Customer Logins

Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.

Customer Logins

EC Fit for 55 proposals promise “transformative impact” on aviation

21 July 2021 Kevin Adler

Aviation is one of the industry sectors that could be most affected if the proposals in the European Commission's (EC) Fit for 55 package, announced last week, are approved, observers say.

Aviation produces approximately 3% of the world's annual GHG emissions, according to the International Energy Agency. So far, the industry's efforts to reduce emissions globally have been voluntary, but as the EC seeks to reach its emissions goals it is looking closely at every sector of the economy.

Fit for 55, announced on 14 July, is a series of legislative proposals aimed at enabling the EU as a whole to meet its legal obligation to get on track for net-zero carbon emissions in 2050 and for a 55% GHG reduction by 2030 from a 2005 baseline.

Fit for 55 touches on aviation from a number of angles, including mandated blending of sustainable aviation fuel (SAF), an end to free carbon allowances, and a possible border adjustment tariff. Each of these programs comes with costs, and they will add to the strain on an industry that's still reeling from the travel slowdown caused by the COVID-19 pandemic.

"The proposals unveiled today will have a transformative impact on the sector. We look forward to working with policy-makers to ensure airlines can deliver on our commitments, while at the same time making sure regulators also play their part," said Thomas Reynaert, managing director of industry trade group Airlines 4 Europe (A4E).

To be sure, the impact on aviation fuel for EU-based carriers would be unlike any seen across the globe so far.

If adopted, the regulations would require EU airports serving more than 1 million passengers or 100,000 mt of freight per year to comply with increasing SAF blending levels—the only such mandates in the world. Fuel used in flights departing from any of the EU's 27 countries would include a minimum 2% of SAF starting 1 January 2025. The blending floor would increase to 5% in 2030, 20% in 2035, 32% in 2040, 38% in 2045, and 63% in 2050.

"Looking at the 13 components of the Fit for 55 package, it seems like the fossil fuels industry is now firmly in the crosshairs of the legislator," said Hedi Grati, IHS Markit executive director and head of Europe/CIS refining research.

But Grati said it is important to remember that Fit for 55 is just a set of proposals that will go through the legislative process for about two years.

Destination 2050

In responding to Fit for 55 last week, European airports, airlines, aerospace manufacturers, and air navigation service providers referenced their own plan for full decarbonization, released last year under the title "Destination 2050."

The report identified emissions reductions in aircraft and engine technology, use of hydrogen and SAF, development of hybrid fuel-electric aircraft engines, efficiency improvements in air traffic management, and carbon removal as the steps that could combine to eliminate the projected 250 million mt of CO2 that the industry would be emitting in 2050.

A4E supports the aspects of Fit for 55 policies that are similar to the Destination 2050 plan, while at the same time it is concerned about elements of the proposal that would harm European aviation operators' competitiveness with non-European carriers.

Fit for 55 elements: SAF

SAF mandates are one of the most prominent aviation aspects of Fit for 55 under a program known as the ReFuelEU Aviation Initiative, and they mesh fairly well with the aviation industry's interest in using sustainable biofuels. ReFuelEU was proposed by the EC in 2020, with the goal of increasing use of SAF from its current market share of just 0.05%.

The International Air Transport Association (IATA) says that studies have shown that SAF blends can reduce emissions by 80%, but the trade group said the Fit for 55 proposals do not necessarily solve the two challenges they are facing: supply and cost.

"To reduce emissions, we need governments to implement a constructive policy framework that, most immediately, focuses on production incentives for SAF and delivering the Single European Sky," said Willie Walsh, IATA executive director. "Insufficient supply and high prices have limited airline uptake to 120 million liters in 2021—a small fraction of the 350 billion liters that airlines would consume in a 'normal' year."

Single European Sky, which is not part of Fit for 55, is an industry-led proposal to coordinate air traffic management across EU member states, potentially reducing emissions by 6-10%, according to IATA. It is part of Destination 2050.

The target market shares for SAF in 2025 (2%) and 2030 (5%) do not seem far-fetched, given that individual airlines that are major players in Europe have made much higher commitments. In April, British Airways said that by 2030, at least 10% of its fuel will be SAF. Not to be outdone, two days later, rival Ryanair committed to 12.5% of its fuel being SAF by 2030. They are the fifth-largest and largest airlines in Europe by passenger load, according to IATA.

