One may ask what are the rules set by the European Union Emissions Trading System (EU ETS). How can the ETS work in practice to reduce emissions and encourage the aviation sector to invest in cleaner aviation technologies? It operates on a "cap-and-trade" principle and includes aviation emissions.

The EU ETS covers CO2 emissions from flights within the European Economic Area (EEA), which includes the EU member states, Iceland, Liechtenstein and Norway. This includes both commercial and non-commercial flights.

The EU ETS provides a robust framework for reducing aviation emissions through market-based mechanisms. By setting a cap on emissions, creating economic incentives for reductions and promoting investment in cleaner technologies, the EU ETS can play a critical role in mitigating climate change. However, addressing challenges such as carbon leakage, competitiveness and administrative burden is essential for maximising the system's effectiveness and ensuring its long-term success.

The International Air Transport Association head Willie Walsh told attendees of the group's annual meeting that complying with climate change regulations will make flying more expensive as governments seek to reduce the industry's contribution to increasing global temperatures. Aviation is responsible for one in every 30 to 50 tons of carbon released into the atmosphere every year.

As can be expected, certain flights are exempt from the EU ETS, such as small aircraft operations, flights by public service providers and flights for humanitarian or emergency purposes. By comparison, the ICAO's Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) was adopted in 2016 as a global measure to address international aviation emissions. Corsia aims to cap CO2 emissions from international aviation at 2020 levels and requires airlines to offset emissions growth beyond this baseline.

In response to international opposition, the EU introduced a "stop-the-clock" provision in 2012, temporarily exempting flights to and from non-EEA countries from the EU ETS. This exemption was intended to provide time for the International Civil Aviation Organisation (ICAO) to develop a global market-based measure for aviation emissions.

Flights between EEA countries and non-EEA countries are covered by Corsia.

While the EU ETS primarily covers intra-EEA flights, the international flights are addressed through the ICAO's Corsia scheme. In the near future, the EU is considering how to align the EU ETS with Corsia and other international measures to ensure a coherent and effective approach to reducing aviation emissions globally.

So, one may ask why is the fulcrum of ETS in Europe based on a Cap-and-trade system. This cap is reduced over time to ensure that total emissions fall. The government or a regulatory authority sets a cap on the total amount of greenhouse gas emissions allowed from all covered entities (example, airlines) over a specific period.

In a smart and effective way, airlines receive a certain number of free allowances based on historical emissions data, but they must purchase additional allowances if their emissions exceed their free allocation. Thus such allowance permits the holder to emit one tonne of CO2.

Airlines must hold enough allowances to cover their annual emissions. The allegation to trade refers to the system that permits airlines to buy and sell allowances on the carbon market. Obviously, no international system performs well unless it is monitored.

Finally, each emission report must be independently verified to ensure accuracy and compliance. How does the market function? It works by putting a price on CO2 emissions, the EU ETS creates a financial incentive for airlines to reduce their emissions. Airlines that can reduce emissions at lower costs can sell their excess allowances to others, thus generating revenue.

The true benefit of the EU ETS is to place financial pressure on the airline industry to drive innovation and research and development (R&D) in sustainable aviation technologies, such as more fuel-efficient aircraft, sustainable aviation fuels (SAFs) and electric or hybrid propulsion systems. German airline giant Lufthansa said it is facing extra costs from EU regulations related to sustainable aviation fuel (SAF).

Ticket prices have already surged in recent years in the post-Covid travel boom, raising fears that further increases could start deterring travellers from flying. Fares will go up between €1 and €72, depending on the type of ticket, on all flights departing from European Union countries, Britain, Norway and Switzerland, according to Lufthansa, the German airline group. Lufthansa said the airline group will not be able to bear this successfully with such additional costs resulting from regulatory requirements in the coming years on its own. Carriers will need to include 2% of SAF in their fuel mix from next year, rising to 6% in 2030 and then soaring to 70% from 2050. The aviation sector is among the toughest to decarbonise and SAF, a biofuel that produces lower carbon emissions than traditional jet fuel, is seen as a crucial ingredient to hitting emissions targets but is currently more expensive to produce.

Hydrogen is increasingly being considered as a sustainable fuel for aviation due to its potential to significantly reduce greenhouse gas emissions. However, the widespread adoption of hydrogen-powered aircraft faces several technological, economic and infrastructural challenges.

At a local level, Nationalist MEP Peter Agius deplored the introduction of the surcharge. At the same time, he argued that Lufthansa was introducing the surcharge because of costs imposed by EU laws, which the Maltese government had voted in favour of.

This is a wake-up call for the ministry of tourism to anticipate a potential slowdown of tourist arrivals next year since the majority originate from Europe. Certainly, it has been evident since the onset of the pandemic that the island cannot rely on its past achievements and should have intensified efforts years ago to diversify the mix of non-EU arrivals.

gmm@pkfmalta.com

George M Mangion is a Senior Partner at PKF Malta