Greening airline bailouts?

Policy Pulse - George Anjaparidze - 2 April 2020

Governments plan to inject over $5 trillion into the global economy to counteract the social, economic and financial impacts of the coronavirus pandemic. This intervention is on an unprecedented scale.

In the United States, actions through the CARES Act represent a stimulus package of about $2.2 trillion, which amounts to over 10% of US GDP, multiples larger than the US government stimulus during the Global Financial Crisis. As part of this package, the US aviation sector is expected to receive a combination of grants and potential loans of about $60 billion.

Other countries have also enacted specific relief measures with targeted support for aviation. Singapore announced S$750 million in support of aviation, as have others, including Australia, China, Colombia, New Zealand, and Norway. As the impacts of COVID-19 rise, the list of governments channeling direct financial support is likely to grow.

Airline pleas for public finance have been echoed by efforts to link rescue packages to climate targets. In the US, eight Senate Democrats wanted to impose carbon emission requirements on companies benefiting from the rescue package. While this is an interesting idea, imposing company specific requirements is not appropriate in aviation when dealing with the climate challenge. An industry-wide approach is essential for ensuring financial sustainability of climate action.

In general, the airline industry is highly competitive. If one airline has a higher cost structure, all else equal, it will not be able to effectively compete against rivals. Therefore, imposing requirements that result in additional costs for an individual airline, will likely lead to financial ruin. Due to the competitive pressures from its rivals, the airline will struggle to pass on the higher cost to consumers and instead be forced to operate with a lower profit margin, which will eventual likely lead to market exit.[i]

In contrast, if the increase in cost is industry-wide, there will be no adverse impact on operating profit margin per passenger. If airlines are informed well in advance of the introduction of a policy change, they will be able to incorporate this consideration into their fleet planning and capacity deployment practices. For example, the airline industry could adopt the Delta Air Lines target of going fully net carbon neutral but with implementation starting in 2025. As illustrated in Table 1 and Table 2 below, this will not adversely impact operating profit margin per passenger. There will, however, be a small negative impact on air travel demand.

If industry fails to further scale-up global climate action, it will face a backlash of unprecedented proportions. Even before the outbreak of COVID-19, a paradigm shift in consumer sentiment could be observed. As government bailouts come under public scrutiny, there will be renewed pressure to take climate action against aviation.

A wave of new green taxes, operating restrictions and other local and national initiatives will again threaten to impose a patchwork of overlapping environmental measures on the sector. A proactive industry-wide approach to scaling-up climate action, can put at bay environmental activists without compromising financial sustainability.

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[i] Airline specific price elasticity is widely recognized to be more sensitive to changes in price compared to market level elasticities as well as national, supra-national and global elasticities. Market level (also referred to as route level) elasticities are those where price changes impact all carriers serving a route. As evidenced by the IATA Air Travel Demand study, market level price elasticities range between -1.3 and -2 within and across major aviation regions of Asia, Europe, North America and South America. The airline specific price elasticities are considerably higher compared to market level price elasticities. Meaning that if an airline tried to pass on the higher carrier specific costs, it would lead to a significant drop in passengers.

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

#Airports #Airlines #aviation #climatechange #sustainability #coronavirus #bailout #CARESact

COVID-19 impact on climate change and UN negotiations

Policy Pulse - George Anjaparidze - 26 March 2020

COVID-19 has succeeded where UN climate talks have failed. Heat trapping greenhouse gas emissions across several sectors have drastically fallen as governments have imposed travel restrictions and social distancing measures in response to the virus. For example, travel by air is expected to decrease by 38% in 2020 compared to 2019.

Despite leading to lower greenhouse gas emissions, COVID-19 is not a solution for dealing with the climate challenge. It has devastated communities, robbed people of livelihoods and taken the lives of over 21 thousand people (as of March 26th).

Our current circumstances can offer valuable learnings on how we can work smarter and live more sustainably, even after COVID-19 is under control. However, we also need to be realistic. These learnings alone will not be enough to overcome the scale of the climate challenge.

