Welcome, everyone, to our second panel, who are here to discuss what is deliverable within the aviation, shipping and industry sectors, so it will be a very broad discussion.

Thank you for coming to speak on this panel. We really appreciate you giving up the time. Could each of you please introduce yourselves and the organisations that you represent?

I am Gareth Stace, the director general of UK Steel, which is the sector association that represents steel producers and downstream steel companies in the UK.

I am Jonathon Counsell, group sustainability director at the International Airlines Group. We are the parent company of five airlines: Air Lingus, British Airways, Iberia, Vueling and Level.

My name is Edmund Hughes and I represent myself, essentially. I am director of Green Marine Associates, but I now consult to the industry. Previously, I worked at the International Maritime Organisation and also at the Maritime and Coastguard Agency. My clients are in the industry, but I presume that I was also invited to this meeting because I was the specialist adviser to the inquiry on net zero and shipping that you did in the previous Parliament.

Mr Counsell, the Climate Change Committee pathway projects aviation emissions falling by 2040, but at the moment we are looking at continuing demand growth and, of course, airport expansion. In your view, how deliverable is the pathway? What are the critical strategic decisions that the aviation sector and the Government need to take to prevent slippage on progress along the pathway?

We work very closely with our industry to develop our carbon road maps and pathways, and we work closely with the Climate Change Committee. We agree on the four key elements that are going to deliver net zero by 2050, which are operational efficiencies, new aircraft and engine technology, sustainable aviation fuels and greenhouse gas removals. Where we differ is in the relative proportion of those, and we are, surprisingly, a lot more optimistic than the Climate Change Committee. The big difference is on sustainable aviation fuels. I will come on to what we need to see to make that happen, particularly here in the UK. The CCC have a constraint where they can only consider UK-produced sustainable aviation fuels. We think that is a major restriction. Our view is that the SAF industry will be global and the majority of the SAF we use here in the UK will be imported. For instance, in 2040 the CCC think we will have only 17% SAF—that is surprising to us, because the mandate is 22%—and by 2050 they think that will be 28%, whereas we in industry think that could be as high as 70%. It is because their constraint says it has to be all UK produced, whereas we are saying you can have imports. We think it is deliverable. Sustainable aviation fuels are going to be a very significant part of our decarbonisation, for two reasons. They are available now. Last year we had 1 million tonnes of globally sustainable aviation fuel—a small proportion of the total, but still 1 million tonnes—and this year we expect that to double to 2 million tonnes, and by 2030 we expect that to go to 15 million, so it is happening. We already have momentum. We believe there are opportunities to produce the more advanced SAF in the UK. What we need here is policy to make that happen. We have the SAF mandate, which is great, starting at 2% in January of this year, and escalating to 10% by 2030. Critically, mandates do not deliver investment in SAF capacity. You need incentives for investors, so we support the progress on the revenue certainty mechanism. The timeline is that that will not be implemented until the fourth quarter of 2026. We think that is getting very tight if you want to have SAF production here in the UK to meet your 10% target by 2030. We plead with the Government, because anything we can do to accelerate the timeline on that revenue certainty mechanism will be key. Also, there are incentives. One of the great benefits of being a trans-European airline is that we see what is happening in the EU and we can see the best of both policies. The EU has some further incentives. It provides SAF allowances—currently 20 million, worth about €2.5 billion. Currently SAF is between three and five times the price of jet fuel. These SAF allowances help to close that price gap for airlines. In addition, the EU recycles aviation ETS revenues. We put several billion euros every year into the EU emissions trading scheme. They recycle some of that to support the decarbonisation of our sector, particularly sustainable aviation fuels. We do not do that in the UK. We think those two additional policy elements can help us to establish a SAF industry here and get us on the way to net zero by 2050.

Thank you for that very clear answer. I have a couple of follow-up questions. You mentioned some absolute numbers in terms of millions of tonnes of aviation fuel; how many millions of tonnes is the total global market? What sort of percentage are we talking about?

