Developments in environmental regulation for the aviation industry have gathered momentum over the last year, notwithstanding the challenges arising from the pandemic and the related groundings.

Last month saw the publication of plans for the UK Emissions Trading System, which is proposed to take the place of the European Union Emissions Trading System when the UK leaves the EU at the end of 2020. The baseline emissions reference period for the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation has also very recently been adjusted to reflect the dramatic drop in 2020 aviation emissions resulting from responses to the COVID-19 pandemic, in the context of a heated debate over long-term environmental goals and the aviation industry’s survival. You can read more about this in our earlier blog on the topic here.

Aviation is reportedly responsible for 2 per cent of global carbon emissions, and in the last 12 months we have all had to come to terms with Extinction Rebellion protests and ‘flyksgam’ (discussed in this piece by Ashleigh Standen last autumn). The industry is very aware of the need to reduce its carbon footprint – both for green reasons and to help mitigate its exposure to oil price fluctuations. However, the drivers are frequently external factors. We had become familiar with the push by financial institutions, which are subject to increased regulatory requirements and public scrutiny, as part of a drive for increased sustainability. However, as attention turns to what emergence from the pandemic might look like and our prospects of entrenching green imperatives in our recovery infrastructure, one of the major points of discussion in aviation is the ‘green strings’ attached to government bailouts of airlines.

‘Green strings’ (or ‘green handcuffs’, as some describe them) are bailout conditions relating to climate change goals, requiring the recipient of the funding to operate in a certain way (such as limiting flights covering routes already well served by rail links), observe certain targets or restrictions (such as using prescribed percentages of sustainable aviation fuel or making identified emissions reductions), and achieve certain goals (such as upgrading a fleet to include more efficient equipment).

‘…there are arguments to be made that conditional bailouts could be a far more effective tool, and would provide the opportunity to stimulate aviation’s performance in terms of both economic recovery and environmental improvements.’

Bank lenders have been providing ‘green’ loans for several years now, following the success of the green bond market. The development of green and sustainable lending products has seen pricing reward ‘good’ behaviour, although the aviation sector has not been particularly quick on the uptake if compared to, for example, the Equator Principles framework for determining, assessing and managing environmental and social risk, widely used in project finance across almost 40 countries. These ‘green strings’ could have been a real opportunity to address this.

This is not to say that airlines have been doing nothing: IAG, easyJet and Air France-KLM, for example, have all publicised plans to voluntarily offset emissions. However, an ‘airline bailout tracker’ prepared by Greenpeace, Transport & Environment, and Carbon Market Watch[1] compiles the binding climate conditions imposed on airline recipients of funding packages to date, and currently records vanishingly few of them, with those climate conditions that have been imposed non-binding or part of existing voluntary commitments by the airlines involved. But there are arguments to be made that conditional bailouts could be a far more effective tool, and would provide the opportunity to stimulate aviation’s performance in terms of both economic recovery and environmental improvements.

From red: short-term bailouts

There is no question that finances in certain parts of the aviation industry are in a precarious state as a result of the effects of the pandemic, and bailouts have been required in some cases as a matter of immediacy. Taking the decision to provide these is a very thin tightrope for governments to walk, as the packages can mean the difference between survival and collapse for the airlines involved, and the imposition of long-term environmental conditions can seem a secondary priority when in the short term people are losing their incomes.

However, there is evidence that the lack of green strings in these packages should be a source of concern. A working paper produced by the Smith School of Enterprise and the Environment at the University of Oxford reviewed “25 major fiscal recovery archetypes across four dimensions: speed of implementation, economic multiplier, climate impact potential, and overall desirability”,[2] and found that “non-conditional airline bailouts […] recorded a markedly poor performance on all metrics”.[3] The paper illustrates the distinct performance gap between non-conditional airline bailouts (represented by the letter ‘E’) and other recovery packages in the following chart:[4]

Source: Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D., ‘Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?’, Smith School Working Paper 20-02, (2020), 10.

If airline financing packages without strings attached do not provide governments with the full value of their money to such an extent, the current crisis offers a real opportunity for those with a seat at the table to redesign these packages, including thoughtful (and binding) conditions to improve bailout performance – particularly on the climate impact potential metric. The authors of the working paper suggest, for example, that

conditional green bailouts for airlines could require achievement of net-zero emissions by 2050 with intermediate targets set at 5- or 10-year intervals (O’Callaghan and Hepburn, 2020). If airlines are unable to meet these targets, bailout funding would be converted to equity at today’s very low stock market spot prices.”[5]

The inclusion of measurable targets and financial outcomes would be a powerful motivator for recipients, and would work to ensure that future bailouts are more effective against all metrics and have a long-term impact, while still providing airlines with the short-term funds and breathing space to recover.

…to black: passenger trust

Air traffic will not recover until passenger trust is rebuilt, and in this respect aviation cannot afford to resume its pre-crisis reputation as insufficiently proactive on its environmental impact.

