Carbon leakage and mitigating measures

To help meet the CO₂ reduction aims as outlined in the EU Climate Law, the EU has implemented the Fit for 55 (FF55) package, which includes decarbonisation policies for aviation. The most relevant are the ReFuelEU blending mandate and a strengthened EU ETS. These policies lead to additional costs for flights from/to EU airports, and these costs are expected to rise substantially in the coming years. Concerns that they lead to an unlevel playing field and carbon leakage are widespread. These concerns were further fuelled by the Draghi report[1] and increased geopolitical instability, flagging risks to the competitiveness of the EU aviation sector and EU strategic autonomy.

While the EU decarbonisation policies are needed and are effective to achieve emissions reduction, a competitive disadvantage for EU hubs could lead to traffic (and carbon) leakage to non-EU hubs and airlines. The EU should aim to address these concerns with effective targeted  policy mechanisms, without compromising on the ambition of the policies.

Where does carbon leakage occur?

As certain flights fall outside the scope of the FF55 policies, there is a risk of carbon leakage. Three types of carbon leakage can be distinguished (see Figure 1):

1. A shift from a flight to a direct destination within the EU to a destination outside the EU (e.g. a passenger flying to Turkey instead of Greece);
2. A shift from a direct flight from the EU to a destination outside the EU to an indirect flight to the same destination (e.g. flying from Frankfurt to Bangkok via Istanbul instead of a direct flight);
3. A shift from an indirect flight through an EU hub to an indirect flight through a non-EU hub (e.g. flying from Madrid to Tokyo through Dubai instead of through Helsinki).

Table 1 presents the estimated cost differences on certain example routes for each type. Cost differences are particularly high for flights to and through non-EU airports in neighbouring countries. The largest impact of carbon leakage will occur in type 3, as flights through EU hubs face higher costs than similar alternatives through non-EU hubs. Types 1 and 2 are arguably less impactful, as switching destinations or switching to indirect options will mostly occur for only the most price-sensitive passengers.

A study conducted by SEO[2] estimates that the Fit for 55 measures lead to net CO₂ savings of 4.8 Mt, while a shift in traffic to non-EU hubs leads to an increase in emissions of 0.7 tons.

Figure 1

What can we do about it?

The first thing to strive for is policy alignment. On a global scale, this has proven to be a challenge. However, carbon leakage mainly occurs through alternatives close to the European border. This means that with targeted changes in aviation agreements with third countries it might be possible to seek alignment with non-EU countries, for example Turkey and North-African and Middle-Eastern countries. As with all trade negotiations, this will neither be easy nor straightforward, but by providing access to a market of 450 million inhabitants the EU has something to offer.

Alternatively, other trade/tariff options could be considered. Different options have been proposed, such as CBAM-like mechanisms and a SAF levy.[3] Regardless of the terminology and legal issues, from an economic point of view they all boil down to the same logic: incorporating a fee to address the cost advantage of operating outside the scope of the policy. For ReFuelEU, a SAF levy could be imposed based on the estimated fuel burn of the total trip, where the levy equals the amount of the estimated SAF cost for the flight not covered by RefuelEU.

To address carbon leakage from EU to non-EU destination switching (type 1), expanding the scope of the EU ETS to all flights would be an option. However, scope expansion would lead to (arguably undesirable) cost increases for airlines and would increase the risk of trade tensions and retaliation.

Competitiveness and sustainability

If the options above are not or are only partially feasible, one could argue there is another option: to scale back the ambition level of the proposed policies to limit cost increases. There are two reasons why this option is neither favourable nor effective in the long term.

First, scaling back the EU’s decarbonisation policies will make meeting CO₂ aims for aviation increasingly difficult. The share of aviation in total emissions is quickly rising, while a significant step-up in technology, operations and SAF is needed to limit climate warming and stay within reasonable boundaries of the Paris Agreement.[4] ReFuelEU and EU-ETS are economically the most effective instruments of their kind to address the decarbonisation problem of aviation. These instruments put a price on CO₂ (i.e. the polluter pays). The additional costs that airlines pay are used to mitigate emissions – either in the sector through an uptake of SAF (ReFuelEU) or outside the sector by acquiring tradeable emission allowances (EU-ETS).

Second, decarbonisation and competitiveness should go hand in hand, as was pointed out in the Draghi report (‘a joint decarbonisation and competitiveness plan’). The report states that “EU companies are ‘first-movers’ in other sub-sectors of sustainable transport. For example, the EU holds 60% of global high-value patents and tops global rankings of the most innovative companies for low-carbon fuels, which are essential for decarbonisation of aviation and maritime transport in the medium term.” Setting ambitious and realistic SAF targets helps the renewable fuel sector stay ahead, which in the long term will be required globally.

In order to stay competitive and deliver on decarbonisation, the EU should stimulate innovation, using revenue from suitable policies. The EC’s FF55 package is an essential step and will hopefully serve as a worldwide example of how a union of very different countries makes an effort to jointly address this challenge.

Read the full Policy Brief on Carbon Leakage and Mitigating Measures for more information.

[1] The Draghi report on EU competitiveness

[2] SEO (2022). Aviation Fit for 55. Ticket prices, demand and carbon leakage (Aviation Fit for 55 )

[3] See for example Steer (2025). Mitigation for Fit-for-55 legislation. Mitigation for Fit-for-55 Legislation

[4] As shown for example in Destination 2050 (Roadmap – Destination 2050)