Across the world, human-induced climate change has prompted the adoption of measures intended to reduce our CO2 footprint. Shipping and aviation were initially exempt from these measures but, over the last decades, international authorities’ views have shifted and these sectors are no longer exempted.
Greenhouse gas (GHG) emissions from international aviation rose rapidly in recent decades. The sector now contributes to around four per cent of the European Union’s total GHG emissions and, as predicted by the International Civil Aviation organisation (ICAO), international aviation emissions could triple by 2050, in comparison to 2015.
The last decade has seen the EU and the global aviation community pool resources to construct a decarbonisation pathway for the sector, with some of the regulatory tools being the European Trading Scheme (ETS), Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the proposed ReFuelEU and Energy Taxation Directives.
What is the ETS?
The EU’s European Trading Scheme is a cap-and-trade scheme intended to cost-effectively limit GHG emissions across key sectors such as power generation, energy-intensive industries and aviation. The scheme sets a limit on the number of emission allowances issued and decreases this cap over time.
Airlines operating in an EU ETS member country – both EU and non-EU – are obliged to monitor, report and verify their emissions, with enough allowance surrendered at the end of the year to cover their emissions.
What is CORSIA?
In comparison to the EU ETS, CORSIA is an offsetting scheme launched by ICAO in 2016. It is a global market-based, short- to-medium-term mechanism, which aims to stabilise global aviation emissions from 2021 onwards by allowing airlines to compensate for their excess emissions over the baseline via financing a reduction in emissions elsewhere. It also aims to avoid fragmented market-based measures among ICAO members.
The International Air Transport Association (IATA) envisages that the need for CORSIA will diminish once new technology such as sustainable aviation fuels (SAF) become more widely available.
Beyond ETS and CORSIA: the ReFuelEU and Energy Taxation Directives
The EU will introduce measures restricted to intra-EU community flights to encourage the use of biofuels through the application of a tax on fossil-derived fuels. It is noteworthy to mention that biofuels are far more expensive than fossil-derived fuels and are not available at every airport.
As of 2030, the proposed ReFuelEU Directive will ensure the share of SAF (including synthetic fuels as well as biofuels) distributed by aircraft fuel suppliers across EU airports will increase. Refuelling of aircrafts will occur with the amount of fuel exclusively required for the flight, to avoid excess emissions.
The revised Energy Taxation Directive will tax fuels based on metrics such as energy content and environmental performance, negating fossil fuels utilised to fuel intra-EU flights from being exempt from energy taxation.
What are the effects of such measures?
While being beneficial for our climate, compliance with the EU ETS, CORSIA and the proposed ReFuelEU and Energy Taxation Directives may translate into higher costs for operators and price increases for the end users.
European skies are also flown by non-European operators which are exempt from certain rules such as fossil fuel taxation. Large non-European industry players are also often funded by their governments which allows them to absorb extra costs to avoid being reflected in airline tickets. This price distortion may indirectly induce passengers to choose longer but cheaper flights.
In our view, measures should move beyond taxation to include incentives promoting the use of SAF, technology and processes that reduce carbon emissions. This may include production of SAF within Europe to protect the market against external geopolitical shocks that might impact price and availability; inclusion of contrails management systems in parallel with CO2 reduction policies as research shows that aircraft contrails have a higher negative impact than direct engine CO2 emissions; and the reduction of air space rights fees as several jurisdictions still impose fees much higher than those in neighbouring countries, resulting in airlines rerouting their journey through longer routes to the detriment of our environment.
How is KPMG supporting the local aviation sector?
KPMG in Malta’s long-standing association with the sector has seen us support aviation clients navigate multiples issues over the years. Our team is closely following developments on the above-mentioned themes within the aviation sector. KPMG network firms have successfully performed over 3,000 carbon emission verification engagements for aviation clients world-wide.
With carbon professionals embedded within KPMG’s global transport practice, having the right technical skills, international verification experience in the aviation sector, and the specific knowledge of EU ETS and CORSIA we remain committed to be of support to the sector in the context of the changing regulatory climate.
KPMG can also support aviation companies to develop and refine their ESG strategy and support with ESG implementation and reporting, such as that required by the upcoming Corporate Sustainability Reporting Directive (CSRD).
Download the report from https://home.kpmg/mt/en/home.html to learn more.
For more information about KPMG’s Environmental Social and Governance (ESG) Advisory services for the aviation sector, contact Rachel Decelis on racheldecelis@kpmg.com.mt or Stephan Piazza on stephanpiazza@kpmg.com.mt.
Stephan Piazza is an associate director, Transport, Shipping and Aviation, and Rachel Decelis is senior manager, environmental, social & governance (ESG), both at KPMG in Malta.