The total today is about 250 million tonnes of jet fuel, so 1 million and 2 million are relatively small numbers, but it is working at scale. There are about 20 plants in the world producing SAF. We have proven that it works; we just need to scale it. By 2030, we think that will be 15 million tonnes, so we are getting to about 5% of global fuel. As I said, by 2050 we think that could be 70%. Our global industry association, the IATA, did a very extensive study earlier this year looking at the availability of feedstocks to meet that 70%, which will be about 400 tonnes to 500 million tonnes by 2050. It says there is clear evidence that we can get to about 400 million tonnes by 2050. So we think we can get there with the right policy support.

You mentioned imports; where do you envisage imports coming from?

All over the world. Last year, at IAG we were the largest procurer of SAF in the world, with 162,000 tonnes—16% of the global total. A third of that came from the United States, a third came from Asia, and the rest from Europe and the UK. The beauty of SAF is any country in the world can produce sustainable aviation fuel because there are eight different pathways, so many different feedstocks. It is beautifully diversified, and most countries are now looking at how they can establish their own SAF industries. We have 12 mandates around the world, and I expect that to double in the next two to three years as countries want to get into the production of SAF. It will be a global industry.

Presumably those countries that are exporting will also be expanding their own aviation industries?

Absolutely, as they develop their own mandates. Today, China is quite a big producer of sustainable aviation fuels, but they are looking at producing their own mandate. Some of that will get diverted for their own domestic use, but they are building SAF plants so quickly, we think there will still be surplus to meet the global demand for SAF.

Dr Hughes, the CCC expects major shifts in maritime decarbonisation by 2040. How confident are you that shipping can deliver on that pathway? What strategic choices or signals are needed from Government, sooner rather than later, to make that pathway credible?

I am probably confident about domestic shipping. I noticed that the CCC phrased its conclusion in terms of domestic and international shipping, because of the way they are controlled. You obviously have UK control over the domestic fleet; the international fleet is another matter. In many respects, the decisions made that we are seeing throughout the IMO will affect how international shipping can achieve decarbonisation. There are measures in place, not just here in the UK with the consideration of extending the ETS to the international fleet. If you look at the European Union, for example, it also has a GHG fuel intensity standard that is applied to the international fleet, and that has another effect in terms of decarbonisation. In some respects, there has been a waiting game to see what the IMO does in terms of its regulation. There was hope it was going to adopt this net zero framework in early October. Unfortunately, the meeting was adjourned without a decision, and it is no coincidence now that a decision has been made to go forward with the UK ETS extending to international shipping as well. It was already agreed to consult on that, but it is the clear intention. While I can be confident about the domestic fleet and you can apply more technologies, such as electrification, fuel cell technology and so on, that is something you can do at a domestic level. When it comes to the international fleet, it becomes much more challenging.

Can you say a bit more the strategic choices needed from this Government within the next few years to make the pathway credible?

It depends on what you mean by “strategic choices”. If you mean by policy in terms of regulation, I have already mentioned the extension of the ETS to be applied to domestic shipping. There is a need to perhaps look at fuel standards, and what fuel the ships have to use to comply, and strengthen those standards over time, because that will then drive them to move towards using the lower-carbon-intensity fuels. For international shipping, it is very difficult to judge what UK Government can do on their own. That is a very difficult thing to say.

Mr Stace, I have a fairly similar question on industry. The CCC pathway relies on big increases in electrification by 2040, with hydrogen and CCUS accounting for the rest. What is your assessment of how deliverable that pathway is? Are there any decisions that the Government need to look at including in the seventh carbon budget delivery plan to ensure that industry meets that CB7 trajectory?

