COVID-19 Financial support for the aviation industry and carbon emission reduction requirements

Given the climate emergency declared by many administrations in many parts of the world, now at a time when the aviation industry is in crisis due to the travel restrictions caused by the pandemic, questions have arisen as to whether state funded economic assistance for COVID-19 recovery should be coupled with emission reduction requirements to prevent business as usual emissions when the economy recovers. Some developments in this area are outlined below with more anticipated.

The EU

Prior to the identification of COVID-19, the European Green Deal[1] published in December 2019 set out the EU’s commitment to climate neutrality by 2050. This means achieving net-zero greenhouse gas emissions (GHG) by 2050. The Green Deal includes a commitment to achieve a 90% reduction in transport emissions in the same time frame. In terms of aviation, the Green Deal committed to review existing tax exemptions for aviation under the Energy Taxation Directive; reduce free emissions trading allowances to airlines under the EU ETS; promote sustainable alternative fuels and resume work on the Proposal for a Regulation on a Single European Sky such that significant reductions in aviation emissions can be facilitated.

Post awareness of the global pandemic, on 26 March 2020, EU leaders issued a joint statement noting that “The urgency is presently on fighting the Coronavirus pandemic and its immediate consequences. We should however start to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis. This will require a coordinated exit strategy, a comprehensive recovery plan and unprecedented investment.” A Joint European Roadmap towards lifting COVID-19 containment measures published on 15 April included similar sentiments in brief.

On 8 April 2020 the European Commission launched a Consultation on a “Renewed Sustainable Finance Strategy” emphasising that a sustainable finance strategy must transcend economic cycles including, global pandemics. (The consultation closes on 15 July 2020[2]). On 14 April 2020 the Green Recovery Call to Action to develop and support financial solutions that reward sustainable performance was launched in the European Parliament. Amongst the signatories there are 79 MEPS, 11 Member States’ representatives, 37 CEOs including those of financial institutions and 28 business associations who have expressly committed to supporting post COVID-19 green economic recovery packages. The Green Recovery Call to Action calls for a “new model of prosperity” that is more resilient and more inclusive built around Green principles.

The UN Response

The UN’s March report Shared Responsibility, Global Solidarity: Responding to the socio-economic impacts of COVID-19 states that “Governments should not respond to the COVID-19 crisis by making policy and investment decisions that exacerbate existing crises such as air pollution and the climate emergency.” Separately, in advance of Earth Day on 22 April 2020, UN Secretary-General António Guterres commented that a COVID-19 recovery should be based on 6 principles. “These six principles constitute an important guide to recovering better together” noting “Greenhouse gases, just like viruses, do not respect national boundaries.”

First: As we spend huge amounts of money to recover from the coronavirus, we must deliver new jobs and businesses through a clean, green transition.

Second: Where taxpayers’ money is used to rescue businesses, it needs to be tied to achieving green jobs and sustainable growth.

Third: Fiscal firepower must drive a shift from the grey to green economy and make societies and people more resilient.

Fourth: Public funds should be used to invest in the future, not the past, and flow to sustainable sectors and projects that help the environment and the climate. Fossil fuel subsidies must end and polluters must start paying for their pollution.

Fifth: Climate risks and opportunities must be incorporated into the financial system, as well as all aspects of public policymaking and infrastructure.

Sixth: We need to work together as an international community.[3]

How these principles will ultimately manifest into action is not yet clear.

Present emissions related measures which impact aviation

Emissions from flights within the EU are regulated under the EU Emissions Trading Scheme, a cap and trade scheme designed to reduce greenhouse gas emissions from ‘installations’ that operate within the EU. The EU ETS has applied to flights between airports located in the EEA since 2012. Airlines operating intra-EEA flights, regardless of whether the airline is based within the EEA, are required to monitor, report and verify their emissions. Within an overall cap on total emissions, airlines covered by the scheme are allotted or buy tradeable emissions allowances. At the end of a reporting year, they must surrender allowances equal to or exceeding their reported emissions or face a heavy fine.

