Green: is it good or is it greed?

Many politicians and environmentalists on the national level are targeting airlines to take the toll for reducing CO2 emissions, defining airlines as being the world’s leading emissions crooks.

The EU has since 2012 implemented the ETS (Emission Trading Scheme) and in 2021 United Nations aviation agency ICAO-led (International Civil Aviation Organization) CORISA (Carbon Offsetting Scheme for International Aviation) will be put into effect to cover airline industry emissions on a global scale with 109 countries already signing up for CORSIA’s implementation.

In short, CORSIA’s goal is to stabilize future CO2 emissions from aviation at 2020 levels, and during 2021-2035 the scheme is planned to offset 80% of the emissions above 2020 levels. This will be done by airlines required to offset the growth in their emissions by purchasing eligible emissions units generated by projects that cut emissions in other sectors (e.g. renewable sectors). The cost for purchasing emissions units have quadrupled over the last year, and this fact alone will soon put limits on airlines’ uncontrolled growth, as prices for emissions units are projected to continue to grow. This can result in airlines having to cap their growth or invest in new aircraft with less emissions, or alternatively downscale their aircraft fleets.

Cutting emissions on a global scale

Many airlines fly to dozens of different countries daily, with some larger carriers serving over a hundred different countries each day. They need to have a single point of accountability. If airlines are subject to a patchwork of national or regional CO2 taxes, offsetting mechanisms, emissions trading schemes and other carbon pricing instruments, compliance would be unnecessarily complex and costly.

Implementing CORSIA will avoid the need for existing and new carbon pricing measures to be applied to international aviation emissions on a regional or national basis.

National regulations create headwinds

The CORSIA scheme is not enough; national environment and emissions schemes must do the job. You must believe in Santa Claus if you think CORSIA will work, a Norwegian high ranking official said recently when confronted on the subject of the local CO2 scheme in Norway versus CORSIA.

This is a very good example of the main problem. Politicians and environmentalists in rich and well-developed countries like Norway and Sweden want to be the lighthouses for winning the fight on reducing global emissions to reach the max 1.5 degrees global warming target. Politicians and environmentalists want to impose local CO2 taxes, offsetting mechanisms and other carbon pricing instruments, to the contrary of ICAO’s recommendations. They thereby create unpredictability and complicated reporting procedures and increasing costs for the airlines that could drive away competition and result in higher airfares and less connectivity.

Although this is normally the main objective for local emissions initiatives against airlines, reducing travel volumes and aircraft movements, it doesn’t change anything on a global scale. The planes will continue to fly, not in Norway but elsewhere, and emissions will not be reduced. Airlines’ emissions are global, not local.

Airlines know emissions must fall

I have never met an airline executive not agreeing on the need for aircraft and engines to be more environmentally friendly and emissions to be drastic reduced, understanding that such reductions and environmental regulations will be a significant force that will impact airlines’ regulatory framework on a global basis going forward. But the same executives also say that people want to travel, and we must supply the capacity for the increasing demand.

Airlines and the aviation industry have since the dawn of commercial aviation been one of the most regulated industry sectors in the world, resulting in safe and efficient transport over time by billions of passengers, but at the same time putting a heavy burden on the airlines’ financial results to operate within the regulations. Looking back over the last 75 years, airlines’ ROIC (return on invested capital) and profit margins have been on average close to negative, keeping investors like Warren Buffet at arm’s length to pick up airline shares, at least until recently.

The specious environmental tax

Norway implemented in 2016 a specious environmental tax for all air passengers travelling on domestic and international flights from Norway. The tax came because of a last-minute, late-night negotiation between the parties in the coalition government to agree on the state budget. The tax became one of the most hated in Norway and created a social media engagement never seen before, resulting in the ‘tax makers’ becoming very unpopular. The case continued in the media for a long period.

It culminated on June 1, 2016, when Ryanair published it would close its base at the privately owned Oslo Rygge airport as a result of the new tax, though it would maintain non-based operations generating 600,000 passengers annually. On the same day, the owners of Oslo Rygge decided to close the airport effective from November 1, resulting in 500 jobs lost.

This is the price we must pay to save the environment, the politicians and environmentalists said, disregarding the fact that all Ryanair aircraft based at Rygge would fly just as much, somewhere else in Europe. What did the Norwegian specious environmental tax gain? Nothing except an airport closed down, 500 jobs lost and NOK 2 billion flowing into the Finance Department account per year. The travel volume has not been affected, the number of passengers increasing 3-5% annually in Norway.

The green greed

Not to forget, the EU commented on Norway’s use of the word environmental air passenger tax, asking how this tax could justify being an environmental tax. It was quickly changed to just a ‘tax’. This fiscal tax brings in NOK 2 billion annually and none of it is allocated to environmental areas, it’s just another fiscal tax on airlines.

In 2017, Sweden followed suit with same type of tax and Denmark is looming on implementing something similar, to finance the building of railroads. This is exactly what ICAO warns about, local initiatives on taxes, charges and carbon pricing for the airline industry.

One may ask how it can be expected that countries like China, India and Indonesia where emissions from the enormous growth in aircraft and travel will take place the next 20 years, to stand down and follow global schemes when small countries like Norway, Sweden and most likely Denmark set up their own emission policies outside CORSIA.

Nevertheless, these examples show the direction that the environmental taxation and regulations of airlines are heading in, when national interests and party politics rule instead of having global emissions reduction schemes like CORSIA take the lead.

Global growth to 9.9bn passengers

The large aircraft producers Boeing and Airbus estimate around 44,000 new aircraft will be produced and put into operation by 2036. Around 75% of these will be short-medium haul like the Boeing 737 and Airbus A320 family planes, while long-haul aircraft represent around 20%. Annual global travel volumes could double to 9.9 billion by 2036, according to the International Air Transport Association. 

The bulk of these aircraft and the main travel volume growth will be driven by India and Asia (including China) due to economic factors improving and the travel-hungry middle-class and lower-middle classes there growing significantly.

New tech to drive green aircraft into production

It is of the highest importance that new technology gets support to implement zero and low-emission aircraft in test markets like the USA, Europe and Scandinavia, before zero and low-emission planes can be rolled out in high volumes to support markets worldwide.

Norway welcomes new zero and low-emission technology and is open for incentives to attract this type of plane to operate in a high number of airports, short-field, regional and national. Avinor, the state-owned airport operator in Norway, is waiving charges for electric planes landing at its airports and hopes to welcome the first commercial zero or low-emission commercial aircraft before 2025.

But on the global arena there will be a need for global emission-reducing agreements to ensure maximal effect and impact in the emerging markets that will be the main drivers of growth in the airline industry in the next 20 years, as CORSIA can do. Green is good, but not so good if it creates a myriad of national regulations, taxes, carbon offset schemes and unpredictable operational conditions for airlines, instead of supporting sustainable emission reductions on a global scale through carbon offset and reductions schemes such as CORSIA.

Article first published by Hans Jorgen Elnaes on www.standbynordic.com 31OCT18.