My answer could be really simple: it would be for the UK to move from blast furnace steel production to electric arc furnace steel production, and that is our plan. We published a net zero road map in the summer of 2022—the first country, in terms of a steel plan, in the world to do that. That would be quite a simple solution. The problem we face is not only the steel sector in the UK being uncompetitive in a global market, mainly because electricity prices are significantly uncompetitive here compared to Europe and far beyond, but that although uncompetitive electricity prices and the procurement of steel by Government are key issues for us, what blows everything out of the water is the rapid change in the global steel sector. We now produce the lowest amount of steel since the 1930s. Imports are 70% of UK steel demand. Why is that? Because there is a global overcapacity of something like 700 million tonnes of steel. We make 4 million tonnes, so 700 million tonnes floating around the global marketplace for steel, traded internationally, is very difficult for us. An example would be that hot-rolled coil sold in the UK would be something like £525 per tonne, but it lands in Europe from China, Vietnam and elsewhere at £100 cheaper than that. We would sell hot-rolled coil in the UK for £525, but you can buy it for £100 cheaper. We are not competitive. What I really want to talk about is the Government making us competitive by addressing energy prices. The Government could do all that they are doing and more, yet if they do not tackle the trade issue and deliver UK steel quotas that will protect us from unfair trade from China, Vietnam and elsewhere, everything the Government do, and anything that we do to move to net zero and electrification, will mean nothing because we will be completely out-competed in our own market, and it will not be 70% import penetration—it will be 100% and we will be out of business.

We have referred to this section as the industry section, but I should say that I would not like to suggest that UK steel is the only industry we have heard from. We had a roundtable with a huge number of different industries contributing. I wanted to get that on the public record.

Thank you for joining us today. In respect of delivering on the seventh carbon budget, I would like to explore some questions around technology and infrastructure readiness. Beginning with aviation, Mr Counsell, could we draw some specific tangible aspects of progress that would be required between now and the mid-2030s to scale up SAF and e-fuels, and also deliver on airspace modernisation to improve fleet efficiency and prepare airport infrastructure for new fuels?

One of the beauties of sustainable aviation fuels is that they are called drop-in—basically, you do not need to modify any of your aircraft engine or fuel supply infrastructure. They are essentially very chemically similar to jet fuel; they are just made from renewable feedstocks. That is one of the elements that makes SAF very attractive: you do not have any of the problem of having to modify infrastructure. You do have to build the supply infrastructure—you have to build the plants, which is where the mandate, coupled with the revenue certainty mechanism and the allowances, comes in. The other piece we would look for from the UK Government, which we have again seen in Europe, is flexibility on feedstocks. There are a whole range of different feedstocks that you can use. The UK is currently quite restrictive. Early on, that makes a lot of sense, because we are all very concerned with ensuring that they are as sustainable as they can be, but it is becoming quite clear. One example is cover crops. These are crops that are used in rotation to help to restore vital nutrients into the soil. They can be used to produce sustainable aviation fuels, and they are adding to food crops, not taking away. In the last two years, the EU has allowed cover crops to be used to produce SAF, but we do not have that in the UK. That is another piece that we need to look at to help increase the supply of sustainable aviation fuels. On the other element, airspace modernisation, there is a huge opportunity here. In the UK we still have an airspace that was designed in the 1950s. Can you imagine the road structure if it had no motorways or dual carriageways and it was B and C roads? That is what we have in airspace. If we moved to best practice airspace, and we do not actually have to modernise anything—all the aircraft are capable, as are the airports; we just need to redesign the airspace—we could deliver a 10% improvement in our carbon efficiency. Across Europe, that is 20 million tonnes of CO2 per year. If you look at the elapsed-time graphs of what happens, and just look at the stacking around Heathrow, you can see we have four stacks around Heathrow, and the average stacking time is almost 10 minutes. That is all wasted flying and additional CO2. Maybe that links to the airport expansion question. My understanding is that there would be no point in building additional runways in this country with the current airspace, because you could not provide the capacity, so they go hand in hand.

Before you move on, Mr Counsell, can you put it in layman’s terms? When you talk about routes operating in the same way as they were in 1950, people who do not follow these things may think the sky has not changed and is not the same as the M5 or the M6. Can you explain what you actually mean?

There are very restrictive corridors, and those have not changed.

Was that for noise pollution purposes?

No, it was the navigational technology at the time—it was these beacons. You had to fly from these fixed ground beacons, which basically designed the network. Today, we have satellite navigation, so you can basically fly an aircraft anywhere. We have the capability to be ultimately flexible in where we can put aircraft.

What are the barriers to that? It would seem an obvious thing to do, so why is it that no one has done that?

