote. “This cost increase is driven by fuel taxes, higher carbon costs and a mandatory drop-in of expensive sustainable aviation fuels. To raise ticket prices, the European sector would have to commit to something it has been notoriously unable to do: slower growth.”
Roeska warned that Europe’s network airlines would face competitive distortions as a result of the new plans. “They will face ETS carbon charges on their intra-European flights and higher fuel costs (due to SAF blending) on all EU departing flights. This puts European network airlines at a disadvantage.”
European airlines’ trade group Airlines for Europe (A4E) says the proposals would have a “transformative” impact on the sector. However, Managing Director Thomas Reynaert warns that climate policy regulation can be ecologically and economically counterproductive, and he has renewed calls for investment in carbon-reducing technologies.
The group warns against the possibility of “double-pricing” of CO2 under several market-based measures, saying it would be counterproductive. “If airlines pay for their CO2 under the EU ETS, for instance, they should not have to pay for it again elsewhere. Inefficient policies leading to a disproportionate cost burden hamper aviation’s decarbonization plans,” A4E says.
Reynaert also reiterates a warning that reducing airlines’ ability to invest in emissions-reducing technology will harm efforts to make the industry more sustainable.
“Increasing costs reduces our capacity to make these investments, while CO2 emissions are potentially shifted to other regions,” he says. “By making flying more expensive, it may shift demand globally and reduce traffic locally. But it will not tackle the source of the emissions.”
