“It was the age of wisdom”:
IAG targets sustainability November 2019

It was the best of times. It was the worst of times. In November two of the major network carriers in Europe held investor days: one in London, one in Paris. They couldn’t have been more different. In London, IAG’s CEO Willie Walsh highlighted that their event would be entirely carbon-neutral, and put forward the group’s strategy to aim for zero net carbon emissions by 2050 — the first airline in the world to promulgate such a target.

Climate change and aviation’s impact on it has come to the fore in the past two years. We highlighted the industry’s lacklustre response to environmental activist groups such as Extinction Rebellion in the June edition of Aviation Strategy. IAG now feels it imperative to show that the group is at the forefront of the sustainability movement.

IAG believes that it has a track record of leadership on environmental issues. British Airways, Walsh avers, was the first airline to report its carbon footprint in 1992. In 1999 it was the first airline to set a fuel efficiency target. It voluntarily joined the UK emissions trading scheme in 2002 and claims that it was an early pioneer in exploring sustainable aviation fuels in 2010.

Background

Transport accounts for an estimated 22% of global CO2 emissions, of which over three quarters relates to road transport and about a tenth each to sea transport and aviation. While road transport is busy developing the technology for hybrid and electric cars, aviation has no realistic alternative to carbon based fuels for propulsion; and over 85% of air travel is on routes of over 1,500km for which there is no timely alternative for the carriage of people or goods.

The airline industry as a whole currently accounts for about 2.3% of total man-made CO2 production (and a possible 3% of total radiative forcing). Over the next thirty years other industries (mostly power generation and ground transport) will be forced to reduce their dependence on fossil fuels, and by 2050 aviation could be responsible for 4.5% of CO2 — a doubling of current levels.

The 2015 Paris Accord saw an agreement by 195 countries in the world to limit global warming to 2°C above pre-industrial levels by 2050 (it is already at 1.1°C over those levels). Since then there has been an increasing sense of urgency that more has to be done, and over a shorter timescale. The World Meteorological Organization’s 2019 report noted that atmospheric CO2 concentration had reached 407 parts per million (ppm) in 2017, up from 342ppm in 1985. Some commentators have claimed that this level has not been seen on earth for 3-5 million years — possibly a time when temperatures were 2°C and sea levels 10m higher than today. The Intergovernmental Panel on Climate Change (IPCC) published a report at the end of 2018 calling for a new limit of 1.5°C increase in global temperatures by 2050 compared with those 300 years ago. This would mean that global emissions would need to halve from 2018 levels by 2030 (twenty years earlier than the former agreement) and that the world should now aim for net zero emissions by 2050 (meaning that by then as much CO2 must be absorbed or captured as emitted).

Many have baulked at this target, but over 70 countries and 85 companies have now committed to “net zero” by 2050 or sooner; some countries including the UK and France have committed to it in law.

Pathway to net zero emissions

Is IAG’s target achievable? A significant part of the roadmap to zero net emissions is under the group’s control. The natural process of the industry is to renew the fleet with new generation and increasingly fuel efficient aircraft.

The group will be acquiring 142 new aircraft by 2022 including A320neos and A350s, which are up to 25%-40% more fuel-efficient than the aircraft they will be replacing. Under current plans this will reduce the average fleet age from 11.4 to 10.2 years. Indeed Willy Walsh pointed out that the group had delayed replacing some aircraft awaiting the newest generation and most fuel efficient offerings; and it is accelerating the disposal of the older 747s. It is expecting that its overall CO2 fuel efficiency will reach 87.3g/RPK in 2020 and drop by 10% (or by a compound 2% a year) to 80g/RPK in 2025.

The group is also exploring ways in which in-flight operational alterations can improve its environmental footprint. In 2018, as examples, Aer Lingus fitted retracting landing lights to save 570t of CO2; Vueling retrofitted lighter seats on its aircraft to save 1,000t CO2; Iberia adjusted on-board water usage to save 200t; and BA was able to make changes to flight paths creating a saving of 7,000t.

