FEATURE: EU review of ETS an opportunity for aviation decarbonization

London — The EU's review of its Emissions Trading System in June presents a chance for the bloc to look at the aviation sector, with environmentalists saying long-haul flights and pricing were key issues to address.

The review will come amid a growing number of announcements about sustainable aviation fuel (SAF) production from the airline and oil sectors.

SAF costs around four times the level of conventional jet fuel but, with production of the cleaner fuel poised to climb in the coming decade, there is potential for that price premium to diminish, according to industry sources.

The ETS provides an incentive to aircraft operators to use SAF that complies with the sustainability criteria by attributing them zero emissions under the scheme.

That reduces an aircraft operator's reported emissions and, in turn, the number of ETS allowances it must buy, according to the EU Aviation Safety Agency.

"Carbon markets have huge potential to reduce emissions but there are two conditions for that to happen," Matteo Mirolo, Aviation Policy Officer at NGO Transport & Environment, told S&P Global Platts.

"The first is inclusion of non-European Economic Area flights within the EU's carbon market as otherwise the problem is that you are only tackling the tip of the iceberg."

Flights starting or ending outside the EEA are exempt from the EU carbon market. Thus, in the case of some major airlines around 80% of their emissions are excluded, making them exempt from paying into the EU ETS for those emissions, data from Transport & Environment showed in March.

Mirolo said that, at present, the scheme does not go far enough. "The other condition for [the EU ETS] to work has to do with pricing. There were too many free allowances in the ETS and as a basic market mechanism this creates too much supply with regards to demand."

Reform to carbon trading

EU carbon traded at less that Eur10/mt ($12/mt) for many years, attracting criticism that the scheme was ineffective. But prices have risen above Eur40/mt ICE Futures Europe following reforms that tightened supply and ahead of expected further tightening to align with stronger 2030 climate goals.

The 16-year-old carbon market has begun to play a more significant role in decarbonizing Europe's economy in recent years, helping prompt a shift from emissions-intensive coal to natural gas and renewable sources for electricity generation.

But in its current form, the system has failed to cut carbon emissions to a significant extent outside the power sector. That may start to change during the next 10-year trading phase, as the market's rules begin to tighten the supply of allowances available to all sectors.

The upcoming review of the ETS aligns with plans to cut carbon by 55% by 2030 from a 1990 baseline.

The European Commission will present a proposal to reduce free ETS allowances allocated to airlines. The commission will also propose implementing the ICAO Carbon Offsetting and Reduction Scheme for International Civil Aviation (CORSIA) through the revision of the ETS Directive in 2021.

The EU ETS covers CO2 emissions from intra-EU flights, while the CORSIA system covers international flights on a global basis.

Platts CORSIA-eligible carbon (CEC) credits were assessed at $2.14/mtCO2e on April 8, up from 80 cents/mtCO2e from early January.

SAF prospects

It was currently cheaper to buy conventional jet fuel and pay for carbon credits than to buy SAF, one jet fuel market source said.

Platts assessed SAF in Northwest Europe at $2,083.11/mt on April 8. By comparison, it assessed Northwest European jet fuel cargoes at $513.50/mt.

The SAF market remains tiny in comparison with the amount of jet fuel traded globally, and accounts for 0.02% of global jet fuel use, according to estimates by Platts.

Aircraft can only operate using a blend with a maximum of 50% SAF and the balance in conventional jet fuel, known as Jet A1. The amount of SAF that can be blended into Jet A1 depends on the purity of the initial petroleum-based product.