There is recognition that we need to do it, and NATS have been true champions of this. It is a huge amount of work. There are some noise issues, because currently there are very clear flightpaths and we know who is going to get that noise. If you change the airspace system, the existing people will get less noise, but more people will get new noise. The argument goes that aircraft today are so quiet that actually, for a lot of people, that noise is far less noticeable than it would have been. A good example that I use is that the metric we use is 57 decibels. Science says that is the point at which noise becomes annoying—the same as standing by a road and listening to a car. The 57-decibel footprint of a 747 would have covered most of London. Today, for the most modern aircraft, it sits within the perimeter of Heathrow airport. It is basically a decrease in the noise of more than 10 times. We are in a position where noise is less of an issue for airspace modernisation.

You touched on the plants and the feedstock, which was very interesting. When are the latest viable dates for when we will start to see SAF plants and fuel transition infrastructure, and for the airspace upgrades to be operational if the sector is to remain on the Climate Change Committee’s pathway?

If I focus on the SAF plants, because that is the most critical element today, we have SAF produced here in the UK—you can produce it in existing refineries, so the Phillips 66 refinery on Humberside is producing SAF—but we only have a small number of refineries, so the amount of SAF we can get from those is limited. We need to build dedicated SAF plants. The key trigger is the revenue certainty mechanism. That is like the contract for difference that was used for offshore wind. We need that. It is a requirement for investors. The investors said they will not invest in SAF plants until we provide them with some sort of contracts for difference. That is due to come in at the end of 2026. From then, we would look to have plants achieve financial close and start construction in 2027. They can take two to three years. The big milestone for us is the 2030 mandate, because the UK Government has produced what it calls a HEFA cap, which is for 1G SAF, so you can only use so much of the current SAF that is available. There is quite a large volume of advanced SAFs. The plants in the UK are going to produce advanced SAFs, and we need about 350,000 tonnes by 2030. Today there is zero. You can see that, as an industry, we are getting quite nervous that if we get the policy in place at the end of next year and we start construction of the plants, we have to have that SAF being produced by 2030. It is tight, but one of the opportunities is to be more flexible on imports in the feedstocks. We are hitting some pretty critical path items when it comes to SAF production. There is no reason why you cannot do that in airspace modernisation today.

Would it cost to get it to where it needs to be?

We can have a look at the costings, but the technology is available. The current Government would probably be looking at aligning it with airport expansions. It would make sense to do it once you know what your national airport expansion looks like, because you have to design it around what the future airports look like.

Dr Hughes, for the shipping sector, our evidence shows that there is major uncertainty around fuel availability, port readiness and international alignments by 2040. What are the biggest obstacles that could stop shipping delivering on that pathway? What does the sector need from the Government in the next decade to overcome those obstacles?

I would echo the comments about uncertainty—that is the biggest issue now for the industry. Where is the fuel to help to fuel the ships going to come from? We are also competing with other sectors for those same fuels. With the response to the EU instruments, for example—I mentioned FuelEU maritime before—the shipping industry is using biofuels as one of the options because they are drop-in, and they do not have to necessarily change and spend a lot of capital expenditure on the engine technology. We also saw an initial burst of interest in methanol as a fuel, but that has now waned because of the lack of certainty over the fuel supply, particularly green methanol, to the extent that we are seeing the early proponents of methanol now moving back towards using LNG gas fuel, and they are ordering ships to use gas-fuelled ships. It is a complex picture, as we heard in the previous panel, when it comes to where these fuels are going to come from and what energy sources are going to be provided to industry. That just breeds uncertainty into how we are going to move forward. To go back to the previous questions about the strategy of the Government, they are obviously looking at things like green corridors and further looking at how you can promote shipping in those routes to be greener. One thing you can do is to try to work on bilateral agreements with other states in terms of the energy at each end. We see this initiative called the clean energy ministerial, whereby these clean marine hubs are generated in ports. It is not just the port; it is about the whole supply chain to the port, because that is critical. You can produce the fuel, but unless you can get it to the port and get it to the ship, you are not going to move forward. That CEM initiative, which the UK is a member of, would be a potential way for the UK Government to try to extend beyond just national consideration. As I said before, it is within your control and power to do that, to move towards those ships, to say you have to meet these certain goals and targets, but to do it at an international level you will have to give confidence to international shipping about the fuels that they can utilise at each end of their voyage. Ultimately, they have to have confidence that they can fuel the ship.