The current reporting cycle for the EU-ETS is proceeding (see our recent lawnow the future of EU ETS in the UK). The next deadline is 30 April 2020 when operators will be required to surrender allowances for the previous year. There are plans to expand the scheme from 31 December 2023 in order to include all flights arriving at or departing from EEA countries, including those arriving from or going to non-EEA countries.

The Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) is a scheme adopted by the UN’s aviation agency, the International Civil Aviation Organisation (ICAO), to stabilise net CO2 emissions from international civil aviation . A pilot scheme will run from 2021. It will run as a market-based emissions offsetting regime, which will require aircraft operators with emissions above 10,000tCO2 per year and operating a route covered by the scheme to buy offsets for any increase in emissions above a baseline level of CO2 emissions. The calculation of the baseline under the current CORSIA model was premised on ‘business as usual’ for aviation in 2019 and 2020. Under the system, airlines have to pay to offset any growth in carbon emissions above a baseline set by the average emissions of 2019 and 2020. With travel restrictions in place across the world and aircraft grounded, it is expected that carbon emissions emanating from the aviation sector in 2020 will be abnormally low and as a baseline much more challenging. The International Air Transport Association (IATA) has called on ICAO to amend CORSIA or risk airlines pulling out.

As CORSIA will offset emissions above a 2019/2020 baseline up to 2035, there will be no mandatory reduction in net emissions between the baseline and 2035 due to the scheme. In its current form, CORSIA alone does not achieve both global and UK emissions reductions targets. Partly recognising this issue, until recently the Commission consulted on a roadmap for proposed legislation on boosting the supply and demand for sustainable aviation fuels in the EU which requires significant initatives. A further, more detailed, consultation is expected later this year.

Office for Carbon Removal – UK

A UK think tank Green Alliance report “Flight path to net zero: making the most of nature based carbon offsetting by airlines”[4]suggests that CORSIA and EU ETS are incompatible with a 1.5OC target and the UK’s net zero emissions target, and that traditional carbon offsets and carbon sequestration and removal cannot be a substitute for reducing actual emissions. Green Alliance proposes the creation of an Office for Carbon Removal the main purpose of which would be to manage the growth of UK carbon removal capacity and put in place the policies, rules and frameworks needed. The report suggests that the functions of the body could be funded by a levy on sectors and businesses which use carbon offsets. The report also includes recommendations for the UK Government to legislate to include the UK’s share of international aviation emissions in the domestic legally binding net zero target and to agree at the 2022 ICAO general assembly an emissions plan that is compatible with the Paris climate agreement, to be agreed at the 2022 ICAO general assembly.

Comment

In today’s world airlines are fighting for survival. For many stakeholders, public and private, the immediate concern is securing and maintaining financial stability at this time. But even before COVID-19 airlines were in a process of modernising their fleets, upgrading their engines and implementing weight saving measures in order to achieve optimal operational performance. The modernisation process is now being accelerated. The A380 and the old 747-400s are being retired with immediate effect. In many cases there is evidence that airlines are acutely conscious of the pressures to meet greater fuel efficiency for an increasingly aware flying public making more palatable measures such as the proposed green recovery package to Austrian Airlines as reported by EURACTIV[5].

In some instances airlines seeking concessions to lease agreements, restructuring their debt or requesting state assistance from governments may be presented with CORSIA compliance clauses and other emission reduction conditions. Given the unmitigated shock to the global system of COVID-19 such conditions may not be widespread but the aviation sector, once it re-emerges, will need to consider how it can meet increased sustainability and emissions reduction criteria in the near, not distant future.

[1]https://www.cms-lawnow.com/ealerts/2019/12/a-huge-moment-for-business-european-green-deal?cc_lang=en

[2] https://ec.europa.eu/info/consultations/finance-2020-sustainable-finance-strategy_en

[3] https://www.un.org/press/en/2020/sgsm20051.doc.htm

[4] https://green-alliance.org.uk/The_flight_to_net_zero.php

[5] https://www.euractiv.com/section/aviation/news/austrian-airlines-bailout-to-be-linked-to-climate-targets/