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Sustainable Flying:
Biofuels as an Economic and Environmental Salve for the Airline Industry

EQ² Email: enquiries@eq2.eu.com UK: 0845 371 2520 International: +44 7921 253 222

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Executive Summary

Feb 2010

The aviation industry will need carbon-neutral biofuels as a feasible and desperately needed way to reduce its reliance on fossil fuels and cut its greenhouse gas emissions. The EU Emissions Trading Scheme (EU ETS), starting from 2012, will put a direct cost on carbon emissions for all flights into or out of Europe. It is likely only a matter of time before most flights around the world will be similarly taxed. More than just the carbon risks, the airline industry has been battered by unstable jet fuel prices and biofuels offer a potentially more stable (not to mention more sustainable) fuel source. This report provides a review of the development of biofuels for aircraft and a critical examination of the economic and climate impacts of the aviation industry moving towards the large-scale adoption of biofuels. • Bio-derived Synthetic Paraffinic Kerosene (Bio-SPK), made from Jatropha, Camelina, algae or halophyte feedstocks, is the most promising candidate for alternative jet fuel and test flights have successful proven its feasibility as a replacement for conventional jet fuel. Although not commercially viable yet, the EU ETS offers a strong financial incentive for the adoption of bio jet fuels. Based on the current EU ETS price for carbon in 2012 of €15 and 2009 average jet fuel price of $1.69 per gallon, every gallon of jet fuel burned would incur carbon costs of an additional $0.21, which is a total cost of $1.34 billion across the industry. This is a premium of 12.4% that would not apply to biofuel, but would help make it more cost competitive. Further out, the EU ETS will impose costs of $9.56B in 2020 and $19.48B in 2030 on the airline industry. This will be equivalent to approximately 3.6% of the total operating cost of the EU aviation industry by 2030. While airlines may be able to pass along some of these costs to consumers, it is too competitive a market for the industry to reap windfall profits, particularly in later years when the industry needs to buy most (and likely all) of its carbon credits. Based on the Air Transport Action Group (ATAG) industry body assumptions of 15% and 30% consumption of biofuel in 2020 and 2030, the EU aviation industry will be able to avoid 35 million tonnes of CO2 emissions in 2020 and 100 million tonnes in 2030. Such reduction in emissions is equivalent to $2.01 and $5.84 billion of savings on carbon expense in 2020 and 2030, respectively. Based on the same assumption of aviation biofuel consumption, the global aviation industry will be able to avoid 129 million tonnes and up to 420 million tonnes of CO2 emissions in 2020 and 2030, respectively.

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If the global aviation industry is to achieve the International Air Transport Association (ATA)’s aim of carbon neutral growth from 2020 solely by biofuel consumption, it will need to use approximately 46.1–72.0 billion gallons of biofuel in 2030, which is equivalent to 38-49% of total jet fuel consumption.

The internalisation of billions of dollars carbon costs by the air transportation industry will provide a significant financial incentive for the development and adoption of new carbon reduction alternatives. Biofuel offers the only near to mid-term solution for the industry to significantly reduce its climate impact, with the added benefit of diversifying away from non-renewable fossil fuels.

CO emission (Million metric tonnest)

$200 Credit Cost ($ bn) $160 Biofuel Cost ($ bn) Jet Fuel Cost ($ bn) $120

1600 Avoided CO emission 1200

Expense ($ bn)

800

$80

400

$40

$0
201 0 201 2

el) el) el) el) el) iofu % biofu ral biofu iofu % biofu t no b no b 30 ( 030 (30 (C neu 20 ( 020 (15 20 20 2 2 0 203

0 2010 2020 2030 Low 2030 High (15% biofuel) (30% biofuel) (15% biofuel)

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Content
1. Introduction: Biofuel in aviation
1.1 1.3 The challenges faced by the aviation industry The feedstock 1.2 Bio-derived Synthetic Paraffinic Kerosene (Bio-SPK) 1.4 Environmental benefit 1.5 Economic viability of Bio-SPK 1.5.1 Price and production cost uncertainties 1.5.2 Oil price pressure on biofuel producers 1.5.3 Aviation industry’s dependence on fossil fuel 1.5.4 Emission trading 1.6 Other alternative jet fuels

2. Environmental and financial impacts of aviation biofuel
2.1 2.2 2.3 Main assumptions Biofuel, EU aviation and EU ETS Biofuel and carbon-neutral growth 2.3.1 Outlook of global aviation CO2 emission 2.3.2 How much biofuel does the aviation industry need in order to achieve carbon-neutral growth from 2020? 2.4 Global emission trading scheme for aviation 2.5 Aviation biofuel as a competitor to conventional jet fuel 2.6 Biofuel vs. Carbon offsetting

3. Bio-SPKs – the future of aviation fuel?
Business Sustainability

4. References

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1. Introduction: Biofuel in aviation
Kerosene-type jet fuel has been the prevalent fuel used by commercial aircraft since World War II when it became financially preferable to gasoline-type fuels. The specification for the fuel was established in the 1950s and has not changed since. Such a monopoly of fossil fuel in the aviation industry is set to change with the next generation of new, sustainable jet fuel – biofuel. In 2008, airlines started to carry out test flights using jet fuel blended with biofuel. Virgin Atlantic was the first to carry out a test flight with a blend of coconut-derived methyl ester with conventional jet fuel. Later in 2008, different airlines started to join the aviation biofuel testing trend and perform test flights with biofuel derived from a variety of feedstocks. Up to December 2009 there were five successful biofuel test flights performed by Air New Zealand, Continental Airlines, Japan Air Lines, Qatar Airways and KLM. In addition, Jet Blue, Interjet and British Airway have already scheduled their biofuel test flights in 2010.