It sounds like it could be an important lever for upcoming trade deals that the country may wish to make.

Potentially. I think the UK is president of the G20 in two years’ time, so there may be an option to bring it to the table there as an issue. I don’t know. You also asked about infrastructure, which is another key part of this. I mentioned before the ports and the hubs and the bunkering that will be needed. Ultimately, it has to give confidence to the market to make those investment decisions, as we heard in the previous panel. It is about doing that. At the same time, we can make improvements. It is that confidence that is really lacking.

Thank you. Mr Stace, from your perspective what needs to happen over the next 10 to 15 years to ensure that we can deliver on carbon capture, usage and storage, hydrogen networks, and grid capacity so that we can support your sector?

As I said before, it is us moving from blast furnace production to electric arc furnace production, and that needs grid connections. We have six steel sites in the UK, as in six companies that make steel in the UK, four of which already operate with electric arc furnace technology. Two are blast furnace. Tata Steel has already embarked on that journey to move to electric arc furnace. The remaining one is British Steel in Scunthorpe. What does it need? It needs that grid connection. When it was looking at a very large electric arc furnace in Scunthorpe, it was told that the grid connection would come in the mid-2030s, which is obviously far, far too late. So it went to two electric arc furnaces, one in Teesside, one in Scunthorpe, and that seems like that would be a much easier solution. Again, if we are paying 25% more for our electricity than a steel plant in France, why would you make that investment here in the UK when you could easily make it in France, produce the steel and sell it into the UK? We need a plan. The Government currently control British Steel. It is still owned by the Chinese but the Government control it. Until there is a plan from Government about how British Steel will move from blast furnace production to electric arc furnace production, it will be very difficult for Government to produce the steel strategy they say they are going to produce, because that decision on how we are going to get there is so significant. How are you going to attract either Government investment in making that shift or private investment, and therefore make that investment attractive? That is around the grid bit, but it is also about how we move to 100% electric arc furnace and slash our emissions significantly, by over 90%. In terms of carbon capture, usage and storage, that would not be needed for our sector because we would not have the carbon emissions that we do today. Hydrogen for us is way off in the distance in terms of competitive green hydrogen. It is something that we think about but not in any way in the short term. I think that is a long way off for steel production in the UK.

Why is it further away than it might be for things like automotive? Is it not comparable?

More because, as I said in my first answer, steel is traded globally, and the price is set globally. If you think that 92% of all steel produced in the world carries no carbon cost whatsoever and has Governments that have no carbon policies whatsoever, how could we compete if we are using expensive hydrogen in that global market?

You have outlined some of the challenges. Looking ahead, do you see any emerging bottlenecks that risk industry not being ready for the seventh carbon budget? Is there a deadline by which those need to be resolved?

No. I talked about the transition we want to do. If we look to that budget period, say in 2040, for us it is about whether we can survive in the next 12 months, two years and perhaps three years. If we can—and in the plan I have set out, we can do that and make that investment—I think all of where we need to get to will be fairly straightforward. I mean straightforward compared with some other very difficult sectors. It is more about whether we can survive in the next few years. That is why from my point of view the Government’s anticipated steel strategy is the only game in town. If we did not have a Government that wanted to deliver a steel strategy for the UK steel sector, it would be—when I say the end of the steel sector in the UK, I think we would resize and become a 2-million-tonne production country, but not where we are now. We would lose further jobs, and we certainly would not be growing in the future. We should be growing in the future because the global demand for steel ever increases. We should be making the steel here and producing the steel here for our own economy, and displacing the 70% of imports that we unfortunately see at the moment.

I want to ask some questions about costs and where they should or could lie. Mr Counsell, we have discussed SAF, and you mentioned things like upgrading the fleet, and that all requires significant investment. In terms of the costs, where do you see the balance lying between the airlines—yourselves—passengers and the taxpayer?

