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EU’s Decarbonization Policies Will Drive up Costs for Airlines

 - July 11, 2022, 4:01 AM
European airlines have expressed concern about the significant costs of implementing the EU’s Fit for 55 package aimed at trimming CO2 levels by 55 percent. (Photo: Fraport AG)

When the European Commission published its Fit for 55 package of legislative proposals in July 2021, stakeholders were positive and supportive of the initiative. The industry wanted to show that its decarbonization pledge and efforts were genuine and that the public perception of air transport as an irresponsible polluter, propelled by anti-flying movements like Flygskam, were unfounded. Yet, the realization is slowly sinking in that Fit for 55’s financial impact will prove significant.

Fit for 55 forms part of the European Green Deal and the European Climate Law, which aims to strengthen the EU's position as a global climate leader and reduce net emissions by at least 55 percent compared with 1990 levels by 2030 across a range of industries and society. Of the 15 legislative proposals that comprise Fit for 55, three are of major importance to aviation: changes to the EU carbon emissions trading scheme (ETS); the revision of the Energy Tax Directive, which seeks to introduce an EU-wide tax on kerosene; and the ReFuelEU Aviation proposal, which aims to accelerate the uptake of sustainable aviation fuels (SAF). Fit for 55 includes some other measures that would affect aviation, such as new electric infrastructure for airports planned under an Alternative Fuels Infrastructure Regulation (AFIR) and the implementation of a carbon tax at the border.

Raising Economic Barriers

According to Sebastian Mikosz, senior vice president for environment and sustainability at the International Air Transport Association (IATA), the European Commission’s Fit for 55 environmental proposals stand as a “vital opportunity” to deliver a significant boost to sustainable aviation, unleashing investment in green technologies and operational efficiencies. But, he warned, the Fit for 55 proposals in their current form would likely represent a missed opportunity. “Instead of promoting green technologies and operational efficiency improvements, making flying sustainable for all, the package aims to reduce flying by raising economic barriers and making it significantly less affordable,” he said. IATA analysis estimates that the joint cost of a mandate for the use of SAF, the phaseout of free emissions allowances, and a proposed fuel tax could add €38 per ticket on an average flight in Europe, and €205 on the average transatlantic flight by 2035. “This would mark the end of low-cost air travel in Europe as we know it and reverse decades of democratization of flying,” asserted Mikosz.

A recent Eurocontrol "think paper" assesses that the cumulative extra cost of the EU’s decarbonization measures to the aviation industry could amount up to €62 billion over the period from 2022 to 2030. The total consists of €29 billion in extra tax costs on kerosene (applied to intra-European Economic Area flights), €23 billion in extra ETS costs (applied to EU, UK, and Switzerland), and €10 billion in extra fuel mix costs (applied to all-European Civil Aviation Conference states based on a 5 percent SAF/95 percent kerosene mix). The extra cost to the airline industry in 2030 alone would amount to €14 billion, estimates show.

On a per flight basis, within the EEA and aboard Airbus A320 family and Boeing 737NG narrowbodies, the Fit for 55 policy measures would translate into a 22 to 27 percent hike in operating costs. In absolute terms, operating costs would increase on average €1,809 per intra-EEA flight in 2030 compared to 2019 in Eurocontrol’s ‘high scenario’ and €2,087 in it ‘base scenario.’  Eurocontrol bases its estimates on the three traffic scenarios—high, base, and low—published in the recent Eurocontrol Aviation Outlook 2050. It considers forecast traffic growth and the speed and scope of industry acceptance of policy measures;  for instance, the base scenario assumes moderate traffic growth—1.2 percent annual aggregate growth between 2019 and 2050—and moderate uptake of SAFs (5 percent in 2030). The high scenario assumes a 1.8 percent annual traffic growth rate and blending of SAFs at percentages higher (10 percent in 2030) than current European regulatory requirements.  

Implementing the EU’s policy decarbonization measures will create “significant extra costs for airlines,” affirmed Eurocontrol director general Eamonn Brennan. But, he added, “improvements led by the aviation industry are capable of bringing the extra cumulative costs significantly down” while contributing to the required 55 percent net CO2 emissions reductions by 2030. Industry-led measures include the long-delayed implementation of the Single European Sky, other operational improvements, higher-than-mandated SAF uplift, and accelerated fleet updates and renewal. Together, they could reduce the cost of the EU’s decarbonization measures by €45.7 billion in the high scenario and €34.8 million in the low scenario and account for 24.1 percent and 13.4 percent of the net emissions savings, respectively, the paper finds. “The vast majority of the remainder would thus need to rely on market-based measures such as ETS and CORSIA,” it concludes.

The upcoming changes to the aviation ETS, however, do not sit well with the industry. “Phasing out free allowances by 2025, even before decarbonization technologies such as SAFs are widely available, will only make traveling in Europe more expensive. It will not speed up the deployment of clean fuels or more efficient aircraft,” remarked Laurent Donceel, senior policy director at Brussels-based airline trade body Airlines for Europe (A4E).

Speaking at A4E’s in-person aviation summit earlier this year, Lufthansa Group CEO and A4E chairman Carsten Spohr asserted that Europe can become a global leader in decarbonizing aviation.  But, he added, achieving net-zero emissions by 2050 should not erode the competitiveness of European airlines nor lead to carbon leakage.  Lufthansa and its sister airlines Swiss, Austrian Airlines, Brussels Airlines, Eurowings, and Air Dolomiti are part of the Aviation Alliance Fit for 55 created in January to call for changes to the commission’s proposals, claiming they risk skewing the “level playing field” and transferring activities and CO2 emissions to a country or region with less stringent environmental rules or concerns.

In a recent economic analysis of the Fit for 55 proposals, the Institute of the German Economy (IW) pointed to similar concerns and stated they could lead to “severe market distortions to the detriment of European airlines.”  The EU Commission’s climate protection plans would primarily make flights by European airlines, including direct connections to other continents, more expensive while for airlines from neighboring regions, only the flight to their home hub would become more expensive, not the onward flight from there.  “In particular, nearby hubs such as London, Istanbul, or Zurich would gain a competitive advantage in this way. But flights of the Gulf airlines via Dubai or Doha would also be less expensive compared to direct flights from the EU,” according to the study by the German Economic Institute titled EU Climate Policy Could Make Direct Flights More Expensive. “It is to be feared that due to the resulting distortions of competition caused by the EU plans, both passengers and cargo will migrate to non-European airlines in the future,” it said.