1.1. The challenges faced by the aviation industry
Figure 1 - Jet Fuel and Crude Oil Price ($/barrel) There are two main drivers for the development of a sustainable alternative aviation fuel. The first driver is the financial risk of the dependence on conventional fossil fuel-derived jet fuel. Shadowed by the suspicion of peak oil and no sign of decline in demand for energy and coupled with a range of market uncertainties (weather events, U.S. Dollar trend, etc), jet fuel price is not likely to be stable Source: Platts, RBS and such volatility has and could continue to exert enormous pressure on the operation of the airlines. Although such risk can be financially hedged to some extent, the problem is not resolved as long as the industry still depends on nonsustainable fuel.

The problem is further worsened by the climate change crisis. The environmental issues are so important nowadays that they are given the same priority as the economy on the national and global agenda. Translating these environmental issues into business operating terms is leading to additional regulations and compliance, which means a tougher operating environment. Companies endeavour to remain profitable while paying a considerable amount of attention to their environmental footprint. A company’s obligation on environment has become the second driver for the development of sustainable aviation fuel.

1.2. Bio-derived Synthetic Paraffinic Kerosene (Bio-SPK)
Haunted by these operational pressures, airlines are looking for ways to become independent of conventional jet fuel and the use of bio-derived jet fuel is considered to

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be the way forward. One of the most promising candidates for alternative aviation fuel is Bio-derived Synthetic Paraffinic Kerosene (Bio-SPK). Bio-SPK is the biofuel used in all the test flights mentioned above, apart from Virgin Atlantic’s. It is the most tested type of biofuel by the aviation industry and has shown very similar performance levels to conventional jet fuel. In understanding the potential of Bio-SPK to the aviation industry, this paper will provide an informative and critical account of the environmental and financial benefits and uncertainties of Bio-SPKs both to airlines and the industry as a whole.

1.3. The feedstock
To understand the significance of the Bio-SPKs, we can start with the figurative and literal roots – the feedstock. The production of transportation biofuels using food crops, such as biodiesel and ethanol has generated enormous social and environmental concerns. One of the most furiously debated topics with regard to biofuel is the conflict between food and fuel production. A small, but significant portion of food crops (such as corn for ethanol) have been turned in to biofuel, leading to a fall in the output and
Figure. 2 - The four most promising feedstock for “second generation” biofuel 1

Camelina
Camelina has high lipid oil content and the primary market of its oil is as a feedstock to produce renewable fuels. Camelina is often grown as a rotational crop with wheat and other cereal crops when the land would otherwise be left fallow as part of the normal crop rotation program.

Algae
Algae is potentially the most promising feedstock for producing large quantities of sustainable aviation biofuel. These microscopic plants can be grown in polluted or salt water, deserts and other inhospitable places. They thrive on carbon dioxide, which makes them ideal for carbon capture (absorbing carbon dioxide) from sources like power plants. One of the biggest advantages of algae for oil production is the speed at which the feedstock can grow. It has been estimated that algae produces up to 15 times more oil per square kilometer than other biofuel crops.

Jatropha
Jatropha produces seeds containing inedible lipid oil that can be used to produce aviation fuel. Each seed produces 30 to 40% of its mass in oil and is capable of growing in a range of difficult soil conditions, including arid and otherwise non-arable areas. The seeds are toxic to both humans and animals and are therefore not a food source.

Halophytes
Halophytes are salt marsh grasses and other saline habitat species that can grow either in salt water or in areas affected by sea spray where plants would not normally be able to grow.

1

Beginner’s Guide to Aviation Biofuel, Air Transport Action Group (2009)

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storage of edible crops to historically low levels; a study by the World Bank in 2008 suggested that biofuel production has caused the world’s food prices to surge by 7075% 1. This, furthermore, led to another long-term environmental problem; the alternation of land use and deforestation, which contributes significantly to GHG emissions, thus causing an increasing rate of climate change. Moreover, all of these biofuels cannot be used directly by aircraft. Refining biofuel to aviation fuel involves energy-intensive manufacturing processes and in so doing, the cost and life-cycle GHG emission of these processed biofuels increase substantially and can exceed that of conventional jet fuel. While commercialisation of food-derived biofuels may be unsustainable, Bio-SPKs are derived from a new array of feedstocks, namely Jatropha, Camelina, algae and halophytes. Biofuel derived from these feedstocks are sometimes referred as ‘second-generation biofuel’ and they share two overwhelming advantages over traditional biofuel feedstocks. The first advantage is that these second-generation feedstocks are all inedible, which means the production of bio-SPK will not compete with the food supply. The second advantage is that the feedstock vegetations do not need to be cultivated on fertile farmland. For example, Jatropha is resistant to drought and pests and can be grown on non-arable land. This gives them the potential to be cultivated in remote areas or factories

Bio-SPK Production Technology
Bio-derived Synthetic Paraffinic Kerosene (Bio-SPKs) is the most promising candidate for sustainable alternative aviation fuel. The current research into Bio-SPKs is being conducted using second-generation feedstocks. Secondgeneration biofuel generally refers to biofuels that are derived from sustainable and inedible biomass sources; Bio-SPKs represent biofuel derived from sustainable feedstocks that have the same distillation range as the jet fuel and can be used readily by aircrafts. There are two main processes to produce Bio-SPKs: Fischer-Tropsch processing and hydro-processing. Fischer-Tropsch The Fischer-Tropsch (FT) process is a process that allows the production of liquid fuel, such as gasoline, diesel and jet fuel, from carbonaceous feedstocks including natural gas, coal and biomass. Aviation bioSPKs can be produced from the FT process using biomass feedstocks. The FT process involves four main steps: 1. Creation of synthesis gas from feedstocks 2. Removal of CO2 and other undesired compounds 3. FT synthesis using iron- or cobalt-based catalyst 4. Upgrading to liquid fuel by refining Hydro-processing Bio-SPKs that are produced from hydro-processing are referred to as hydro-processed renewable jet fuel (HRJ). The production of HRJ includes a process that first uses hydro-processing to deoxygenate the oil and then uses hydro-isomerization to create isoparaffinic hydrocarbons. The chemical contents of these HRJs can fill the distillation range of conventional jet fuel and are thus suitable for aviation use.

