Climate change: aviation, carbon neutrality and the potential impact on the insurance market

This article was originally published on Insurance Post. Phoebe Penman, trainee solicitor, Kennedys, also contributed to this article.

After 197 countries signed the Paris Agreement in 2015, there has been a call for industries to solidify proposals to tackle climate change. Additionally, the onset of the COVID-19 pandemic has amplified the effects that these industries have had on the environment.

The Kennedys 2020 Climate Change survey results ranked aviation as the most significant industry that contributed to lowering carbon emissions during lockdown. According to the International Air Transport Association, ordinarily, commercial aviation is responsible for 2% to 3% of global carbon emissions.

Of the respondents, 63.1% agreed that green policies should be a major consideration in fiscal recovery plans. Achieving this while navigating the impact of COVID-19 may certainly prove difficult. Many airlines have already pledged to cut their net carbon emissions to zero by 2050 despite planning for 70% more flights. However, this does not reflect the broader industry position whereby the Air Transportation Action Group has set a long-term goal of halving net emissions by 2050 compared to their 2005 levels.

Moreover, the UK government launched its Jet Zero Council to aid this goal, while International Air Transport Association also has a published list of objectives. This multifaceted approach involves global market-based measures, improvements in technology and fuel, more efficient aircraft operations and modernised air traffic systems.

The executive director of ATAG, Michael Gill, explains that the industry has put in place a four pillar strategy to meet its emissions reduction targets.

“Aviation was the first global sector to put in place an industry-wide plan to cut emissions. A key to hitting those targets will be new technology – engines and airframes and the use of Sustainable Aviation Fuel, which cuts emissions by about 80% over the lifecycle of the fuel. SAF is already being widely used but it needs to be scaled up dramatically. To achieve that we need support from governments. Our three remaining pillars are aircraft operations, air traffic management, and market-based carbon offsetting measures which will be important in the short to medium term.”

Market-based measures

A key consideration is the potential implementation of legislation requiring airlines to participate in carbon offsetting. In 2016, the International Civil Aviation Organisation adopted a resolution for a global market-based measure to address CO2 emissions from 2021. Additionally, the Carbon Offsetting and Reduction Scheme for International Aviation, aims to stabilise CO2 emissions at 2019 levels by requiring airlines to offset the growth of their emissions. CORSIA will require airlines to monitor emissions on all international routes and purchase eligible emission units generated by carbon-reduction projects in other sectors.

All European Union countries are expected to join the scheme from the outset. This may result in national measures designed to implement and enforce CORSIA at a domestic level.

Many airlines are also investing in sustainable fuel alternatives. British Airways is exploring converting waste into renewable fuel, while Easy Jet is researching the usage of electric and hybrid aircraft. Most recently, Etihad and Boeing concluded testing on a 50/50 blend of sustainable and traditional jet fuel.

Improvements in aircraft

Modernising fleets of aircraft will significantly reduce emissions according to ATAG. Etihad boasts one of the world’s youngest fleets with the Boeing 787-9 being over 60% more fuel efficient per trip than larger aircraft such as the A380. Qatar Airways has ordered 200 new aircraft and developed an enhanced engine wash that removes contaminants restoring performance and reducing fuel burn.  ATAG has also noted modifications such as adding wingtips to an aircraft can reduce fuel use by 4%.

Captain-led actions such as one-engine taxiing and optimising direct flight routes also reduce emissions. Virgin Atlantic undertook a flight optimisation study and across eight months saved 21,500 tonnes of carbon emissions.

Reducing aircraft waste by recycling materials and limiting single-use plastic will also assist. Many airlines recycle unused amenity kits, sleep blankets and seat fabrics. Etihad has tracked unconsumed food to highlight consumption and wastage patterns; helping to reduce waste and improve planning. However, it is unclear whether the increased need to keep aircraft sanitary will be counterproductive if more plastic is re-introduced to protect passengers and prevent the spread of COVID-19.

Impact on the insurance market

While many airlines are undertaking measures to reach carbon neutrality, several are nascent and their impact on the insurance market remains to be seen. However, consumer behaviour alongside the potential implementation of legislation are likely to be key drivers to the aviation industry’s ability to cut emissions by 50% compared with 2005 levels by 2050.

As the planet continues to warm, public opinion on climate change appears to be hardening in favour of action. A recent Ipsos international poll carried out in April 2020, found that 71% of respondents considered climate change to be as important a global concern as COVID-19. Airlines not implementing carbon offsetting efforts may find themselves out-competed in the free market and potentially encountering financial difficulty. Such financial difficulty may pose problems when negotiating policy renewal with insurers and paying premiums.

While legislation implementing and enforcing CORSIA is still being developed, it is likely that airlines which fail to abide by CORSIA will face some form of sanction. This may develop into potential coverage considerations for insurers as, for public policy reasons, most fines/financial penalties are not normally insured under policies governed by the laws of England and Wales.

Furthermore, aircraft with more efficient, less emissive engines are likely to be more modern and, therefore, safer. Airlines operating such fleets will present less of a risk for insurers than airlines operating ageing, less efficient fleets, making the former more attractive insureds for insurers. If public opinion (in favour of carbon offsetting) continues to solidify, insurers may also be faced with the adverse publicity risk of underwriting more emissive airlines.

While the world navigates the fallout of COVID-19, whether airlines are able to reach carbon neutrality by 2050, or halving net emissions compared with 2005 levels, remains unclear. Many are recovering from the impact of the pandemic and are not set to return to pre-pandemic levels until 2024. It is uncertain whether the effects of reduced air traffic in 2020 will be invalidated if airlines are unable to invest in green initiatives due to lost revenue.

However, as COVID-19 infections continue to surge and governments across the globe prioritise the health of their citizens, there is some recent contrasting evidence suggesting that public enthusiasm for tackling climate change may be temporarily waning as the effects of the pandemic crystallise. A YouGov UK survey in September 2020 found that 67% of respondents thought the government should prioritise tackling the pandemic over combating climate change.

Nevertheless, it remains clear that the aviation industry has a key role to play in addressing climate change. The benefits of operating an efficient, less emissive fleet indirectly result in such airlines being considered less “risky” by insurers. Meanwhile, as legislation requiring carbon offsetting develops, airlines are at risk of bearing the additional costs of any financial penalties imposed as a result of failing to abide by such legislation, as well as the direct and indirect cost of compliance.

Related content

Climate change focus area

Climate change: How insurers can make a difference

Climate change: The role of insurers in reducing carbon emissions