Walsh even upped his environmental credentials by mentioning “tankering” — the process of loading more fuel from a departure airport to avoid lifting fuel from a destination airport where jet kerosine was priced substantially higher. This represents (in his words) “corporate greed” to achieve the lowest input fuel cost at the expense of fuel efficiency (an aircraft needs to use a significant proportion of that fuel to transport that fuel to and from the destination).

But fleet renewal and operational changes will not be enough to mitigate against the inexorable growth of traffic. According to IAG’s figures these measures would reduce carbon emissions by nearly 40% of what they would be without any action by 2050 (see graph). They would still increase.

Using sustainable biofuels is one potential to improve on these actions. In 2018 IAG partnered with AIM-listed Velocys to generate sustainable drop-in aviation fuel from waste products. They are developing Europe’s first waste-to-fuel plant in England’s South Humberside and expect this to be operational by 2024, with 40m litres of sustainable fuel production by 2030. Unfortunately, the economic cost of generating biofuels, even from waste products, is a significant multiple of the current cost of jet kerosine. (It is perhaps interesting to note that Norway recently passed legislation to mandate local aviation fuel suppliers to blend jet fuel with 0.5% biofuels from January 2020, despite the lack of supply. Carriers less ethical than IAG will no doubt increase tankering on flights to Norway.)

By 2050 the group expects that 30% of its fuel requirement will be fulfilled by sustainable fuels. But this will only reduce its net carbon footprint by an additional 18%, leaving no change from current day levels.

Market-based measures

The remaining 43% of the target towards net zero, Walsh points out, has to be achieved by market-based measures.

Governments, particularly in Europe, have tried to tackle the issue through taxation. The UK introduced its Air Passenger Duty (APD) tax in 1995, ostensibly as an environmental tax (but more honestly as a way of raising general tax income). Since its introduction the rate has risen more than six-fold, and is now the highest rate of passenger aviation tax in the world.

The Netherlands first introduced a passenger tax in 2008 but then withdrew it two years later when it found that it had had a negative impact on GDP as passengers decided to fly from neighbouring countries where taxes were lower. However, the country is currently proposing a European departure tax on a “level playing field”, failing which it has tabled a draft law to re-introduce such a tax in 2021.

But departure taxes are not efficient at solving the problem: they may have an impact in reducing demand by increasing ticket prices, but they do nothing to encourage fuel efficiency or the development of technological change. In its presentation, IAG points out that its airlines in 2018 paid €885m in APD, the UK’s passenger tax, sufficient to offset its total annual CO2 emissions ten times over.

So the answer is a combination of the European Emissions Trading Scheme (ETS) for intra-European flights and the ICAO negotiated CORSIA. The former requires carbon emitters to buy allowances (with a current price of around €25/t). The price of carbon will rise over time. The latter involves a commitment to invest in carbon capture and offset schemes to match CO2 emissions — but by the nature of the ICAO agreement only on international flights.

Independently, IAG is fostering Mosaic Materials, a new start-up selected for the group’s Hangar 51 accelerator programme (which gives disruptors and innovators the opportunity to pilot their technologies at scale through the group’s airlines). Mosaic is developing carbon capture and storage (CCS) technology, which the IPCC identified as essential to reach the 1.5°C target

Other airlines are keen to demonstrate their green credentials. Qantas, three days after IAG’s Investor Day, announced it would also target “net zero” by 2050. easyJet in its full year results statement announced that it would be the first airline to offset all its carbon emissions “on behalf of passengers” at a surprisingly low cost of £25m for the year to end September 2020. British Airways itself will be offsetting all domestic UK flights from 2020.

However, IAG (and the industry) still has an uphill struggle with its ESG aims. Neither the ETS nor CORSIA schemes are easy to understand by the man in the street, and on the face of it they may be subject to “double counting” and, with offset schemes, validation. Various press articles suggesting that this is “greenwashing”, may undermine the underlying PR message.