1

A Note on Rising Food Prices, The World Bank (2008)

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Figure. 3 - Comparison of life cycle GHG emissions between conventional jet fuel and aviation biofuel

1.4 Environmental benefit
In terms of environmental effect, the greatest advantage of Bio-SPK is that not only is it a carbonneutral fuel, but it also releases significantly fewer greenhouse gases (GHGs) than conventional jet fuel in its life cycle. As a fuel, Bio-SPKs are considered to be carbon neutral because the amount of CO2 absorbed by the feedstock during cultivation is roughly the same as the amount of CO2 released back to the atmosphere when they are burnt, as opposed to fossil fuels that release GHGs that are buried underground. However, there are both direct and indirect carbon emissions related to the production of the fuel, including processes from feedstock harvesting and transportation, to oil extraction and hydrotreatment. As these processes cause GHG emissions, they are considered in the calculation of life cycle GHG emissions of the fuel. It is sometimes referred to as the ‘well-to-wake’ GHG emissions – the emissions from the wellhead through refining and final combustion and emission in an airplanes wake (see Figure. 3). Second-generation biofuels show substantial reduction in life cycle GHG emissions compared to conventional jet fuel. The amount of life cycle emissions reduction is estimated in the range from 20 – 98% less than conventional jet fuel, depending on the type of feedstock. Apart from the benefit in GHG emissions, Bio-SPKs also have much lower particulate matter (PM) and sulphur content than conventional jet fuel. The sulphur content in bio-SPKs is below 15 parts per million, while conventional Jet-A consist of 700 parts per million of sulphur on average. However, it is important to address the potential environmental impact of the development of second-generation biofuel. Although the feedstock of second-generation biofuels are inedible and can be grown in non-food crop farmland, developers must plan the production thoroughly to minimise the environmental footprint. Figure. 5 shows that the life-cycle GHG emissions of biofuels can be greatly increased due to misuse of land. Another potential problem that may be caused by biofuel development is the introduction of invasive species. The introduction of alien species can lead to serious ecological disasters and great care must be taken to restrict the undesirable propagation of feedstock vegetation.

Source: Beginner’s Guide to Aviation Biofuels, ATAG 2009

Figure. 4 - Life-cycle GHG emission comparsion between petoleum jet fuel and Bio-SPKs
90 80 70 60 50 40 30 20 10 0

g CO2 eq/MJ

Cultivation Fuel Production Use Oil Production Transportation

Petroleum Jet fuel

Jatropha Bio-SPK

Camelina Bio-SPK

Source: Evaluation of Bio-Derived Synthetic Paraffinic Kerosenes (Bio-SPK), Boeing (2009)

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Figure. 5 – the potential life cycle GHG emission intensity (normalised with conventional jet fuel) of different type of alternative jet fuel in different production scenarios. This figure illustrates how unsustainable cultivation of feedstock can lead to dramatic increase in life cycle GHG emissions of biofuel.

Source: Near term feasibility of alternative jet fuel, Hileman et al. (2009) Scenarios (S0) No land-use change (Soy oil to HRJ) (S1) Grassland conversion to soybean field (Soy oil to HRJ) (S2) Worldwide conversion of noncropland (Soy oil to HRJ) (S3) Tropical rainforest conversion to soybean field (Soy oil to HRJ) (P0) No land-use change (Palm oil to HRJ) (P1) Logged-over forest conversion to palm field (Palm oil to HRJ) (P2) Tropical rainforest conversion to palm field (Palm oil to HRJ) (P3) Peatland rainforest conversion to palm field (Palm oil to HRJ)

1.5 Economic viability of Bio-SPK
The technology for extracting oil from inedible feedstock is available and Bio-SPKs test flights have shown promising results; both producers and airlines are keen to get the fuels on to the market. However, there are several uncertainties on the economic viability of Bio-SPKs.

1.5.1 Price and production cost uncertainties
Firstly, it is hard to accurately estimate the economic viability of bio-SPKs due to the lack of price and production cost information. The price of bio-SPKs largely depends on the underlying feedstock from which they are derived. Currently, Camelina can be produced at low cost and will have a price comparable to conventional jet fuel in the near future. On the other hand, producing a gallon of algae-derived biofuel would cost $32.81, according to its manufacturer Solix in April 2009 1. Although Solix suggests that it can reduce the cost to $3.50 a gallon in the near future, there is no clear timeline for such development. The price of bio-SPKs is also determined by the method of produc1

“It’s $33 a gallon”, Greentech media (2009) http://www.greentechmedia.com/articles/read/algae-biodiesel-its-33-a-gallon-5652/

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tion. The current production price estimation for coal-and-biomass-derived FischerTropsch jet fuel from a coal-and-biomass-to-liquid (CBTL) FT plant range from $1.97 to $2.39 per gallon. However, pure biomass-derived FT fuel produced from a biomass-toliquid (BTL) FT plant costs $6 per gallon. For hydro-processed renewable jet fuel, which most of the test flights used, cost information is not yet publicly available.