We support the polluter pays principle. Ultimately, the costs of the net zero transition have to be borne by airlines and our passengers. We believe that if we have appropriate policy in a timely fashion, the costs will be manageable. The biggest single cost we are facing at the moment will be through the SAF mandates. SAF today is three to five times the price of jet fuel. Here in the UK we are looking at 10% by 2030. In the EU we are looking at 6%. When I talk about appropriate policy support, those SAF allowances and the recycling of ETS revenues in the EU is what they are doing to try to manage that short-term cost and impact on airfares in Europe. We are excited about the potential linkage of the UK and the EU emissions trading schemes, because we believe that is a great opportunity for us to replicate those two policy instruments that will help us manage some of the costs.

Where does the balance lie between airlines absorbing costs and passing them on to passengers?

That decision will be down to the individual airline, but the cost of the net zero transition is going to be a cost of flying. It is going to be significant. One of the critical asks for policy is that you do not create competitive distortion. We have to apply policy equally across all airlines. Today we have that: the mandates apply equally across airlines by route and so on. You cannot impose costs on any particular airline. Our view is that ultimately this becomes a cost of flying.

Dr Hughes, on shipping, you are going to have all these additional costs in regard to upgrading vessels, fuel and so on. You also made a distinction earlier between domestic and international. How do we ensure that the extra costs do not put our shipping at a huge disadvantage in competing with other shipping fleets?

At the domestic level, you will not have competition. They are domestic ships. At the international level, it depends on the policy instrument you design. If you are using an emissions trading system, for example, that is frankly viewed just as a tax on the shipping sector, which it will pay as part of polluter pays. It will potentially pass the cost on through surcharges. The consultation document recognises that. CMA CGM has just announced that it is going to add a 46% surcharge from 1 January next year because of the extension of the EU ETS to 100% scope of emissions. They will do that. They will pass the costs through.[1] This is why I come back to what I said earlier. If you want to move towards decarbonisation, you have to look at the technical standards that ships will have to meet as well. That will drive them to look at the fuels they have to use on the ship, and that is a different perspective. There is no doubt that those fuels are significantly more expensive, if they are available. Frankly, they are not available at the moment, but those that are being produced are estimated to be at least two or three times more expensive than current fuels used by shipping. Again, if they have to absorb those costs and other competitors are not absorbing those costs then yes, there will be unfair competition.

Is there some way of helping the UK shipping sector in general? If it is going to be disadvantaged by doing that, are you suggesting that there should be some Government support?

I am not sure how popular it would be to spend taxpayers’ money and give it to private ship owners. As long as there is fair and even competition, that is the key in shipping. You have to have a level playing field. If you have a level playing field, the industry will find a way to absorb the costs. That is the nature of shipping. If it is uneven then yes, you create market distortion.

Thank you. Mr Stace, you have already mentioned energy cost issues with regard to retrofits and all the related costs that there might be. How should those costs be fairly distributed? Who should pick up the tab?

I could be really blunt and say I think we should just be exempt, as we have been. If you think of the ETS, we have free allocation, because if you pile the costs on to us, we will be uncompetitive and our competitors will just flood our market, as they have done. Let me think about an example from last week, the afternoon of the Budget. We digested the Budget, and then an announcement came out an hour or two later that said that with the UK carbon border adjustment mechanism, which comes in in 2027, by 2030 they will start phasing out free allocation for us. We know that that would really add significant costs. If you think that British Steel at the moment pays £60 million a year in carbon costs, by 2035 that would be over £500 million a year on carbon costs. It will make us less competitive. It will not at all deliver what we ultimately want to deliver in terms of green steel. It will just mean that we will see more imports. We should not see the cancellation or the withdrawal of free allocation because CBAM comes in, when CBAM is totally untried, untested and we do not know if it is going to work. The EU has said, “We might do that, but we want to see whether CBAM works first.” That is what the UK Government should do, not just say today, “Yes, we’re going to phase out free allocation to the sector in the UK.”

