Green Strings Attached? State aid and the Aviation Industry in the Wake of COVID-19
28 May, 2020
Prior to the COVID-19 pandemic, the only emerging consensus when it came to climate change and airlines, was that airline greenhouse gas emissions needed to be reduced – however, no one could agree on how to achieve this. Taking into consideration the contribution airlines make to both the economic and social fabric of the European Union, reaching a solution that satisfies both environmental standards and industry needs, is proving to be complex.
Although the pandemic has not simplified this situation, air travel has reached a global standstill—opening several possibilities on how State aid can be used to achieve sustainable goals when rebooting the airline industry. However, within the context of current discussions regarding the fractured approach to the pandemic response by Member States, will this aid actually be used to promote a consistent approach across the EU as a whole?
Aviation and the Green Deal
On an economic level alone, the aviation sector promotes close to 5 million jobs and contributes €300 billion, or 2.1%, to the European GDP. Aviation also fuels the tourism sector, which supplies 10% of the EU’s economic output and provides 12% of all employment in the EU. However, with borders closed and planes grounded, Europe’s tourism industry is expected to lose 40% of its 2020 revenue. On a social level, civil aviation helps to build the profile of regional areas that would otherwise be hard to reach, and when paired with the low cost of flying and popular budget airlines, this has expanded travel horizons for more Europeans than ever before. In 2019, a web of 23, 400 daily flights spread across Europe—shuttling one billion people over the course of the year. However, all this comes with a cost: in 2016, the civil aviation sector accounted for 13.4% of the EU28’s transport emissions—and 3.6% of all EU28 emissions.
Despite successful efforts that halved emissions per passenger journey compared to 1990 levels—along with aims of the International Air Transport Association Agreement to reduce emissions by 50% by 2050—many in the industry acknowledge that current efficiency gains in the sector are not enough to counterbalance the CO2 emitted. Due to the growing number of flights, aircraft size and distances flown—more decisive action is still urgently needed. Therefore, the European Commission’s Green Deal has set out a roadmap towards a more sustainable EU economy. Specifically, the Deal seeks to reduce the rate of greenhouse gas emissions by 90% from the transport sector by 2050.
For the civil aviation sector, this reduction is to be achieved through a variety of mechanisms: reducing free allowances to airlines under emissions trading schemes (to be coordinated with international efforts, such as the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA); operational improvements, such as improved air traffic management systems; and government investments towards research for more efficient sustainable fuel options. While these measures have been met with cautiously positive responses from the aviation industry, discussions regarding reduction or removal of tax exemptions continues to be extremely controversial.
Furthermore, as the world grapples with the COVID-19 crisis, conversations surrounding the Green Deal have been sidelined—if not fully suspended—during the last eight weeks. Additionally, flight restrictions mean that airline’s cash reserves are running extremely low—with some industry forecasts predicting bankruptcy for many by the end of May. This has led many European airlines to turn towards their national governments for financial assistance.
Considering the post-COVID-19 world, prominent figures and some national governments have called for State aid (across all sectors) to be provided under the proviso that related measures for sustainability are still met—with this approach termed the ‘green strings’. Even so, the Commission has not expressed further guidance on this matter; only going so far as to say that its Member States have the option available. Presently, only the French government has attached green strings to aid delivered to Air France; while Denmark, Sweden and Finland are providing credit guarantees with no conditions. Other airlines, such as Austrian Airlines, Alitalia, Brussels Airlines and Lufthansa, are negotiating national funding, with no clear indications on where this will land.
Benefits of Green Strings
On the most fundamental level, supporters of adding green strings to State aid argue that public money should be used to address “social and environmental priorities, as well as economic needs”. The President of the European Council, Ursula von der Leyen, also reiterated during a speech on 16 April 2020 that environmental goals should be just as important as economic considerations in the application of State aid (and among other actions).
More specifically, for businesses and the aviation sector, attaching green strings consistently to State aid is a strong indicator that the EU remains committed to its self-appointed role as the global leader for sustainability. Accordingly, continued and consistent action in this vein sends strong signals to the business sector—allowing them to invest accordingly. Any change to this situation would result in a lose-lose situation, whereby businesses need to pivot and the EU does not achieve its environmental goals.
This is critical for the aviation sector, due to the long-term nature of its investments (e.g. an aircraft may be in service for up to 25 years) and the unique limitations on the airlines’ operational structures within the Internal Market. Combining these factors, this means that any distortion to the Market through inconsistent delivery of State aid to individual airlines not only has the ability to negatively impact the effective operation of the market, but also severely misses the opportunity to encourage sustainable practices.