1.5.2 Oil price pressure on biofuel producers
Given the lack of cost information for second-generation biofuels, we can consider the problem from another perspective. One of the dominating factors that determines the development of next generation biofuel is the price of crude oil. Due to high production costs, the biofuel industry is particularly vulnerable to low oil prices. According to the International Energy Agency’s World Energy Outlook 2009, the investment in conventional biofuel production has fallen heavily over the past year and such a downturn is directly linked to the sharp reversal of oil prices from their peak in late 2008. A series of new bio-fineries’ construction has been put on hold and many existing plants have been left idle in recent years. Therefore, the question for aviation biofuel developers as well as the aircraft operators is whether they are going to face the same problems.

Figure. 6 - Global assest financing of bio-refinery. The figure suggests that the amount of investment in biofuel sector closely resemble the trend of oil price Source: World Energy Outlook 2009, IEA (2009)

1.5.3 Aviation industry’s dependence on fossil fuel
To answer this question, we should consider one of the main incentives to develop aviation biofuel – the aviation industry’s complete dependence on liquid fossil fuel. This is the strongest incentive for the aviation industry to develop aviation biofuel. There is a fundamental difference between the natures of energy consumption in the aviation industry versus other sectors. While switching energy supply from coal to renewable energy sources is relatively easy for manufacturing or ground transportation industries, it is not the same case for aviation. Aviation is a truly international and

1

Press Releases: Questions & Answers on Aviation & Climate Change, European Union (2005)

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mobile industry that involves personnel, facilities and infrastructure all over the world. Such reliance makes the aviation industry extremely vulnerable to the instability of oil prices and such financial risk makes the aviation industry keen to develop alternative fuels and gradually reduce its dependence on fossil fuel. Therefore, economically and financially speaking, the aviation industry’s desire for a ‘drop-in’ renewable fuel far exceeds any other industry simply due to the lack of alternative solutions. Although aviation biofuel developers will be stressed by the fluctuation of oil prices, they are likely to have a more stable client base and receive robust support from the airlines.

1.5.4 Emissions Trading
In addition to a strong incentive driven by the dependence of crude oil, there are direct financial benefits to support the development of aviation biofuel – the implementation of carbon emissions trading regimes. Emissions trading is regarded often as the best and most economically efficient global mechanism for tackling climate change. In 2008, the global carbon market was estimated to be worth more than $125 billion. The European Union Emission Trading Scheme (EU ETS) is the key framework for achieving the emissions reduction targets the EU has set out as part of its commitment under the Kyoto Protocol. Accounting for over half of all global aviation emissions, flights departing from and arriving into the EU play a key role in fighting climate change. The EU’s increase in CO2 emissions from international aviation has been rapid and it is estimated that emissions will rise 150% by 2012 compared to 1990 levels if such growth rates continue. As such increases in aviation emissions would offset more than a quarter of the emissions reductions the EU is required to make under the Kyoto protocol 1. From January 2010, all aircraft operators in the EU are required to take part in the EU ETS. Aircraft operators are now obligated to submit their annual emissions and tonnekilometre data for benchmarking purposes. Emission allowances, called European Union Allowances (EUAs), will be issued to the operators in 2012, when they will have to start paying for their emissions. The total quantity of allowances to be allocated to aircraft operators in 2012 will be equivalent to 97% of the historical aviation emissions and the cap will be further tightened in the following years. 15% of the EUAs will be auctioned in 2012 and the rest will be allocated freely to the aviation industry. It is anticipated that auctioned EUA will reach 100% by 2020, which means the aviation industry will need to pay for every tonnes of CO2 they emit. The implementation of emissions trading scheme will generate significant financial pressure on the aviation industry. Regarded as carbon neutral, biofuel will provide an opportunity for the aviation industry to reduce its expense on carbon credits. The impact of emissions trading scheme implementation and the potential opportunity of aviation biofuel will be quantitatively examined in the following section.

1.6 Other alternative jet fuels
Although the aviation industry is eager to find a replacement for traditional jet fuel, Bio-SPKs are not the only alternative jet fuel available. Jet A derived from oil sands or Venezuelan Very Heavy Oils (VHO) is an alternative fuel that is already in wide commercial use, with a cost competitive with conventional Jet

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A. The refining technology is well developed and there is a sufficient supply of oil sands from Canada. The down side of oil sands-derived Jet A is that they have even higher lifecycle GHG emissions than conventional jet fuel and they are not derived from sustainable feedstocks and are not carbon neutral. Another type of alternative jet fuel that is of wide commercial use is Fischer-Tropsch synthetic jet fuels. While Bio-SPKs produced by FT processes are still in the development stage, mainly due to the immaturity of the supply of the second-generation feedstocks, FT fuel derived from fossil fuel has long been used by the aviation industry. Since 1999, aircraft leaving O. R. Tambo International Airport in Johannesburg, South Africa, may receive a blend of up to 50% FT synthetic fuel. However, the downside of FT synthetic fuels is that their lifecycle emissions are significantly higher than conventional crude-oil derived jet fuel. Compared with conventional jet fuel, coal-derived FT fuel is estimated to be 2.0 to 2.4 times higher in lifecycle GHG emissions and natural gas-derived jet fuel is about 1.15 times higher 1. Recently FT fuel suppliers are putting efforts into minimising the environmental impacts of FT synthetic fuel production by employing carbon capture and sequestration (CCS) technology. This would contribute to a substantial reduction in life-cycle emission of FT synthetic jet fuel down to 0.8 to 1.3 times that of conventional jet fuel. These alternative jet fuels, though still fossil-fuel derived and not sustainable, could be used as a substitute for conventional jet fuel before Bio-SPKs are available in commercial scale.

