Fringe airlines outside of EU gain unfair advantage with EU climate policy

Quantum Commodity Intelligence - Airlines in countries on the fringe of the European Union, such as carriers in Turkey and Israel, will reap the benefit of the new environmental rules imposed by Brussels that are set to make air travel more expensive, a jet fuel trader told Quantum.

Ticket prices in the EU may rise by between 5% to 8% under carbon pricing rules proposed as part of the European Union's "Fit for 55" scheme, UBS warned, as cited in the Daily Telegraph.

"Imagine you are Turkish Airlines or ElAl or a host of fringe EU carriers - you are going to have a huge advantage," the trader said.

British airlines could also gain an edge over their EU rivals, although it remains to be seen whether the UK government will fall closely in line with the European Commission's taxation on jet fuel, especially after its 'jet zero' ambition to decarbonise the sector by 2050 was announced.

"In theory, although it won't happen, the UK could refuse to align and then (UK airlines) offer free flights to London from the EU for trans-Atlantic flights."

"They could throw in a free night in London. UK economy gets the tourist spend on the overnight stay, Heathrow get the slot fees and duty-free, and British Airways gets the market share."

The European Commission unveiled a raft of draft legislative proposals last week to enable the European Climate Law that aims to slash its 1990 carbon emissions 55% by 2030 and make the EU carbon neutral by 2050.

One of the proposals was a minimum tax on jet fuel flights within Europe, which was given the green light by European Council finance ministers in Lisbon in May.

But the Commission also wants to scrap the free carbon allowances given to airlines every year to help them meet their emissions cap under the EU Emission Trading System.

Airlines will also have to start using sustainable aviation fuel, including a minimum 2% fuel burn using either synthetic fuels or biofuels from 2025, which then rises to 5% in 2030, when the minimum share of synthetic fuels is set at 0.7%.

Jarrod Castle, an analyst at UBS, warned that a new minimum tax on aviation fuel for flights within the EU would push up costs for operators and "is likely to result in the industry trying to increase ticket prices".

He added that airlines would face the highest bills across the transport sector if they were forced to offset their own carbon emissions.

Most European countries already impose some form of taxation on airline travel, either through ticket prices or value-added taxes on domestic flights.

The UK, which levies Air Passenger Duty on individual passengers, raised £3.6 billion from the revenue in 2019 before the pandemic.

The UK has also included aviation in its own domestic cap-and-trade market and the government has called for the sector to have net-zero emissions by 2050.

But the UK could now also diverge from Europe on its taxation of jet fuel, and the extent of an airlines carbon cap.

UK airlines were awarded free carbon permits for 2021 to 2025 for the UK Emissions Trading Scheme in June.

"In line with the UK's commitments under international law, the UK does not levy any duty on commercial aviation fuel or VAT on airline tickets," a spokesperson for the UK Treasury told Quantum.

But the spokesperson added the Government continues to keep all taxes under review.