However, the airlines and their trade groups have said that SAF costs three-to-five times as much as conventional jet fuel. According to the OPIS price service, jet fuel in Europe on 20 July was about $1.50/gal, compared with about $6.80/gal for SAF.

Fuel is about 25% of an airline's costs. For an industry that globally has been hit by more than $150 billion in COVID-19 economic impacts just in 2020, the burden of tripling fuel costs is too great, said Walsh.

IHS Markit's Grati said that Fit for 55's SAF incentives and new costs imposed on conventional jet-kero fuel (taxes and carbon allowances) would not completely close the cost gap. However, he said the legislative impact would send positive signals about supply. "At first glance, a regulatory track out to 2050, not just 2030, together with initial tax exemptions and additional measures to prevent tankering outside the EU provide some level of demand certainty, [which is to be] generally welcomed by investors," Grati said.

The ReFuelEU program takes aim at tankering—which involves carrying more fuel than is needed for a safe flight, in order to reduce or avoid refueling at the destination airport. ReFuelEU obliges airlines to take on SAF-blended fuel before each flight from an EU airport, and operators would have to report how much fuel was actually supplied "to prove that no fuel tankering was performed," the EC said.

Finnish refiner Neste, a leading producer of renewable diesel and SAF, said it believes ReFuelEU will create a more level playing field. "The Commission's proposal to establish an EU-wide obligation to supply a growing minimum share of SAF as of 2025 will create a large market and progressively cut down emissions from flying," Ilkka Räsänen, Neste's vice president of public affairs, said in a statement.

"Now that the Commission proposals will enter the legislative process, it will be important to further raise the level of ambition and keep the focus on emission cuts by various solutions, not only by specific technologies," she added.

From a fuel buyer's perspective, an IATA spokesperson said the current proposal is inadequate, even with associated the 10-year tax break for SAF. "A tax break and taxing regular kerosene would unlikely be enough. We need a combination of tax credits, grants, loan guarantees, [and] direct government investment," he said in an email to Beyond Net Zero.

At the same time, there are a few skeptics about the impact of incentivizing demand for SAF in Europe, given the limits on fuel feedstocks. A study released in April by Transport & Environment, a think tank, said that demand for used cooking oil globally for conversion to biofuels will soon outstrip supply, and this could lead to deforestation in Asia, as palm oil trees are planted to generate supply.

The study included a scenario in which SAF is 1.7% of the Europe aviation market in 2030, which is well below the 5% envisioned in Fit for 55. Even at that lower level, T&E said aviation would add 1 million mt/year of demand for biofuels, and thus overwhelm the used cooking oil market. T&E says that demand for biodiesel without considering aviation will more than double by 2030 from a current 2.8 million mt/year to 6-6.5 million mt.

To produce more biodiesel, suppliers will turn to palm oil from Malaysia and Indonesia, which is not the intent of the EU's biofuels programs, as the bloc wants waste products to be fuel feedstocks, T&E said.

"The current EU system for biofuels does not provide certainty that used cooking oil is actually used," T&E said in its report. "The EU should strengthen its verification and monitoring requirements along the supply chain and do regular checks to make sure it is really a waste product and therefore sustainable."

But that, of course, is yet another regulatory burden for industry to follow.

CORSIA and carbon allowances

The other major pillar of Fit for 55 affecting aviation would be the inclusion of many aspects of the airline industry's global voluntary emissions program, CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), in the EU emissions trading system (ETS).

The aviation industry has been part of the EU ETS since 2012 through free allowances allotted to airlines. Those grants would be ended after 2025, and airlines would need to purchase allowances. At the same time, the number of allowances in the entire ETS would be trimmed by about 5.1% per year, likely raising the cost for compliance for all participants.

Already, some airlines have been purchasing allowances to meet their emissions obligations and goals, with A4E estimating this figure at €900 million ($1.06 billion) in 2019 for passenger and freight air.

While supporting the integration of CORSIA into the emissions trading program, A4E warned it will cost the industry €5 billion ($5.89 billion) per year by 2030, given the number of allowances that will be needed and the projected rising cost of allowances, which have reached record levels above €50/mt this year.