2. Environmental and financial impacts of aviation biofuel
This section analyses the environmental and financial impacts of biofuel on the aviation industry. This section will quantitatively demonstrate: 1. 2. 3. Potential impact on conventional jet fuel consumption caused by the introduction of aviation biofuel Environmental abatement in terms of CO2 emissions reduction The related cost implication for the introduction of aviation biofuel

Carbon emissions trading will also be taken into account when estimating the cost implications. Due to the uncertain perspective of a global emissions trading system for the aviation industry, we will consider the environmental and financial impact for the EU and global aviation industries separately.

1

Technical Report: Near-Term Feasibility of Alternative Jet Fuels, Hileman, et al (2009)

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2.1 Main assumptions
Our projections and estimations are based on the following assumptions: • Rate of biofuel commercialisation In this report, based on the commercialisation rate suggested by Air Transport Action Group, we assume that aviation biofuel consumption will be equal to 15% and 30% of total jet fuel consumption in 2020 and 2030, respectively.
Source: Beginner guide to aviation biofuel, Air Transport Action Group & enviro.aero (2009)

• Conventional aviation fuel price
Unit
Barrel Gallon

2010
$139.00 $3.31

2012*
$139.56 $3.32

2020
$145.00 $3.45

2030
$205.00 $4.88

Table. 1 - Assumptions for conventional aviation fuel price: 2010, 2012, 2020 & 2030 Source: IATA economic briefing: outlook for oil and jet fuel price, IATA (2008) *Jet fuel price 2012 is projected with linear projection based on the IATA Economic Briefing figures

• Carbon price
Currency
EURO/tCO2 USD/tCO2

2012
€15.00 $21.95

2020
€40.00 $58.53

2030
€40.00 $58.53

Table. 2 - Assumptions for carbon credit price: 2012, 2020 & 2030 Source: 2012 carbon price – Carbon Price Summary, Vertis Finance (2009) 2020 and 2030 carbon price - IATA 2008 Report on Alternative Fuel, IATA (2008) December 2009 exchange rate - 1 EURO = 1.4632 USD

• EU ETS aviation emission cap
emission (Mt)
EU27 148.90

2012 Cap (97% average)
144.43

2013 onwards cap (95% average)
141.45

Table. 3 - Assumptions for EU ETS emission caps for aviation Source: Transportation emission data, European Commission (2009)

There will be other assumptions related with each specific case and will be stated in the footnotes.

2.2 Biofuel, EU aviation and EU ETS
We estimate the cost implications of the EU ETS to the EU aviation industry to be significant. In 2012, the aviation industry will be included in the EU ETS and the emissions cap will be approximately 144 million tonnes (Mt) based on historical emission levels. We estimate that the total CO2 emissions of EU flights will reach around 184 Mt in 2012. This implies that the aviation industry will need to spend a total amount of $1.34 billion on European Union Allowances (EUAs), including the 15% auctioned EUAs

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Table. 4 – Fuel consumption and CO2 emissions implications of biofuel consumption for EU27 aviation

2010
Scenarios
-

2012
19.23 183.98 -

2020
No biofuel 24.47 234.13 -

2020
w/ biofuel 15 24.47 3.67 199.01 35.12

2030
No biofuel 34.78 332.81 -

2030
w/ biofuel 30 34.78 10.43 232.97 99.84

2030
Carbon neutral growth from 2020) 40.2 34.78 13.98 199.01 133.80

Total jet fuel

18.10 -

gal) Total CO2 emissions (Mt) 173.22 CO2 emissions avoided by biofuel (Mt)

Table. 5 – Cost implication and benefit associated with EU ETS compliance

2010
Scenarios
-

2012
$1.34

2020
No biofuel $9.56 $94.04 3.56%

2020
w/ biofuel 15 $7.51 $2.06 $94.04 2.79%

2030
No biofuel $19.48 $189.25 3.60%

2030
w/ biofuel 30 $13.64 $5.84 $189.25 2.52%

2030
Carbon neutral growth from 2020) 40.2 $11.65 $7.83 $189.25 2.15%

EUA expense ($ bn) Avoided EUA expense ($ bn) Total (maximum) expense on fuel ($ bn) EUA expense vs total

$59.91 -

$65.23 0.72%

*Total operating cost is calculated based on the assumption that total fuel expense account for 35% of the total operating cost. [Source: Boeing, IATA]

and the purchased EUAs from other industry sectors, and excluding the free credits allocated to them. Without biofuel, we estimate the potential EUA cost on airlines will rise to $9.6 billion in 2020 and $19.5 billion in 2030. Such an increase is dramatic and is equivalent to an 11% spending increase on carbon credits annually. Relating these figures with business operation terms, spending $1.34 billion on EUAs in 2012 is equivalent to nearly 2% of the total fuel cost. The percentage rises sharply to 10% of the total fuel costs when the credit expense reaches $19.5 billion in 2030 if no biofuel is used by the aviation industry. This rapid increase is driven by a combination of aviation industry growth, increase in EUA prices and an increase in auctioned EUAs. In other words, assuming that fuel cost accounts for 35% of airlines operating costs, the carbon credit expense in 2030, without using biofuel, would be equivalent to approximately 3.6% of total operating cost. There is a possibility that the spending increase will be even sharper than we estimate
Table. 6 – Biofuel price premium in US Dollar per gallon

EUA price ($/tonnes)
2012 2020 2030
$21.95 $58.53 $58.53

Biofuel price premium ($/gal)
0.21 0.56 0.56

Projected jet fuel price ($/gal)
3.32 3.45 4.88

Percentage price premium
6.33% 16.23% 11.48%

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Figure. 7 - Projection of 2010 - 2030 jet fuel consumption of EU27 aviation
40
Biofuel

between 2012 and 2020 because it is a possibility that auctioned EUAs may likely reach 100% of the emissions cap by 2020, from 15% in 2012. One of the solutions to mitigate the financial pressure of the EU ETS is to use aviation biofuel. Regarded as a carbon neutral fuel, airline operators do not have to buy EUAs for biofuel combustion. Assuming 15% and 30% consumption in 2020 and 2030 respectively, we estimate that biofuel application can contribute to potential saving of $2.1 billion in 2020 and $5.8 billion in 2030 on carbon credits. This would only be true if bio jet fuels were the same price as traditional jet fuel.

