New analysis by PwC, The Future of Aviation Regulation, highlights the pressure on airline sector officials in the International Civil Aviation Organisation (ICAO) High Level Group, meeting today for the first time.

The group is expected to develop recommendations for a global emissions framework to be adopted in October 2013. Failure to do this will leave aviation regulation in turmoil.

In November, facing overwhelming international pressure from a coalition of 26 nations - including USA, China, India and Russia - the European Commission proposed a suspension of the EU ETS on international flights for 12 months, pending regulation at ICAO. Despite this, President Obama signed the EU ETS Prohibition Act, making it illegal for US airlines to comply with the EU regulation if it resumes in 12 months.

Roger de Peyrecave, partner, PwC said:

The aviation sector, which represents only 2.1% of emissions globally, has made good progress on reducing their average emissions intensity by 1.7% each year since 2000, and the industry body IATA has set ambitious targets to halve net emissions from the sector by 2050. The analysis finds that these targets are broadly consistent with a 5.1% rate of global decarbonisation suggested by PwC's Low Carbon Economy Index, needed to limit global warming to 2°C.

Roger de Peyrecave, partner, PwC said:

"Efficiency improvements of 1.7% won't be enough. Governments will need to get behind this or airlines will miss their own targets. Ultimately, they will need to accelerate advances in fuel efficiency beyond business as usual and scale-up biofuel production.

"Coordination on cross-border issues such as international Air Traffic Management, carbon pricing and incentives for the production of biofuel will be critical. The sector also faces big financial stresses, and reinvesting at least some of the revenue raised from new regulation in the industry will help."

ICAO is currently considering market-based measures, based around mandatory global offsetting and emissions trading. PwC analysis shows that:

• Continued efficiency improvements in air traffic management, aircraft design and engine technology could account for approximately one-third of the airlines' reduction goals.
• Incremental efficiency improvements could also come from the imposition of a carbon price such as a global ETS scheme.
• By 2030 the rest of the reduction target could be met by the use of biofuel, provided that the substantial barriers to large-scale production can be overcome.
• Carbon offsets will need to be used between now and 2030, creating a major new source of demand for credits from the Clean Development Mechanism (CDM).

Jonathan Grant, Director, PwC said:

"It is likely that carbon offsets will feature, at least as an interim solution. We could see offset demand from the aviation sector growing to more than 100 megatonnes of CO2 a year by 2020, which would provide a significant boost to the carbon markets. This is more than one-quarter of the CERs issued in 2012.

"The Clean Development Mechanism has been in the doldrums throughout 2012 since the economic downturn in Europe. Progress in Doha on the idea of a CDM reserve bank or fund was limited, but this could rescue the CDM.

"At €10 per tonne of CO2, the cost of offsetting carbon would amount to less than 5% of a tonne of aviation fuel, making this one of the most cost-effective options for the industry."

Notes
1. The ICAO's High-level Group (HLG) meets on the first time on December 12/13 to develop recommendations for applying market based mechanisms on climate action to the next ICAO Assembly that gets underway in September 2013. The group includes representatives from the United States, Canada, Russian Federation, France, UK, Belgium, Nigeria, Uganda, United Arab Emirates, Saudi Arabia, Brazil, Mexico, China, India, Japan, Australia and Singapore.

2. The four options currently under consideration by the ICAO are Global mandatory offsetting, Global mandatory offsetting, including a revenue-raising mechanism; Emissions Trading Scheme; and an Emissions Trading Scheme, based on efficiency benchmarking.

4. The average carbon intensity of global aviation traffic fell from above 1.1 kgCO2 per Revenue Tonne Kilometre (RTK) to less than 0.95 kgCO2/RTK between 2001 and 2011, equivalent to a 1.7% annual improvement.

5. PwC analysed a scenario for the sector to achieve a 5.1% reduction in emissions:

a. Business-as-usual (BAU) fuel efficiency improvements: Carbon intensity follows historical efficiency gains since 2000 - a 1.7% per year improvement in CO2/RTK - driven mostly by commercial incentives to reduce fuel bills. In reality, fuel efficiency gains are 'stepped' rather than smooth, as major changes to the composition of the fleet occur in waves (see page 11).

b. Additional fuel efficiency improvements: A further 0.3% per year improvement, to bring the total rate of fuel efficiency growth to 2% per year in line with ICAO's aspirational target, might be prompted by measures such as a carbon price or better Air Traffic Management.

c. Increasing biofuel usage: A rapidly increasing share of low-carbon biofuels in the fuel mix is assumed, with the total share reaching 30% by 2030.

d. Carbon offset purchases: To make up the difference to the target, it is assumed that remaining emissions are offset against carbon emissions reductions in other sectors. Taking the average long-term price as €10/tCO2, this could mean average annual average purchases by the aviation sector of €1.1 billion yearly between 2012 and 2031.

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