Therefore, it is critical that international efforts continue to focus on finding solutions to the current impasse in international climate negotiations. For two consecutive years, UNFCCC negotiators have failed to agree on the rules for international cooperation on climate action (also known as Article 6 negotiations). These rules are a prerequisite for properly functioning international carbon trading.

The stakes are high. The lack of agreement on rules for international cooperation on climate mitigation leads to higher cost and hinders financial flows to developing countries. The World Bank estimates that in a 2°C scenario, international collaboration will lower mitigation costs by 32% in 2030 and 54% by 2050. Between 2020 and 2050, $24 trillion in global cost can be avoided through voluntary international cooperation on climate mitigation.

Delays in setting up these rules have likely already resulted in lost opportunities. $30 - $50 billion of the 2020 annual financial flows from developed to developing countries was expected (by the 2010 report of the UN Secretary-General’s Advisory Group on Climate Change Financing) to flow via carbon markets. The inability to operationalize mechanisms for international cooperation at the multilateral level has contributed to the emergence of a significant gap in achieving the $100 bn of climate finance flows from developed to developing countries

Not having rules for international cooperation under the Paris Agreement erodes confidence in the agreement and dilutes relevance of the UNFCCC. The lack of standard rules introduces uncertainty and greatly complicates the process of assessing performance against collective climate goals. It also makes it likely that other actors may try to define these standards and fill the void left by negotiators. An example is the recent decision by the International Civil Aviation Organization to approve six carbon offset mechanisms for use under the pilot phase of the airline industry climate agreement.

COVID-19 has led to the postponement of many meetings of the UNFCCC. This "cleaner" agenda of the climate community and its leadership should create an opportunity to focus efforts where they are needed most. Finalizing the rules for international cooperation, under the Paris Agreement needs to be a top priority. The world can not afford a repeated failure at the next UNFCCC Conference of the Parties (COP 26).

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure. 

#climatechange #UNFCCC #COVID19 #coronavirus

Coronavirus deflated aviation emissions

Policy Pulse - George Anjaparidze - 25 March 2020

As of March 24th COVID-19 has killed over 16 thousand people and brought the global economy to a crawl. Aviation has been one of the worst hit sectors. IATA`s latest forecast, published on March 24, expects airlines to see a 38% fall in passenger demand in 2020 compared to 2019. As a result, aviation CO2 emissions will experience the largest annual decrease in recent history.

2020 is a special year in the context of the climate agreement on international aviation - the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The scheme is designed to use the average of 2019 and 2020 CO2 emissions to determine the level (baseline) above which the airline industry needs to offset emissions. A lower baseline implies a larger offset responsibility in the future.

Industry advocacy efforts have been exceptionally successful in securing positive outcomes in dealing with the COVID-19 crisis. Airlines have secured suspension of airport slot rules, special treatment for air cargo operations and direct financial support from governments. Therefore, if deemed an industry priority, airlines would likely also succeed in introducing adjustments to the baseline under the CORSIA scheme. However, there is more at stake for airlines than minimizing their offsetting liability. There is an urgent need to strengthen the sustainability credentials of the sector.

Before the outbreak of coronavirus, surveys suggested that 2020 would usher in a paradigm shift in consumer sentiment. Across all geographic regions majority of survey participants expressed their intention to fly less for holidays to fight climate change.

In recognition of these threats, some airlines took action. Perhaps most notably on 14 February 2020, Delta Air Lines announced a commitment to go completely carbon neutral starting from March 2020. This kind of bold leadership should be admired. However, an airline by airline approach will not change consumer perceptions on flying nor will it deliver the level of action needed to address the climate challenge.

Sustaining growth after the coronavirus requires an immediate scale up in industry-wide action to strengthen sustainability credentials.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

#Airports #Airlines #aviation #climatechange #sustainability #CORSIA #coronavirus #covid19