30

20

10

0

201

0

2 201

202

0

203

0

Figure. 8 - EU27 aviation CO2 emission and carbon credit implications
350 Paid credits (w biofuel) Paid credits (w/o biofuel)

280

Currently, second-generation biofuels are very expensive to produce, but with the price expected to come down as technology and production volumes improve. Given that biofuel would avoid the financial carbon costs associated with traditional jet fuel, airlines would be willing to pay a price premium at least up to the fuels associated carbon cost savings. The price premium of biofuel varies depending on the price of EUAs. Based on the current EU ETS price for carbon in 2012 of €15 and 2009 average jet fuel price of $1.69 per gallon, every gallon of jet fuel burned would incur carbon costs of an additional $0.21, which is equivalent to a premium of 12.4%. Table. 6 summarises the price premium of aviation biofuel calculated using our main assumptions on EUAs and projected conventional jet fuel prices. Note that, an increase in jet fuel prices or a decrease in biofuel prices would cause a decrease in the percentage price premium of aviation biofuel. However, only an increase in jet fuel prices would create an incentive to develop and adopt aviation biofuel.

CO emission (Mt)

210

Free credits

140

70

0
0 201 201 2 202

fuel) biofuel) fuel) biofuel) o bio o bio % % 0 (n 30 (30 0 (n 20 (15 203 0 0 2 2

Figure. 9 - Fuel and carbon credit expense for EU27 aviation
$200 Credit Cost ($ bn) $160 Biofuel Cost ($ bn) Jet Fuel Cost ($ bn) $120

2.3 Biofuel and carbon-neutral growth
As no binding commitments were made in the Copenhagen climate talks, there is no clear prospective for a global emission trading system for aviation. Despite this, member airlines of the International Air Transport Association (IATA) have committed to aggressive goals on emissions reduction. In June 2009, the IATA pledges to achieve carbon neutral growth from 2020 and reduce carbon emissions 50% by 2050 compared to 2005 levels. The IATA has indicated that it would achieve this goal through efficiency improvements, biofuel use and emissions offsets. If emission offset credits were cheap enough, the industry could avoid actually reducing its emissions, as discussed later in this section.

Expense ($ bn)

$80

$40

$0
201 0 2 201 202

l) fuel) iofue fuel) fuel) fuel) o bio (30% bio utral b o bio % bio e 0 (n 0 (n 20 (15 203 2030 30 (C n 0 2 20

*Grey section (figure. 7) represents the amount of jet fuel whose emissions would need to be offset to achieve the IATA target of carbon-neutral growth from 2020. Other Assumptions • • • Projection of jet fuel consumption: 4.1% annual increase [Boeing Aviation outlook 2009-2028] Fuel efficiency improvement: 2000 – 2010 = 1.3%; 2010 – 2020 = 1.0%; 2020 – 2030 = 0.5% [estimation used by DEFRA] Prjection from EU27 aviation emission 2006 [Source: European Commission]

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Figure. 8 - Projection of 2010 - 2030 jet fuel consumption of global aviation industry
160

Figure. 9 - Global CO2 emission and potential emission abatement by using biofuel
1600 Avoided CO emission

120

80

CO emission (Mt)

1200

800

40

400

0 2010
Biofuel

0

2020 (15% biofuel)

2030 Low (30% biofuel)

2030 High (15% biofuel)

2010

2020 2030 Low 2030 High (15% biofuel) (30% biofuel) (15% biofuel)

2.3.1 Outlook of global aviation CO2 emissions
According to the estimates generated by he FAST model (UK DEFRA’s Global Atmosphere Division), global CO2 emissions from aviation will reach 860 Mt in 2020 and will further rise to 1,172 – 1420 Mt in 2030 (see footnote of table. 8). This would be equivalent to consumption of 89.9 billion gallons of jet fuel in 2020, and 122.5 – 148.4 billion gallons in 2030. With the same assumption that aviation biofuel consumption will be 15% in 2020 and 30% in 2030, the global aviation industry will consume a total of approximately 13.5 billion gallons of biofuel in 2020 and 36.8 – 44.5 billion gallon in 2030. This would lead to a reduction of 129 Mt CO2 emissions in 2020 and 352 – 426 Mt in 2030.

2.3.2 How much biofuel does the aviation industry need in order to achieve carbon neutral growth from 2020?
EU If the commitment of carbon neutral growth from 2020 is achieved entirely by aviation biofuel utilization, the level of biofuel penetration needs to be even higher than Air Transport Action Group (ATAG)’s targets. Assuming that aviation CO2 emissions will be capped at 2020 levels, we estimate that the EU aviation industry alone will require around 14 billion gallons of biofuel in 2030 in order to achieve carbon neutral growth
Table. 7 – Fuel consumption and CO2 emissions implications of biofuel consumption for global aviation industry

Low 2010
Biofuel (bn gallon) gallon) Total CO2 emissions (Mt) CO2 emissions avoided by biofuel (Mt)
61.03 584 -

