Biofuels are essential to reducing EU ETS carbon costs and meeting carbon-neutral growth goals, says report

Biofuels are essential to reducing EU ETS carbon costs and meeting carbon-neutral growth goals, says report | EQ2

(photo: KLM)
Tue 16 Feb 2010 – Although not commercially viable yet, the EU Emissions Trading Scheme (EU ETS) offers a strong financial, as well as environmental, incentive for the adoption of jet biofuels, says a new report by EQ2. Based on industry assumptions of 15% and 30% consumption of biofuels in 2020 and 2030 respectively, they could contribute to potential savings for airlines involved in the EU ETS of $2.01 billion in 2020 and $5.84 billion in 2030 on the purchase of carbon credits. Based on the current EU ETS carbon price for 2012 of €15 and the 2009 average jet fuel price of $1.69 per gallon, every gallon of jet fuel burned would incur carbon costs of an additional $0.21, equivalent to a premium of 12.4%.
 
The EQ2 report says the cost implications to airlines joining the EU ETS in 2012 to be significant. With the emissions cap likely to be approximately 144 million tonnes (Mt), EQ2 estimates that total EU aviation CO2 emissions in 2012 will reach around 184 Mt. This implies the aviation industry will need to spend a total amount of $1.34 billion on European Union Allowances (EUAs), including the 15% auctioned EUAs and those purchased from other sectors, and excluding the free credits allocated to them.
 
Without an input from biofuels, which are excluded from fuel calculations under the scheme, EQ2 estimate the potential EUA cost on airlines will rise to $9.6 billion in 2020 and $19.5 billion in 2030. “Such an increase is dramatic and is equivalent to an 11% spending increase on carbon credits annually,” says the report.
 
Relating these figures in business operation terms, spending $1.34 billion on EUAs in 2012 is equivalent to nearly 2% of the total fuel cost. The percentage rises sharply to 10% of the total fuel costs when the credit expense reaches $19.5 billion in 2030 if no biofuel is used by the aviation industry. Assuming fuel accounts for 35% of airline operating costs, the carbon credit expense in 2030, without using biofuels, would be equivalent to around 3.6% of total operating costs.
 
With the exception of premium class tickets and freight transportation, the report says airlines will find it difficult to pass on all of their carbon credit costs to customers because of competition.
 
Based on the industry assumptions on biofuel use, EQ2 estimates the global aviation industry will consume a total of around 13.5 billion gallons of biofuel in 2020 and 36.8 to 44.5 billion gallons in 2030. This would lead to a reduction of 129 Mt CO2 emissions in 2020 and between 352 and 426 Mt in 2030.
 
The report warns the aviation industry not to rely on carbon offsetting to achieve its goal of carbon-neutral growth from 2020. It accepts that if carbon offset credits are cheap enough, the financial incentives for using biofuels would be negatively affected. However, it says carbon offsetting would not reduce a company’s climate risk exposure or improve sustainability in the long term. Moreover, it says, there is public sensitivity to ‘greenwash’ actions and airlines should not put their brand reputation at stake.
 
 “If the airline industry is serious about achieving carbon neutral growth from 2020, biofuels offer the only realistic way to do this,” says Gregory Elders, Director of Research for EQ2. “Our research shows that through a committed use of biofuels, where 30% of global jet fuel is biofuel by 2030, the industry would avoid over 400 million tonnes of carbon dioxide emissions a year.
 
“In Europe, 30% biofuel by 2030 would save the industry $5.84 billion in carbon credit expense per year – a significant financial incentive not only for the airlines involved, but importantly, the biofuel manufacturers who will need to supply between 46 and 72 billion gallons of fuel per year in order to meet a global demand.

“The airlines and manufacturers have been taking the right steps to test and receive regulatory approval to use biofuels. The airlines understand that biofuels offer their best hope for breaking their reliance on fossil fuel and reducing the environmental stigma of flying.”
 
EQ2 is a sustainability economics company based in the UK and US that provides organizations with information relating to their environmental impacts, sustainability risks and financial performance implications.
 
 
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