Across all the different sectors, there are going to be some residual emissions during the period of the seventh carbon budget, requiring greenhouse gas removals. What in your view is the fairest way for each sector to contribute to the cost of those removals?

I suppose I was thinking about where those emissions would come from. Would they be in our use of natural gas at that time? We talked about carbon capture, usage and storage, and there has been some work in the steel sector looking at using that gas to create product. From our point of view, I hope that our emissions would be low enough and would have gone down so much that there would not be those costs. I am making it seem like our problem would be solved. It is just that we are so carbon intensive at the moment when we make steel from iron ore that when we remove that we will not be that carbon intensive.

The point was made earlier about the use of funds collected through the emissions trading system by the Government. I certainly welcome what the Government have done with UK SHORE, for example, in terms of reinvestment. It is £400 million from the taxpayer and £700 million from private funds. Those initiatives are fantastic and help to stimulate demand. It also helps to stimulate ideas, innovation, jobs and things like that, which is brilliant. The thing is, though—and I understand that the Government have a principle of no hypothecation—it is a case of what they do with that money and how they can help those sectors, such as the hard-to-abate sectors, to deal with some of the challenges. It is really going to be very difficult in that transition phase to try to handle all the various risks, not least because, as was said earlier, ships are constructed for 20 years. When you are looking at what fuel strategy you are going to take in that 20-year period to understand how you are going to manage those risks, it would be nice to see some Government intervention to support the sector.

Greenhouse gas removals are going to play a critical role within the aviation decarbonisation pathway. By 2050, somewhere between 10% and 20% of our residual emissions will have to come from that, so we are actively looking at how we create a price signal to invest in greenhouse gas removal technology. We think that, in respect of eligibility within the emissions trading scheme, if a proportion of your compliance to the ETS can be achieved through greenhouse gas removals, that is going to help to create a price signal to invest in that technology. To give all credit to the Government, one of the things they did with the SAF mandate is that it is a greenhouse gas-based scheme. Previously, it was a volume scheme. They said, “No, we’re going to reward on CO2 reduction.” Therefore, if we use GGR technology, aligned with some of our SAF projects, we get rewarded. There is already a price mechanism, but that is when you use GGR technology linked to your SAF. We think that ETS move will be a big step in helping to get investment in this technology.

Operational efficiencies and greenhouse gas removal technology.

I can understand why they would say that, because of the restriction they have on SAF. Because they can only include domestically produced SAF, they have had to be very pessimistic about the role that SAF can play—that is 28% in 2050 versus industry’s 70%. I can understand that they would have to look at something else. Our view on demand—

It baffles me, because it makes absolutely no sense. SAF will be a globally supplied industry. It is apparently something to do with one of the accounting restrictions that they have imposed upon them. They recognise it as a restriction and in future road maps they will look at imported SAF. It is partly to do with whether they can properly account for the lifecycle savings of imported sustainable aviation fuel.

No, 22%.

I will refer to the IATA study, which is probably the most robust and comprehensive study. That is our industry association. This year it says that there is enough feedstock to produce 400 million tonnes of SAF by 2050, so we do not think there will be a restriction—

That is one small part of it. There are a dozen—

Cover crops, no. We are talking about global supply. Most of the supply will not be going to Europe. Europe will only represent 20%—

As it should be. We absolutely support that. We should not be using any crops that compete with food supply. That is certainly one. We have used cooking oil. We have waste biomass. We have third generation. Cover crops are only one element. Most of the global supply of SAF will not be going to Europe because most of the growth in emissions is in the rest of the world. I was in Asia earlier this year; the SAF market is growing incredibly quickly—

No, they want to be a global supplier. China wants to be a global supplier. On your point on demand management, ICAO is our global regulator. It did a very comprehensive study looking at what the most effective policy instruments are for addressing climate change. It looked at demand management—essentially, looking at taxes—and it said that that is 22 times more expensive per ton of CO2 than a well-designed, market-based measure. Because a tax does not address your carbon, it addresses your demand. Therefore, it is not the cost-effective way to address it. We fully accept, though, that there will be a demand impact of the net zero transition. Rather than implement demand measurement policies, in the sustainable aviation road map there is a wedge called demand impact, and basically what that says is that if you—

Exactly. As you pay for SAF—

Basically, it says that through the cost of the SAF through to 2050, plus the cost of the greenhouse gas removals, growth in the industry will be 15% lower than it would have been. You are still going to grow but it will be 15% lower, resulting in 14% lower—so we fully accept that the net zero transition is not for free and there will be a demand impact. The difference is we do not believe taxes are a cost-effective way to address carbon emissions.