The problem is where the EU ETS and CORSIA intersect, explained the IATA spokesperson. Under the agreement hammered out through the International Civil Aviation Organization (ICAO), CORSIA is applied to all international flights, including those between or outside European states. This would change under the new plan.

"International intra-European flights will be subject to EU ETS only for European airlines. Non-European airlines will actually be at a disadvantage because the EU will impose EU ETS on them, but they will also have to comply with CORSIA as their home state will implement CORSIA properly (unlike the EU)," he said.

Meanwhile, with discussions underway at ICAO to update CORSIA, the spokesman said that the EU's proposal adds a layer of uncertainty that could undermine those talks.

Energy Taxation Directive

The Fit for 55 program would add new taxes on fossil fuels, including jet fuel. These have been proposed as updates to the Energy Taxation Directive, announced in 2020 as part of the European Green Deal, and the EC has been seeking stakeholder feedback in order to propose specific tax changes.

Under the current ETD, aviation kerosene is exempted from taxation, but this could be changed to align tax policy with the EU's emissions reductions goals and phaseout of fossil fuel use. Both A4E and IATA are strongly opposed to these taxes, as they argue that the putting CORSIA into the EU ETS is a tax, and the ETD would be, in effect, double taxation.

"If airlines pay for their CO2 under the EU ETS and CORSIA, they should not have to do it under a reviewed Energy Taxation Directive," A4E said, adding that the Destination 2050 plan "showed that an alignment of the industry with the EU's climate targets can be done without further taxation of the sector."

Carbon Border Adjustment Mechanism

Fit for 55 also raises the possibility that the EU will adopt a tariff based on the carbon emissions of imported goods. The trade groups warned that a poorly constructed carbon border adjustment mechanism (CBAM) could backfire, again by raising the cost of fuel on which airlines rely. European airlines forced to pay higher prices for imported fuel would be at a disadvantage to their non-European competitors, they said.

While expressing sympathy for the goal of the CBAM—which is to prevent "leakage" of carbon emissions by allowing Europeans to outsource production of fuels and other finished goods to countries that tax carbon at a lower rate—the trade group said that the issue is highly complex and needs to be studied before a tariff is imposed.

As an example, A4E said that if the cost of fuel rises for European carriers and they raise rates, passengers might choose non-European airlines flying to the same destinations, thus creating carbon leakage. This might occur on a large scale if the network configuration of a particular airline (passenger or freight) is modified to avoid destinations subject to CBAM.

Posted 21 July 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

Explore

Follow Us

{"items" : [ {"name":"share","enabled":true,"desc":"<strong>Share</strong>","mobdesc":"Share","options":[ {"name":"facebook","url":"https://www.facebook.com/sharer.php?u=http%3a%2f%2fihsmarkit.com%2fresearch-analysis%2fec-fit-for-55-proposals-promise-transformative-impact-on-aviat.html","enabled":true},{"name":"twitter","url":"https://twitter.com/intent/tweet?url=http%3a%2f%2fihsmarkit.com%2fresearch-analysis%2fec-fit-for-55-proposals-promise-transformative-impact-on-aviat.html&text=EC+Fit+for+55+proposals+promise+%e2%80%9ctransformative+impact%e2%80%9d+on+aviation+%7c+IHS+Markit+","enabled":true},{"name":"linkedin","url":"https://www.linkedin.com/sharing/share-offsite/?url=http%3a%2f%2fihsmarkit.com%2fresearch-analysis%2fec-fit-for-55-proposals-promise-transformative-impact-on-aviat.html","enabled":true},{"name":"email","url":"?subject=EC Fit for 55 proposals promise “transformative impact” on aviation | IHS Markit &body=http%3a%2f%2fihsmarkit.com%2fresearch-analysis%2fec-fit-for-55-proposals-promise-transformative-impact-on-aviat.html","enabled":true},{"name":"whatsapp","url":"https://api.whatsapp.com/send?text=EC+Fit+for+55+proposals+promise+%e2%80%9ctransformative+impact%e2%80%9d+on+aviation+%7c+IHS+Markit+ http%3a%2f%2fihsmarkit.com%2fresearch-analysis%2fec-fit-for-55-proposals-promise-transformative-impact-on-aviat.html","enabled":true}]}, {"name":"rtt","enabled":true,"mobdesc":"Top"} ]}
Filter Sort