The aviation sector was included in the EU Emissions trading scheme (ETS) in 2012 and the sectors obligations currently apply to CO2 emissions from flights between countries of the EEA and to Switzerland.
As of 2021, following Brexit, flights departing to the UK are covered under the EU ETS, while departures from the UK are subject to the UK ETS.
Aviation in the EU ETS
In 2022, the EU passed several ETS reforms implemented under the “Fit for 55 package” aiming to increase the ambition for decarbonisation in EU ETS sectors:
- 82% of allowances had previously been allocated for free, with 15% auctioned and 3% placed into an auction reserve
- Free allocations (FAs) are calculated based on benchmark values and provided to operators who submitted
- applications based on their 2010 tonne-kilometer data
- Now, FAs are being phased out, all allowances for the sector will be auctioned from 2026 (see figure 1)
EU ETS - Aviation Allowance Supply
Step-wise reduction in originally attributed free allocation
-25% in 2024
Further reforms during Phase 4 of the EU ETS
The linear reduction factor, for all sectors, has been doubled to 4.3% for 2024-2027 and 4.4% for 2028-2030,
Since 2024...
Flights between member states’ overseas territories (OMRs) and the EU are now included in the EU ETS (flights between a territory and the corresponding member state will remain exempt)
From 2024...
EUAAs (aviation’s allowances) will no longer be issued and any remaining EUAAs are interexchangeable with EUAs included in the total number of allowances in circulation (TNAC) in the EU ETS
From 2025...
Monitoring, reporting and verification (MRV) obligations will also apply to emissions from non-CO2 effects including nitrous oxides, soot particles and sulphur oxides.
By end 2027...
The EU will decide whether these emissions should be accounted for in the EU ETS
- Revenues from five million allowances will be invested into technological innovation
- Twenty million allowances will be set aside to cover the price differential between Jet A-1 fuel and Sustainable Aviation Fuels (SAF) - speak to one of our team to learn more about SAF
Aviation operators face a significant challenge to keep up to date with allowance prices, develop a risk management strategy to manage rising compliance costs and execute trades in an increasingly volatile carbon market.
The European Carbon Market
The EU Carbon market has changed dramatically in the last 3 years both in terms of EU Allowance (EUA) prices, market volatility and active market participants.
We saw a tripling of prices, from €30 in 2021 to highs above €100 per EUA in 2023 as policy ambition drove prices higher (see price curve below). However, bearish fundamentals firmly took hold in the first quarter of 2024, as the impact of growing renewable generation and lower Industry output have reduced EU ETS emissions.
After reaching a 2.5 year low in February, investor and compliance demand pushed prices back up over €70 by April and we have seen the market remain very rangebound (€65-75) over the last 6 months..
Daily EUA price fluctuations continue to be influenced by weather, renewable availability, coal to gas fuel switching and wider energy markets.
In addition, an increasing number of investors and funds looking at carbon has put an added focus on technical trading indicators which also exposes the EUA price to wider macro-economic market impacts.
CFP Energy is a leader in carbon, energy and commodity markets, delivering an awardwinning compliance service for ETS operators.
We specialise in working with EU ETS operators to understand policy, develop a compliance strategy and execute trades effectively.
We provide clients with unique market insights and a full range of carbon trading solutions, as well as innovative products to reduce compliance costs
The UK ETS Carbon market is much smaller and continues to be characterised by poor liquidity which results in significant price volatility, thin offer volumes and often a wide bid-offer spread for UK Allowances (UKAs).
Prices often take direction from the larger EU carbon market, while they are also impacted by the UK electricity generation mix (wind vs gas) and the auction supply boost every 2 weeks.
ICE Dec UKA Futures Settlement Price
Aviation in the UK ETS
Free Allowances (FAs) to the aviation sector will reduce by 2.2% in 2024 and 2025, until full auctioning in 2026 (from a total four million in FA in 2025).
By 2026, FAs to airline operators will be capped to 100% of their verified emissions. The current use of historical data has meant operators sometimes received FA beyond their actual emissions
ICE Dec EUA Futures Settlement Price
Sustainable Aviation Fuels (SAF)
On 13 September 2023, the EU formally adopted the initiative ReFuelEU Aviation to lay out a pathway to increase uptake of sustainable fuels until 2050.
The EU has now adopted binding targets for fuel suppliers, to provide increasing shares of SAF at EU airports: 6% in 2030, 20% in 2035 and 70% in 2050. Further, 20 million EU allowances (EUAs) will be set aside to supplement any price differentials between purchased SAF and conventional aviation fuels.
CORSIA
Countries participating in the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), committed to voluntarily offset flight emissions in the pilot phase (2021-2023) and during phase 1 (2024-2026) of the scheme.
By UN convention the second phase of the scheme (2027-2030) will make offsetting by the purchase and cancellation of eligible carbon credits mandatory for all civil aviation operations globally (exceptions apply for small island nations and low-income states).
The EU has extended the ‘stop-the-clock’ mechanism, which will now continue to exempt international flights from EU ETS obligations, until end 2026. The Commission will assess the effectiveness of CORSIA by 1 July 2026 and could propose that flights to and from third countries into the EU be included in the EU ETS.
In such case, operators would be able to credit their EU ETS obligations against CORSIA requirements.
The UK Government are still consulting on adjustments for CORSIA in respect of interaction with the UK ETS.
Get in touch if you would like our detailed CORSIA briefing, here.
At CFP Energy we proactively assist airlines in sourcing CORSIA- eligible carbon credits to support your net-zero goals.
We keep our clients informed of evolving market dynamics and regulatory changes, ensuring you’re always compliant.
Our extensive portfolio provides high-quality, cost-effective credits aligned with CORSIA principles, helping you minimise costs while maximising environmental impact.
Managing Compliance
CFP Energy has been a pioneer in carbon markets for 15 years, particularly the EU ETS and more recently the UK ETS which started in May 2021.
We specialise in helping ETS operators (industrial, aviation, and shipping) understand and stay up-to-date with the carbon market, develop a bespoke compliance strategy and execute allowance trades effectively
We provide clients with a route to market access through our award-winning carbon trading desk. Our offering consists of a full range of trading products and solutions, including spot and forward allowance transactions, order targets to capture falls in the price as well as innovative structured products (options, discount accumulators) to manage risk.
Aviation operators now more than ever need to have an effective carbon risk management strategy in place. This needs to be tailored to a clients’ specific needs but should take into account suitable trading products, emissions forecasts, available budget, appetite for risk and most importantly views on the price.
Whether you want to hedge annual ETS requirements, regularly cost average purchases to better manage price risk or take advantage of our innovative accumulator structures (these can significantly reduce the purchase price), CFP Energy can tailor a compliance solution for your needs.
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