International travel is no longer casual. Passengers will now need to consider many additional factors when deciding to buy a ticket, from virus testing protocols to the distancing infrastructure installed in aircraft cabins, and it would be naïve to assume that any slack will be available in environmental concerns as a result of the crisis. If a customer was confident that an airline was subject to known long-term green strings and was required by government to meet genuine and substantial environmental targets, this would operate in the airline’s favour as one less thing the customer needed to research and decode for themselves when making the decision. This would be an ongoing – and profitable – benefit as passenger demand rebuilds.

Reputation on environmental matters will also speak to the future bankability of the industry. McKinsey, for example, has reported that “investors, for their part, are concerned about the effects of climate risk on airline valuations, with climate-related financial disclosures becoming more common. The frequency of climate-related discussions in European earnings calls with investors increased nearly sevenfold since 2017, according to HSBC data.”[6] Long-term green strings are a powerful way to entrench climate actions in an airline’s operations and obtain a visible commitment to move the dial on certain metrics, both of which would contribute to investor confidence beyond the initial bailout stage, with an eye on the long-term recovery after the short-term rescue stage.

…to green: environmental goals

If passenger and investor perception is key to moving the aviation books back to black, ensuring that reality matches that perception will enable the elevation to green.

Not to put too fine a point on it, binding conditions imposed on airline bailouts would have to be complied with, and failure to do so would have repercussions. The IEA Global Energy Review 2020 reports that, as a result of responses to the pandemic:

Global CO2 emissions are expected to decline by 8%, or almost 2.6 gigatonnes (Gt), to levels of 10 years ago. Such a year-on-year reduction would be the largest ever, six times larger than the previous record reduction of 0.4 Gt in 2009 – caused by the global financial crisis – and twice as large as the combined total of all previous reductions since the end of World War II.”[7]

But with the United Nations Environment Programme’s Emissions Gap Report 2019 finding that an annual 7.6 per cent cut in emissions is now required to meet the goal of limiting global warming to 1.5°C,[8] that 8 per cent decline caused by the pandemic would need to be replicated every year, as the Smith School working paper points out. The scale of the problem requires commensurate action, and binding conditions would provide the stimulant needed for the industry to make changes.

A golden opportunity

Sustainable finance is clearly becoming an important part of the financial market. The LMA and its counterparts, the LSTA and APLMA, have established a Sustainable Finance Working Group to maintain their Green Loan Principles and Sustainability Linked Loan Principles, published in 2018 and 2019, respectively. In May 2020, the LMA, LSTA and APLMA published their Guidance on Green Loan Principles and Guidance on Sustainability Linked Loan Principles, intended to serve as a framework for the development and growth of sustainability-linked loans. In June 2020, the European Parliament adopted the Taxonomy Regulation, which creates “a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment”.[9]

Structurally, a typical aviation transaction which ringfences the use of proceeds for the acquisition or refinancing of a particular aircraft lends itself well to the adoption of these principles – indeed, green loans (and green bonds) have been used to good effect in the shipping industry, for example in financing LNG vessels. It is not too much of a leap to see that the same principles could be applied to a loan for a more environmentally-friendly aircraft.

‘Long-term green strings are a powerful way to entrench climate actions in an airline’s operations and obtain a visible commitment to move the dial on certain metrics…’

However, whether this is operationally realistic remains to be seen, with electric aviation on a commercial scale seemingly some years away. As Rohan Soni touched on in his piece on the electrification of aircraft, aircraft-grade batteries are weighing in at between 2 and 3 metric tons (that’s Range Rover heavy). This means that aircraft manufacturers will need smarter materials to reduce enough weight to compensate for those heavy batteries and their cooling systems. Of course, battery power isn’t the only solution and in addition to aircraft financing structures, there are a number of projects that airlines are already involved in which support investments in alternative fuel sources – for example, Virgin’s first partly biofuel-fuelled flight in October 2019, and British Airways’ partnership with renewable fuels company Velocys, announced last summer. Some airlines are making meaningful reductions in their emissions anyway, and may in any event turn to shareholders, commercial banks or the capital markets before turning to governments for fundraising, while other airlines won’t be in a position to meet any meaningful climate-related targets.

But where the opportunity to include green strings does exist, to mobilise good intentions and make lasting change, it should be taken. The benefits outlined above are substantial, and speak both to the short and long terms. As one commentator in the Financial Times concluded, “just as they did with the coronavirus, governments must seize this chance to be much braver than they had expected to be”.[10]

[1] Carbon Market Watch,

[2] Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D., ‘Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?’, Smith School Working Paper 20-02, (2020) Abstract.

[3] Ibid, 10.

[4] Ibid, 10.

[5] Ibid, 11.

[6] McKinsey,

[7] International Energy Agency, Global Energy Review 2020. Key findings (

[8] United Nations Environment Programme, Emissions Gap Report 2019. UNEP, Nairobi. Page 20.


[10] Camilla Cavendish, ‘We must build back greener after Covid-19’, Financial Times (26 June 2020).