More specifically, if State aid is delivered in an ad-hoc manner, it has the potential to distort the market on a global level by creating a competitive advantage, not only for the airlines that receive it, but for airlines limited by fewer conditions when given aid. Although the action of giving State aid itself (as in the case of Air France) has been deemed by the Commission to not unduly distort competition in the Internal Market, some highlight that the overall inequality in liquidity between Member States may still distort competition through the provision of larger bailouts, or more economically attractive aid (i.e. State aid without strings). This may then give certain airlines an unfair advantage when the sector re-starts.
Guntram Wolff of the Bruegel think-tank noted that when State aid becomes less centralised, there is a higher risk for political motivations to affect conditions placed on that aid; and with greater variance in the amount given, the more severe the threat posed to the single market. While decisions regarding State aid are under negotiations, now is the time to apply this principle: a centralised approach to State aid should be proposed; and furthermore, green strings should be a forefront priority in these proposals for the aviation sector. This will ensure the EU’s continued progression towards its green goals in a manner that continues to support a highly competitive market.
There are also opportunity costs associated with the failure to attach green strings, such as on the States’ individual and collective “firepower” to fiscally and politically pursue Green Deal initiatives after the initial COVID-19 response. In short: once the money is spent, there may not be another chance. An even greater risk is the continuing threat of climate change, which marches on at an alarming pace. Failure to implement decisive measures now will result in worse environmental outcomes, not only for EU citizens, but for airlines themselves, who are also vulnerable to its effects. Therefore, consistent use of green strings can be a measure that preserves the viability of the EU’s aviation sector.
Drawbacks of Green Strings
The largest drawback associated with green strings is undoubtably still its initial economic cost; particularly, the cost associated with the removal of tax exemptions. Many airlines, therefore, argue that taxation approaches (such as those discussed in Germany in 2019) have the potential to approximately double the amount of taxes passed on to passengers. This may widen the opportunity gap for flying based on socioeconomic conditions, while also reducing services to some regional destinations that benefit from the present connectivity enabled by cheaper flights. This is further compounded by the financial reality facing airlines, and to avoid bankruptcy, many have already laid off thousands of staff—with taxation requirements possibly necessitating additional cost-cutting measures. The ramifications of this would be felt throughout the EU—magnifying the economic blow caused by COVID-19 restrictions.
Attaching green strings to State aid in response to COVID-19 may also further exacerbate the potentially uneven regulatory and operational costs arising from national differences in requirements for re-establishing air travel. Some also argue that additional costs may not be warranted when the industry already has a carbon offsetting and reduction system in place under CORSIA—which is expected to potentially mitigate around 2.5 billion tonnes of CO2, while also generating approximately $40 billion towards climate financing by 2035. Some further suggest that the aviation sector already has effective environmental controls in place and, therefore, the untimely costs associated with green strings are not warranted; particularly considering ancillary costs for the industry to regain ‘normal’ operations.
However, in restarting the sector, this opportunity can be used to pursue ambitious Green Deal goals that would not have been achievable otherwise. For instance, a group of EU environmental ministers are calling for the end of all free ETS allowances (which currently covers 50% of the sector’s emissions)—thus, requests for State aid could allow Member States to pursue this sort of ambitious reform. The economic challenges facing airlines can be factored into State aid responses, and—if applied consistently across the EU—they can become an unforeseen and powerful mechanism for pursuing environmental goals.
Despite any differences, one unanimous agreement among the aviation sector, the European Council and its Member States, is that air-connectivity needs to be restored in a consistent and safe way following the easing of COVID-19 restrictions.
The Green Deal is clear regarding the actions needed to reach the EU’s target of becoming a carbon neutral continent by 2050. While debate continues regarding the economic viability of taxation measures for the aviation industry (especially given the economic hit by the COVID-19 crisis), there is still a strong case for all Member States to consistently implement green strings on State aid. This key measure may ensure State aid does not distort the operation of the Internal Market, while still pursuing Europe’s green goals.
As the aviation sector is a strategically important component of the Internal Market, they therefore have an opportunity to spearhead innovation and lead by example by prioritizing green initiatives. With growing hope springing from the Commission’s steps to re-open borders and recommence safe travel, now is the time to guarantee that State aid embeds consistent mechanisms into the aviation industry for a greener future.