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Taking stock on European airline emissions
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by Robert Boyle, SkiesFifty partner
European airlines are entering a new phase of climate-related financial exposure. With emissions rising back above pre-pandemic levels and EU ETS costs increasing sharply, decarbonisation is no longer just a reputational or regulatory issue, it is increasingly becoming material to financial performance. For sustainable aviation investors, understanding the dynamics of emissions, compliance costs, and relative airline performance is critical to assessing long-term resilience and alignment with transition pathways.
EU Emissions Trading System (ETS) and Aviation
The EU launched the Emissions Trading System (ETS) back in 2005. The ETS was the world’s first carbon market, and it remains the largest today. Initially covering only power generation and energy-intensive industries, it was expanded to include aviation in 2012. However, only flights starting and finishing within the European Economic Area (EEA) were included, essentially short-haul flights only. I’ll come back later to the reasons why long-haul flights were excluded.
Initially, most airline emissions were covered by free allowances, but as the industry has grown and the free allowances have been phased out, an ever-growing proportion of flights now have to pay for their full carbon costs. 25% of free allowances were phased out in 2024, 50% in 2025 and there will be no free allowances at all in 2026.
Making aviation pay for its emissions could be thought of as having three objectives. Firstly, to incentivize efficiency. Secondly, to act as a drag on growth, with additional capacity being deployed only when it can cover the full costs including the cost of carbon. Finally, to provide a source of revenue which could be used to pay for emissions reductions in other sectors or perhaps increasingly to pay for the cost of climate adaptation measures. The “cap and trade” design of the system in theory delivered the first two objectives right from the outset. Since the free allowances are fixed, regardless of emissions levels, the full economic incentive for airlines to reduce or constrain their emissions was there from the start. It is only really the third objective of raising revenue that depended on the phase-out of the free allowances.
Before we take a look at what the track-record of the industry on emissions has been since its inclusion in ETS, I need to cover off a few annoying issues with the data.
Technical Notes
- The figures which follow are based on aviation emissions for the EU and UK schemes added together, since originally they were one scheme but they split apart in 2021 following Brexit.
- Flights to and from Switzerland have been included in ETS since 2020, but since we don’t have figures for earlier years, I’ve done my best to exclude them for consistency. The only place where it is tricky to do that is for the UK ETS, since they don’t split out the Swiss figures. I’ve estimated an adjustment based on UK-Swiss ASKs as a percentage of all ETS eligible ASKs from the UK. It’s a small adjustment, but I like to make my data as clean as possible.
- Although aviation was included in 2012, the actual figures for that year are all over the place. I decided to look at a ten-year period starting in 2014, after the system had settled down a bit. In case you are worried, I haven’t been naughty and deliberately picked my base year - 2013 was about 2.5% below 2014 so the trends starting from then would have looked very similar.
- Another issue with the emissions data is that the scope of the EU ETS was expanded in 2024 to include flights to the EU’s “outermost regions”, such as the Canary Islands, the Azores, Madeira and the French overseas territories. That led to about a 7% increase in reported emissions and so I’ve also shown the 2024 figures adjusted for that scope change in what follows.
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Ten-Year Perspective on Emissions
So with all that data nerdiness out of the way, here is a chart showing how total emissions have developed over the last ten years, excluding Switzerland. The red dotted line shows the 2024 figures adjusted for the scope change that took place that year.
Source: EU and UK published data, GridPoint analysis
- In the first five years, emissions grew at an average annual growth rate of 4.5%. That’s pretty strong growth for a mature market like Europe, so it doesn’t look like the ETS was acting as much of a brake on emissions growth.
- Of course, not all of the emissions were being paid for in 2019, due to free allocations. But 57% of emissions were paid and with free allocations fixed regardless of activity, the incentive effect on airline decision-making should have been operating in full.
- Part of the reason for the limited impact on growth undoubtedly lies in the carbon price that prevailed during those years of around €20 per tonne of carbon. Since a tonne of jet fuel produces 3.15 tonnes of carbon, that equates to a fuel price increase of about $74. With jet prices around $800 per tonne, an effective 9% increase in the fuel price was always unlikely to show up as having much of an effect on demand.
- The story over the last five years is far less clear, thanks to the COVID-induced collapse. Five years on, emissions are still 3% below 2019 levels, once you adjust for the change in ETS scope. But even on that basis, 2024 saw emissions increase by 6.4% compared to 2023. And that’s despite the 25% cut to free allowances.
- Around 70% of ETS emissions were being paid for in 2024 and the price of carbon has risen to around €70 per tonne, equivalent to a fuel price increase of $260 per tonne for decisions “at the margin”. That’s a more meaningful increase in effective fuel prices (c. 30%), so perhaps has had more of an effect on demand. Some basic “fag-packet” economics might say that with fuel representing about 30% of revenue, a 30% increase in fuel costs might need prices to be about 9% higher. Using IATA’s -0.924 estimate of price elasticity for “whole market” price changes for the intra-European market would suggest a demand suppression of about 8%.
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Emissions Efficiency
While the ETS hasn’t in practice prevented emissions from growing, there is perhaps a stronger story on emissions efficiency. On the following chart, I’ve shown the same emissions data as an index (in red), together with the capacity flown as measured in ASK, again as an index (in blue).
The green line shows an index of the ratio of ASKs to Emissions, a crude but pretty good measure of emissions efficiency. You can see that during the 2014 to 2019 period, efficiency went up by 8% cumulatively, an improvement of 1.8% p.a. That rate of improvement increased to 2.1% p.a. over the 2019 to 2024 period, leaving efficiency in 2024 up by 20% compared to ten years earlier. Quite impressive really, but not enough to offset the growth in capacity.
Source: Published schedule data, UK and EU emissions data, GridPoint analysis
- One interesting thing to note from the chart is the big bump in efficiency during COVID. With overall demand suppressed, airlines grounded their oldest, least fuel-efficient aircraft and only flew their newest and best. That effect got reversed of course as demand recovered and airlines began to bring most of their grounded planes back into operation.
- The final point to note is that whilst 2025 hasn’t finished yet, the published schedule data suggests that capacity covered by ETS will grow again by 5.1%. That’s not going to be offset by fuel efficiency gains, so emissions seem almost certain to rise again in 2025.
Financial Implications
For investors, the scale and trajectory of ETS costs are now a fundamental part of the financial profile of European airlines. Carriers with limited hedging or higher exposure to short-haul intra-EU traffic may face disproportionate cost pressures, especially as free allowances phase out entirely by 2026. These dynamics are likely to influence profitability, operating margins, and potentially credit ratings — all relevant to assessing long-term investment attractiveness.
Emissions by Airline
I’ve shown below the five-year snapshots of emissions for the six biggest airline groups. I can’t easily adjust these figures for the 2024 scope change or eliminate the UK-Switzerland emissions, so some of the increases will be down to that. But I still think it gives a good overview of the composition of emissions by carrier.
Source: EU and UK published data, GridPoint analysis
- Considered over the entire 10-year period, all of the big six airline groups have grown their emissions and in aggregate they have increased their share of the total from 56% in 2014 to 65% in 2024.
- It shouldn’t come as a surprise that the largest and strongest airline groups have been growing their share of emissions. As we’ll see, weaker carriers have been going out of business, shrinking
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