Global legislators – particularly those in Europe – are pulling on the levers of government to ensure aviation is subject to increasing regulatory change to reduce carbon emissions and encourage a transition towards operating more sustainably.

It’s crucial aviation financiers understand the regulations, and their impact, not simply for compliance but to capitalize on emerging opportunities.

The sustainability regulations landscape

Since 2013, aviation emissions have increased by 26% and are expected to continue to grow, with passenger numbers projected to double to 8.2 billion in 2037.

By 2050, aviation could consume a quarter of the global carbon budget for limiting global temperature rise to 1.5^oC.

EU Member States aim to reduce net emissions by at least 55% by 2030 compared to 1990 and will become carbon emissions neutral by 2050.

Against this backdrop, key regulatory frameworks have been implemented to reduce greenhouse gas emissions and mitigate the environmental impact of air travel.  These include the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)and the European Union Emissions Trading System (EU ETS) among others. Additionally, countries including the UK and US have introduced national initiatives to reduce aviation emissions including the UK’s Jet Zero Strategy and the US’s Sustainable Aviation Fuel (SAF) Grand Challenge.

With CORSIA aiming to create a globally unified approach to offsetting aviation emissions and flight emissions within the EU also being regulated by the EU ETS European carriers are facing a unique challenge.

Adopted by the International Civil Aviation Organization (ICAO), CORSIA was developed and set the baseline levels for emissions exceeding 85% of 2020 levels. Its implementation aims to help the aviation industry reach its aspirational goal to make international flight growth carbon neutral and for airlines to have net zero carbon emissions by 2050. The mandatory phase of CORSIA is set to begin in 2027, with individual airlines accountable for their emissions by 2030.

The EU Emissions Trading System (EU ETS) requires airlines operating in the European Economic Area to monitor, report, and verify their emissions and to surrender allowances equal to their emissions annually. This means from 2026, airlines will face the full cost of emitting carbon, as free allowances taper down to zero on intra-EU flights where the cap has been steadily above 80% since 2012.

American multinational investment bank, Morgan Stanley, has predicted this could lead to substantial rise in carbon costs which will be passed on via higher ticket prices.

Additionally, under the Refuel EU legislation, tankering must be reduced so 90% of annual fuel comes from an EU airport ensuring airlines are not using cheaper fuel outside the EU. From 2025, aviation fuel suppliers will also have to blend 2% SAF and kerosene, increasing to 70% by 2050.

Regulation implications for Aviation Finance

Regulations such as these present both challenges and opportunities for financiers but what is clear is the continually changing regulatory landscape has financial impact. Airlines face higher operating costs due to the need to purchase carbon credits or emissions allowances whilst embracing new and emerging technologies. 

With any financial health impact there also comes a threat to the ability to meet lease or loan obligations and aircraft leasing and finance agreements now need to consider potential financial impacts of compliance with CORSIA, EU ETS and other regulations.

Financiers must factor these costs in when structuring finance agreements and deals or when assessing airline creditworthiness.  The costs also need to be accounted for when considering potential impact on aircraft valuation and lease terms because of the growing demand for aircraft capable of using SAFs, which can reduce lifecycle emissions significantly.

The UK government’s strategy focused on advancements in technology, operations, and SAFs to achieve net-zero aviation by 2050 and the US Sustainable Aviation Fuel (SAF) Grand Challenge encourages financiers to consider funding opportunities for aligned innovations and those that could benefit from government incentives.

Financiers are also encouraged to consider certification status when evaluating SAF-related investments. The International Sustainability and Carbon Certification (ISCC), acertification system for the sustainability of raw materials and products, can also enhance the credibility and marketability of SAF projects, influencing investment decisions.

Diversification and funding

More broadly speaking, portfolio diversification to include more sustainable assets that can reduce exposure to regulatory risks is increasingly important.

Aircraft may require upgrades to meet new standards, impacting financing deals and residual value calculations. Aircraft residual value could also be influenced by environmental performance with older, less efficient aircraft potentially facing a decline in value, while newer, more sustainable models command a premium.

There is also a rise in Sustainability-Linked Loans and Green Bonds. The loans offer favorable terms for borrowers meeting specific sustainability targets, such as reducing emissions or increasing the use of SAFs and the issuance of green bonds dedicated to financing sustainable projects in aviation is growing. These bonds attract investors focused on ESG criteria.

These financial instruments not only support environmental goals but also attract investors focused on sustainable portfolios.

Strategic Responses

Aviation finance professionals must adopt strategic responses to navigate regulations effectively. This includes incorporating ESG Criteria into investment decisions including evaluating the environmental impact of aircraft and operations and ensuring transparency in reporting.

Collaboration with airlines, manufacturers, and regulators is key to stay ahead of regulatory developments – through engagement in industry forums and working groups providing valuable insights and influencing policy-making.

Financiers must develop and promote financing products that support the transition to sustainable aviation which could include green leasing options, financing for SAF projects, and investments in carbon offset programs.

Focus should also turn to incorporating sustainability risks into broader risk management frameworks including assessing the potential financial impact of regulatory changes and the transition to low-carbon aviation.

Moving forward, financing agreement clauses should also account for future regulatory changes and their potential impact on asset values and operating costs.

EmeraldSky

As sustainability regulations continue to evolve, the sector must remain agile and proactive which is where EmeraldSky by Cirium comes in.

EmeraldSky represents a ground-breaking integration of data, analytics, and innovative methodology, delivering unparalleled precision in measuring aircraft and flight CO₂ emissions.

This is why Cirium’s EmeraldSky will be crucial in providing industry-leading data to enable airlines to make data-based decisions to ensure flights operate with optimal efficiency and reduce emissions where possible.

It offers a precise and comprehensive perspective on aircraft and flight CO₂ emissions as well as fuel consumption for every flight and aircraft. It takes in account every essential factor, such as aircraft model, engine type, age, flight duration, passenger count, and even cargo capacity, to ensure a highly accurate and comprehensive emissions assessment.

Harnessing EmeraldSky, means businesses can secure a competitive advantage and contribute to a greener and cleaner future for their own operations and the industry as a whole.

To learn more about this innovative game-changing methodology, visit Cirium.com/EmeraldSky.

Looking ahead

Sustainability regulations are reshaping the aviation landscape and the shift towards greener aviation poses inevitable challenges and opportunities for aviation finance professionals.

We will see the sector accelerate towards achieving net zero emissions by 2050 and by understanding the regulations and their implications, financiers can not only ensure compliance but strategically position themselves to support and benefit from the industry’s transition to a more sustainable future.

The connection between sustainability regulations and aviation finance is becoming increasingly complex and critical but provides an opportunity for the aviation finance community to contribute significantly to the global efforts to combat climate change, while unlocking new opportunities for growth and innovation.

Staying informed and adaptable is crucial to navigating the current regulatory landscape, ensuring that both compliance and competitiveness are achieved as the sector journeys towards a more sustainable future.

Attending ISTAT EMEA in Istanbul? Book a meeting with our team to discover how Cirium enables data-based decision-making with reliable and comprehensive environmental flight intelligence.