High

2020
89.88 860 -

2020
15 89.88 13.48 731 129.00

2030
122.48 1172 -

2030
30 122.48 36.75 820.4 351.60

2030
148.40 1420 -

2030
30 148.40 44.52 994 426.00

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Low 2020
Scenario Biofuel Total (maximum) expense on fuel & EUA ($ bn) EUA expense ($ bn) Total biofuel cost ($ bn)* EUA expense : total fuel cost (%) EUA expense : expense (%)
Table. 8 – Cost implication and benefit associated with EU ETS compliance *Total operating cost is calculated based on the assumption that total fuel expense account for 35% of the total operating cost. [Source: Boeing, IATA] Other Assumptions • • Assumed emission cap used is 457.9 Mt, 95% of 2005 level CO2 emission forecasts are taken from “Allocation of international aviation emissions from scheduled air traffic - future cases, 2005 to 2050 (final report to DEFRA global atmosphere division)” and the 2030 High (FAST-A1) and Low (FAST-B2) emission forecasts is generated by the FAST model. FAST model is a global aviation inventory model that general projection using external data on projections of revenue passenger km (RPK).
$337.85 $27.55 8.16% 2.85%

High 2030
Biofuel carbon neutral 38% $653.04 $37.60 $273.47 5.76% 2.02%

2020
15% biofuel 15% $337.85 $20.00 $54.09 5.92% 2.07%

2030
$653.04 $86.11 13.19% 4.61%

2030
30% biofuel 30% $653.04 $47.43 $218.03 7.26% 2.54%

2030
$794.06 $113.39 14.28% 5.00%

2030
30% biofuel 30% $794.06 $66.53 $264.16 8.38% 2.93%

2030
Biofuel carbon neutral 49% $794.06 $37.60 $427.25 4.73% 1.66%

solely on biofuel. That would be 8.8 billion gallons more than we estimate with a biofuel market penetration of 30%, and will be equivalent to 40% of total fuel consumption. Global We estimate that the entire industry will need to use 46-72 billion gallons of biofuel in 2030 globally in order to achieve the carbon neutral growth target entirely with biofuel. That is equivalent to about 38-49% of total jet fuel consumption in 2030. This level of biofuel consumption in the aviation industry is very unlikely to happen in 2020 or 2030 due to current biofuel production constraints.

2.4 Global emissions trading for aviation
Accounting for 2-3% of global CO2 emissions, aviation is a significant contributor to anthropogenic global warming. This percentage is likely to increase due to the growth of aviation industry and efficiency improvements of other sectors. EQ2 believes there will be a significant possibility that aviation will be included into a global emission trading mechanism. In this section, we estimate the emissions and cost implications if the entire global aviation industry is to be included into an emission trading system. Most of the assumptions for this estimation will remain the same as the ones listed above. Additional or altered assumptions are listed below table 8.

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Without using any biofuel, we estimate that carbon expenses will be $27.6 billion at 15% auctioned credit level (2020), and $86.1 - $113.4 billion at 50% auctioned credit level (2030) for the global aviation industry. By using biofuel, the expense on carbon credits can be greatly reduced, with the corresponding expense on biofuel increasing if the aviation industry needs to pay a premium price for biofuel.

2.5 Aviation biofuel as a competitor to conventional jet fuel
Reaching 15% and 30% of utilisation, aviation biofuel will be a direct competitor to conventional jet fuel and is likely to directly affect the price of conventional jet fuel. According to Hileman et al. (2009), each additional 1 million barrels of alternative fuel supply is estimated to cause a reduction of 0.6% to 1.6% of world oil prices, and this is

Can the cost of carbon credit be passed onto consumers?
One of the main concerns of the aviation industry is whether they can pass their carbon credit expense to customers through ticket prices. In order to maximise profitability, the aviation industry would try to pass all of its carbon credit expense onto customers. They may even attempt to increase prices for the freely allocated credits and reap ‘windfall profits’, as done by the electricity sector in the first phase of the EU ETS. However, the airline’s ability of passing through the credit cost is limited by a number of factors. First, the proportion of cost they can pass through is determined by type of journey and the cost sensitivity of the customer. For leisure journey, airlines are not likely to be able to pass the cost through to the customer as they are very cost sensitive and they look for the cheapest offer available. On the other hand, airlines are more likely to pass the cost onto business trip tickets and freight transportation. These customer groups are less price sensitive and airline can pass more than 100% of the credit price to them1. Another factors that determine the proportion of pass through is competition. An Enrst & Young report, suggests that at uncongested airports, pass-through rate lies between 50% to 100% of the total credit cost. While at congested airports with high competition, no carbon credit expenses can be passed through to consumers. As the demand for air transport is anticipated to increase, the level of competition will only increase and that would further curtail the market power of airlines. However, from a quantitative perspective, the potential ticket price increase associated with carbon credit price is limited. According to the EU’s estimation2, even if airlines fully pass on these extra costs to customers, by 2020 the ticket price for a return flight within the EU could rise by between €1.80 and €9. While the industry may be able to pass along some of its carbon costs to consumers (even more than its own costs on certain segments, initially), we believe that the aviation industry will still have to absorb significant costs from paying for its carbon emissions. Footnote:
1. Department for Environment, Food and Rural Affairs (2007), A Study to Estimate Ticket Price Changes for Aviation in the EU ETS: A Report to Defra and DfT 2. Ernst & Young, & York Aviation (2007), Analysis of the EU Proposal to Include Aviation Activities in the Emissions Trading Scheme

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independent on fuel production location and fuel consumption purpose. Based on the same penetration assumption, we estimate that global aviation biofuel production will be 0.88 million barrels per day in 2020 and about 2.40 to 2.90 million barrels per day in 2030. That implies the potential downward price pressure of aviation biofuel on world oil prices will be about 0.53% to 4.64%. Therefore, there is a fair possibility that future aviation biofuel prices likely could be lower than our estimation.

