The Europe Union's carbon taxes and mandates for using sustainable aviation fuel are likely to hike operational costs for airlines that may choose to fly instead to nearby countries such as Switzerland, the UK and Turkey, an official from the International Air Transport Association told S&P Global Commodity Insights.
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From 2026, the EU will apply its Emissions Trading Scheme, or EU ETS, not just to flights within the bloc, but also to flights entering or leaving it, according to a decision taken earlier in 2023, unless the Carbon Offsetting and Reductions Scheme for International Aviation, or CORSIA, becomes stricter.
In April, the EU also passed the ReFuelEU aviation initiative that requires fuel suppliers to blend SAF in increasing amounts, from 2% of overall fuel supplied by 2025 to 70% by 2050.
EU ETS and the SAF mandates will amount to higher costs for flying into Europe and airlines will try to avoid paying these taxes, Marie Thomsen, IATA's senior vice president of sustainability and chief economist said in an interview on the sidelines of the organization's general assembly in Istanbul on June 5.
"I think it will displace traffic from the EU to countries close to the EU but outside it, for instance the UK, Switzerland and Turkey," said Thomsen. "I think we can totally foresee that happening if local taxes are applied. Ideally this cost should be one cost for the whole world and any different costs in different areas is going to be problematic for a global industry such as ours."
The 1944 Chicago Convention for international air transport recognized the need to exempt jet fuel from taxation and emphasized the importance to have "a common price," she said.
Platts, part of S&P Global, assessed SAF in Northwest Europe at $1758.263/mt on June 6, compared with $724.75/mt for FOB NWE jet cargoes.
SAF purchase mandates could lead to the formation of cartels and oligopolies that will control the price of SAF, inhibit competition and dissuade producers from looking into production pathways other than the current commercially viable HEFA (hydroprocessed esters and fatty acids), Thomsen said.
"As soon as you have a mandate, you are favoring the existing incumbents, so that means you are favoring the very few people that know how to produce HEFA and only HEFA," said Thomsen.
"Now you will have created a little cartel in effect, so mandates tend to de-incentivize other research and development and it tends to make it harder for new entrants to enter the market. It also gives outsize pricing power to the people who are part of this little cartel."
In 2022, SAF production tripled to some 300 million liters (240,000 mt), but was still less than 1% of total jet fuel production, according to IATA.
SAF will account for most of the renewable fuel production, which is expected to reach an estimated capacity of at least 69 billion liters (55 million mt) by 2028, according to IATA. Over 130 relevant renewable fuel projects have been announced by more than 85 producers across 30 countries.
Favoring fossil fuels
SAF is expected to provide about 62% of the carbon mitigation needed to achieve net-zero emissions by 2050, according to IATA.
If renewable energy production reaches 69 billion liters by 2028, the trajectory to 100 billion liters (80 million mt) by 2030 would be on track and if just 30% of that amount produced is SAF, the industry could achieve 30 billion liters (24 million mt) of SAF production by 2030.
However, the development of SAF and other technologies to achieve net-zero emissions will require at least $180 billion in annual investments between now and 2050.
The $180 billion figure is just a third of the $570 billion in annual planned investments in new oil and gas developments by the end of the decade, based on figures in a 2022 report from the International Institute for Sustainable Development, Thomsen said.
The $180 billion figure also pales in comparison with the amount spent globally on fuel subsidies, she said.
In 2022, global subsidies worldwide for fossil fuel consumption soared to more than $1 trillion, by far the largest annual value ever seen, according to estimates by the International Energy Agency.
The investments are "an indication of the money that is out there that today favors fossil fuels energy when we are struggling to get markets going for sustainable fuels: that is a staggering incoherence," said Thomsen.