European Airlines Face Major Emission Penalties by 2026

European airlines are bracing for a substantial increase in operational costs as free carbon allowances under the European Union Emissions Trading System (EU ETS) are set to be completely eliminated by 2026. The regulatory shift, combined with a significant shortfall in the supply of Sustainable Aviation Fuel (SAF), presents a major financial and logistical challenge for carriers operating within the European Economic Area (EEA).

This change will transform carbon emissions from a compliance metric into a material financial liability for airlines. The phase-out of free allowances is gradual, with reductions of 25% in 2024 and 50% in 2025, culminating in a 100% reduction in 2026, according to the European Commission. With current market prices for EU ETS allowances ranging from €70 to €100 per tonne of CO₂, a mid-sized airline emitting one million tonnes of CO₂ on covered routes could face new annual costs of €70-€100 million starting in 2026. For example, KLM's reported ETS costs rose from approximately €25 million in 2019 to an estimated €152 million in 2024, with projections reaching €325 million by 2030.

The Sustainable Aviation Fuel Dilemma

The primary tool for airlines to mitigate these costs is the use of SAF, a non-conventional fuel that can significantly reduce lifecycle carbon emissions. However, the industry faces two critical obstacles: cost and supply. SAF can cost between two and seven times more than conventional jet fuel, according to industry suppliers. More pressingly, production is lagging far behind demand and regulatory mandates.

Data from the European Union Aviation Safety Agency (EASA) shows that in 2024, only 193,000 tonnes of SAF were supplied to EU airports, accounting for just 0.6% of the total 32.1 million tonnes of aviation fuel delivered. This is a fraction of what is needed to meet the EU's ReFuelEU Aviation regulation, which mandates a 5% SAF blend by 2030, requiring approximately 2.3 million tonnes. Current maximum potential SAF production in the EU is estimated at only 0.24 million tonnes, just 10% of the 2030 requirement.

Regulatory Context and Future Outlook

These measures are part of the EU's broader 'Fit for 55' package, which aims to reduce greenhouse gas emissions by 55% by 2030. While the European Commission has set aside 20 million ETS allowances to help offset the price difference for SAF between 2024 and 2030, analysis from the International Air Transport Association (IATA) suggests this support will cover less than 5% of the total allowances airlines will need to purchase over that period.

With insufficient SAF supply and limited financial support, airlines are expected to pass the increased costs of ETS compliance on to passengers through higher ticket prices. The high cost of carbon also strengthens the financial incentive for investment in more fuel-efficient aircraft and operational improvements. However, in the near term, the industry faces a period of significant cost pressure as it navigates the transition away from free carbon allowances.

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