SUSTAINABLE AVIATION – Are the U.S. and E.U. an Ocean Apart?

Introduction                     

Leaders in Washington D.C., Brussels, and national capitals across Europe, are seeking to tie the economic recovery of air travel in a post-COVID world to more sustainable air travel and a greener, more resilient growth strategy. In Europe, the European Green Deal, introduced by the European Commission, has set a new standard for environmental and decarbonization policy, and some policymakers in Washington D.C. are looking to that proposal as a framework for the U.S.’s own sustainability strategy.

With President Biden in the White House and a slim Democratic majority in Congress, there are renewed calls for sustainability efforts. However, while U.S. policymakers are playing catch up with their E.U. counterparts, the private sector and investors alike are prioritizing Environmental, Social, and Corporate Governance (ESG) efforts, which are largely intertwined with a shift towards sustainable travel.

As some U.S. lawmakers have proposed their own version of a “Green New Deal,” we can already see the effects of the “Brussels Effect,” whereby jurisdictions beyond the E.U.’s borders follow the bloc’s regulatory lead, on the aviation sector. While the two sides often utilize policy proposals from one another, there are several differences between how the E.U. and U.S. are planning their future. Below we outline some of the key similarities and differences between how both world and market powers are leading the way to establish a greener future for aviation.

PART I

Emissions Standards

The aviation sector is unique in its global reach – sustainability efforts in transportation in one part of the world can have a strong impact in other geographies. The most important agreement currently on the international stage comes from the a United Nations’ (UN) aviation agency, who has set up a carbon offsetting mechanism also known as the (CORSIA). Under this mechanism, participating countries would purchase carbon credits to offset their emissions and airlines are required to report their CO₂ emissions annually. From 2021 to 2027, it will only apply to parties that have volunteered to participate. However, from 2027 to 2035 it will apply to all ICAO member states, except for those with less than 0.5% of international aviation activity in revenue tonne kilometres, Least Developed Countries (LDCs), Small Island Developing States (SIDS) and Landlocked Developing Countries (LLDCs) unless they volunteer to participate. This scheme is often criticized for focusing on trading emissions, rather cutting emissions.

European Union

In Europe, the ICAO’s carbon offsetting efforts are considered to lack ambition, since participation in CORSIA is voluntary and lacks enforceability on a global scale, beyond clear issues around carbon offsetting. While the European aviation industry is considered the most advanced in terms of sustainability, there is mounting political and public pressure on the E.U. and European industries at large to lead the way on more ambitious global sustainability agreements. We expect this to be a key topic in the ICAO’s biannual meeting in Tokyo, December 2022.

In the meantime, the European Green Deal’s set of policy initiatives has the overarching aim of making Europe climate neutral by 2050 and reducing greenhouse gas (GHG) emissions by at least 55% by 2030. In the Sustainable and Smart Mobility Strategy published in December 2020, the European Commission lays out its vision for the future of transport and for its reduction of GHG emissions by 90%.

In light of these environmental developments, aviation has become a target of E.U. policy-makers keen on delivering on the bloc’s sustainability objectives. The sector has been a lifeline to European economies and a source of ‘national pride’ – which helped it emerge generally unaffected by previous environmental legislation. A clear example is the absence of a fuel tax, which the European Commission is determined to rectify when it proposes a revision of the Energy taxation Directive (ETD) this June. This move is supposed to favour the scalability and uptake of sustainable fuels. Beyond taxation, Brussels will make use of a wide range of policy instruments to curb aviation’s emissions.

The EU Emissions Trading Scheme will soon be reviewed to bring down the number of free allowances, and for what concerns aviation, to be made compatible with ICAO’s CORSIA whose voluntary phase entered into force in January 2021. Carbon pricing in the EU ETS scheme is proving to be a useful policy tool, although its long-term efficacy for aviation is being debated. In February, the price of carbon soared to more than 40€ per tonne for the first time on record. This trend is bound to bring additional revenue to the EU and Member States’ budgets, which in turn will be used to invest in clean technologies and infrastructure.

United States

On the other side of the Atlantic, the United States has taken a far less ambitious approach to curbing airline GHG emissions so far. In December 2020, former President Trump’s Environmental Protection Agency (EPA) established the U.S.’s first-ever enforceable standards for GHG emissions from commercial aviation, aligning US standards with the ICAO’s international CO₂ emissions standards. The rules require manufacturers to fit all new commercial and business aircraft sold with more fuel-efficient engines that emit less CO₂ by 2028. President Biden promised that he would “lead the world to lock in enforceable international agreements to reduce emissions in global shipping and aviation.” Biden campaigned on targeting airline emissions by incentivizing the creation of new, sustainable fuels for aircraft, improving air traffic management, and other changes to aircraft technology and standards.

FTI’s Point of View

The EU will be able to pursue a far more aggressive emissions reduction strategy than the U.S. because there is broad support across E.U. member states and public opinion for ambitious climate action. In the U.S., emissions reduction mandates and addressing climate change more broadly is a contentious issue, with strong Democratic backing and overall politicization of the issue. Measures that need approval of the U.S. Congress face very tough odds in the current 50-50 split Senate, as these measures were not passed through reconciliation which requires only a simple majority. We believe that the discord around pursuing emissions reductions may hinder the U.S. from implementing any long-term strategy in the near future, whereas, the European consensus around reducing GHG emissions gives the E.U. flexibility to put a long-term strategy in place, without fear of it being reversed after personnel changes in the Commission, Council, or Parliament. However, the level of flexibility that the European Union will be granting to Member States when they transpose new E.U. legislation into national law will be a key factor in determining the level of success. Too great flexibility on targets risks to jeopardize the E.U.’s ambition, as Member States tend to see it as a reason to be less ambitious.

ESG Investing

ESG efforts are increasingly being factored into investment decisions in the U.S. and Europe, a trend being led by investors and bolstered by regulatory proposals that inform investors. A link to our recent report on Global Airlines and ESG is found here  some high level views on this are as follows:

European Union

A new E.U. regime on sustainability-related reporting is set to be published this year. The first component of this new regime, governed by E.U. Taxonomy Regulation (2018/0178 (COD)), establishes a common European classification framework for investors and companies to determine which of their activities are sustainable. This is aimed at combatting “greenwashing” and giving investors and firms a clear criterion to facilitate informed investment decisions. Most of the Taxonomy Regulation’s provisions will enter into force on December 31, 2021. The other components focus on ESG disclosure, risk assessment requirements, and regulation. The Commission is expected to issue within the next three months how to achieve compliance with this.

United States

President Biden has made it clear while on the campaign trail and again in once in office, that he intends to require public companies to disclose climate risks and GHG emissions in their operations and supply chain. Gary Gensler, who recently took over as the head of the Securities and Exchange Commission (SEC), is expected to tackle the issue of ESG reporting early on in his tenure The strongest mechanism that Gensler would have at his disposal to strengthen environmental reporting for public companies would be amending Regulation S-K under the Securities Act of 1933, which outlines the various qualitative reporting requirements for public companies.

FTI’s Point of View

Environmental considerations are increasingly factored into investing on both sides of the Atlantic.  Investors are driving this change in the U.S., whereas in Europe there is more of a synergy between policymakers and industry that they can deliver on higher ambitions as long as the adequate funding can be unlocked for green investments.

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