That has changed, of course. They have all gone. All those free allowances in the ETS have been removed. We are the only sector in Europe that no longer has any free allowances.

There will be a demand impact, yes, which there is through the ETS.

You mean pay the full price for the SAF? Of course.

Yes, of course.

Yes.

We fully accept that carbon pricing is a legitimate mechanism to incentivise investment in SAF. Certainly, the ETS scheme helps to build the business case for investment in sustainable aviation fuels. Currently, allowance prices are around €80 per ton, so that is helping us to build the business, because it is doing what it is supposed to be doing. The ETS is only on intra-European travel. All the free allowances will be gone from next year. As I say, we are the only sector, maybe with maritime, that no longer has any free allowances. We are paying the ETS on all our emissions for intra-European. We do not believe that the ETS will be extended to long-haul flying, because that was attempted in 2012 and we narrowly avoided a global trade war, because the rest of the world will not accept European policy to address their carbon emissions. That was very clear and there were some pretty drastic moves by some major countries in the world to prevent that. So we do not believe that is the case. Our view on CORSIA is that we are a global industry, so we need a global scheme. CORSIA is the only global carbon pricing instrument. It was a compromise when it was agreed in 2016, and we agree that it has to be strengthened. Currently, it has very little incentive in terms of investing in sustainable aviation fuels, because the allowance or the carbon credit price is just too low. Therefore, we need to strengthen it. There are three areas to strengthen it. Currently, it is only until 2035; clearly, that needs to go to 2050, because we have net zero 2050. It is only emissions over a baseline; it needs to cover all our emissions. Our view is that it should also include eligibility for greenhouse gas removals, because we believe they are a more robust mechanism than carbon offsets.

We believe that there has to be a pricing mechanism to incentivise. Greenhouse gas removals are for—

In the emissions trading scheme.

Industries have to pay for greenhouse gas removals, because that is the polluter pays principle, but the difference with GGR versus SAF is that every sector will be needing greenhouse gas removal.

We are happy that they should be included within our carbon pricing instruments, the ETS and CORSIA, so that everybody that is in those schemes, particularly the emissions trading scheme, will be supporting the development of that technology.

The net zero framework as drafted was a combination of a technical measure and an economic one: carbon pricing. Frankly, the technical measure, as I have alluded to, was a fuel standard based on the GHG fuel intensity of the energy used by the ship. That is something that the IMO, as a technical body of the UN, is very used to implementing and regulating. The economic one is where the political consensus broke down, because of the implications of carbon pricing being applied to a global sector. We have a very similar situation to aviation. How that can be rectified is another matter. It is interesting because on the point about the aviation sector having this potential trade war, the EU learned its lesson from that and decided it would only apply to 50% of the voyage. The other 50% essentially is to the other person at the other end of the voyage. That is what the UK has essentially now reflected in its consultation document on the extension of the UK ETS to international shipping. You can adjust it, and industry is willing to accept that. There was a consensus in the industry to support carbon pricing. First of all, it was a levy, and that was supported by over 50-plus Governments of the IMO. The industry, again, fully supported the net zero framework because, again, going back to the point made about aviation, global regulation is the best way to achieve the decarbonisation of or net zero for international shipping. It is always this dichotomy or dilemma between domestic and international, and what is the right policy instrument to address those sectors.

Yes, if that is okay. Thank you. Unfortunately, it appears that votes may come a little earlier. The evidence we have heard has been very full, but we may write to you gentlemen with further questions. I will bring the second panel to a close, with thanks to you all for appearing. [1] The surcharge percentage figure is 43%, not 46%. (SCB0071)