Competitiveness of EU airlines and EU connectivity need to be secured when pursuing climate objectives
This article by Anna Sotaniemi, Senior Manager, Government and Institutional Relations, Finnair, originally appeared in the Policy Brief on Carbon leakage and mitigating measures.
Background
During the first von der Leyen commission, the Brussels factory produced an ambitious Fit for 55 legislative package which also included important aviation-related proposals. The core of the package is valid, but we are only beginning to see its impacts as the mandate to supply sustainable aviation fuel (SAF) takes effect from 2025.
“During the first von der Leyen commission, the Fit for 55 legislative package introduced essential aviation proposals for change, including the mandate for sustainable aviation fuel and changes to the European Emissions Trading Scheme. The implementation of these regulations is expected to significantly increase operational costs for EU airlines, raising concerns about their ability to compete with non-EU carriers. Proposed solutions include making SAFs more accessible and imposing higher costs on non-EU air carriers. It is crucial to lower SAF prices to match kerosene rather than raise costs for EU airlines, which are already under pressure from compliance costs. The EU should explore alternative solutions, also via the revision of existing legislation.
The full impact of the amendments to the European Emissions Trading Scheme (ETS) will take shape from 2026 onwards with the completed phase-out of free allowances.
Competitive challenges
Estimates of the cost of implementing the above-mentioned legislation have been made public (see Steer, Airlines for Europe, ‘Assessment of the cost of regulatory compliance of European Airlines’). In addition to regulatory compliance, many airlines have their own emission reduction targets that, when going forward, would need to take the form of an uptake of SAFs well beyond the mandates. All this will heavily increase the operational costs of EU airlines. Serious concern has been raised about how – or if – airlines can internalise these costs and what the impact will be on EU connectivity and the competitiveness of EU airlines.
Expected consequences
Many EU airlines compete with third-country carriers in global markets, in which a level playing field is crucial for fair competition. Therefore, the regulatory costs charged in the EU cannot be considered in isolation but instead in relation to those of competitors based outside the EU. While one can claim that – for now – there are no signs of carbon leakage due to EU legislation, one surely can witness business leakage due to the closure of the Russian airspace. The shift of passenger flows from southeast Asia to Europe is increasingly directed through hubs outside the EU. This trend is expected to intensify when regulatory costs reach their full effect. Even if the Russian airspace were to one day open for overflights, the benefit of shorter routes would not outweigh the regulatory costs.
Business leakage, and therefore carbon leakage, not only increases flight emissions but also reduces connectivity to/from and within the EU. The most apparent consequence is a redirection of passenger flows to/from the EU through hubs outside the EU. This would not only appear in reduced direct long-haul flights to/from the EU but also in bypassing EU airports as transit hubs between east and west.
Beyond the impact on long-haul flights, there are additional concerns about intra-EU connectivity. Airlines using hubs outside the central European market would risk losing their transit passengers, who make it possible to sustain a comprehensive intra-EU network and much higher connectivity than the population in their national market would support.
Proposed solutions
During the second von der Leyen commission, while the ambitious climate targets have been preserved, the competitiveness of EU industry has been the talk of the town. This is highly welcome. The possible solutions proposed to preserve the competitiveness of the EU aviation sector have mainly been twofold: making SAFs more accessible and affordable; and higher costs for non-EU air carriers in pursuit of a level playing field. In my opinion, the course of action is clear: make SAFs a commodity and thereby reduce the cost of CO2 for airlines. There are at least two reasons to justify this. The increase in the price of CO2 is not a solution to direct airlines to use more SAFs. The price of SAFs, not to mention the predicted price of eSAFs (synthetic SAFs) continues to be high. If levelling the prices of SAFs and kerosene with CO2 pricing is attempted, the livelihood or European airlines would be put at risk. Therefore, the solution is not to raise the price of kerosene (with higher CO2 pricing) but rather to bring the price of SAFs to the level of kerosene.
The second justification is that the cost of compliance with current legislation will already now subject the competitiveness and profitability of EU airlines to a very risky stress test. The solution should be found in reducing the current cost base – while preserving the climate objectives – and not in increasing the costs of third-country airlines. With the current state of world affairs, it would seem unlikely that governments outside the EU would take it lightly if their air carriers were made to finance the regulatory costs of EU airlines. A scenario in which EU airlines would face reciprocal charges by third countries – thus increasing overall costs even more – is not farfetched.
The EU needs to open-mindedly and boldly search for a solution to this self-created challenge. There are viable proposals available, both involving redesigning the ETS using ETS revenue and providing incentives, grants and financing for SAF and eSAF production. The forthcoming revisions of RefuelEU Aviation, the ETS and the Sustainable Transport Investment Plan are crucial for the energy transition of the aviation industry, if not for the future viability of the EU aviation sector and European connectivity.
Read the full Policy Brief on Carbon Leakage and Mitigating Measures for more information.