2.6 Biofuel vs. Carbon offsetting
Our estimate for the price premium of Bio-SPK is based solely on industry fuel expenses and carbon prices. However, in reality, the price premium of aviation biofuel is not determined entirely by the price of carbon credits. The aviation industry can achieve its goal of carbon neutral growth through carbon offsetting. As noted, if carbon offset credits are cheap enough, the financial incentives for using aviation biofuel would be negatively affected. In reality, carbon offsets have always been cheaper than EUAs (particularly depending on the quality of the carbon offset), which in theory would exert more downward pressure on the price of aviation biofuel. We would not recommend using carbon offsetting as a method to mitigate a company’s environmental footprint because this would not would not reduce its climate risk exposure or improve sustainability in the long term. Moreover, it is suggested that 40% of the additionality (offsetting programs that actually reduce CO2 emissions on top of business-as-usual scenario) of registered offsetting program are “unlikely” or “questionable” 1. Since the public is sensitive to “greenwash” actions, airlines should not put their brand reputation at stake. Most importantly, the aviation industry should put its focus and investment on developing a sustainable business model, rather than short-term treatments. The failure to develop sustainable business models could lead to drastic consequences and lessons should be learnt from the recent decline in the auto industry.

3. Bio-SPKs – the future of aviation fuel?
In 2008, venture capitalists invested a total of $680.2 million into US biofuel developers, including $175.9 million in microalgae. Throughout 2009, airlines have been doing test flights on different bio-SPKs, and Boeing is aiming to obtain fuel approval and certification in 2010. In December 2009, a core group of Air Transport Association (ATA) airlines, comprising 15 airlines from the US, Canada, Germany and Mexico signed a memoranda of understanding with AltAir Fuels LLC and Rentech, Inc for a future supply of alternative aviation fuel. While Rentech will be supplying synthetic jet fuel derived from coal or petroleum coke, AltAir Fuels will supply approximately 75 million gallons per year of aviation biofuel derived from Camelina oils or comparable feedstock. This action by the aviation industry demonstrates that the recent biofuel test flights are likely more than just marketing stunts. All of this evidence points towards the proliferation of aviation biofuel and leads us to the $64 million question: Is biofuel the future of aviation fuel? This is not an easy question to answer, and it is certainly worth much more than $64 million. We have examined the incentives and costs associated with the development of bio1

Is the CDM Fulfilling its Environmental and Sustainable Development Objectives? An Evaluation of the CDM and options for improvement, Schneider, L. (2007)

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Figure. 10 - Biofuels demand by type and scenario Source: World Energy Outlook 2009, Interational Energy Agency (2009)

fuel. We have identified that the biggest incentive for the development of aviation biofuel is aviation industry’s dependence on crude oil. Such dependence makes the industry passive and vulnerable to oil price fluctuation. A “drop in” fuel derived from sustainable source is hugely desirable and will bring about a paradigm shift to the fuel consumption habit of the aviation industry. Policies and compliance costs create direct financial incentives for the development of aviation biofuel. Without any biofuel consumption, we estimated that the carbon credit expense will cost the EU aviation industry $9.56 billion in 2020. The expense will rise sharply to about $19.5 billion in 2030, which is equivalent to 11% of the total fuel cost and 3.6% of total operating cost. Such financial pressure in an industry with very narrow to non-existent profit margins clearly demonstrates how compliance costs can have a potent effect on airlines’ energy policies. The same theory can be applied to the global aviation industry. The International Energy Agency ’s findings (Figure. 10) suggest that if the world is to commit to stabilise CO2-e concentration at 450 ppm, the demand for second generation biofuels, including Bio-SPKs, would increase more than 6 fold.

Business Sustainability
Ultimately, the development of Bio-SPKs is all about sustainability. Financially, Bio-SPKs potentially help aircraft operator to ease their operational burden by avoiding carbon allowance expenses. However, most important of all, Bio-SPKs provide a chance for the aviation industry to shift into a truly sustainable business model by decoupling from the reliance on crude oil, thus departing from the passive position of being controlled by fossil fuel prices. Environmentally, as a significant GHG emitter, the aviation industry cannot isolate itself from the fight against climate change. While aircraft fuel efficiency has increased over 80% from the 1960s through to the 1980s, mainly due to the development of widebody and mid-range aircrafts, efficiency improvements have dropped to less than one percent annually since. Under the aspirational aim of energy-related emissions to peak by 2020 and stabilising global CO2-e at 450 ppm, changing to renewable fuel is the only option that the aviation industry can adopt to contribute to this battle against anthropogenic climate change.

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4. References
Air Transport Action Group (2009), Beginner’s Guide to Aviation Biofuel The Boeing Company (2009), Current Market Outlook 2009 – 2028 Biofuelwatch (2009), Biofuels for Aviation: More Future Land Grabbing and Deforestation for Agrofuels to Justify Today’s Airport Expansion? http://www.aef.org.uk/downloads/Aviation_biofuels_Biofuelwatch_March2009.pdf Cobbs, R. & Wolf, A. (2004), Jet Fuel Hedging Strategies: Options Available for Airlines and a Survey of Industry Practices http://www.kellogg.northwestern.edu/research/ fimrc/papers/jet_fuel.pdf Committee on Climate Change (2009), Meeting the UK Aviation Target – Options for Reducting Emissions to 2050 Daggett, D.L., Hendricks, R.C., Walther, R. & Corporan, E. (2008), Alternative Fuels, for Use in Commercial Aircraft, NASA Department for Environment, Food and Rural Affairs (2007), A Study to Estimate Ticket Price Changes for Aviation in the EU ETS: A Report to Defra and DfT Department for Environment, Food and Rural Affairs (2008), A study to estimate the impacts of emissions trading on profits in aviation Ernst & Young, & York Aviation (2007), Analysis of the EU Proposal to Include Aviation Activities in the Emissions Trading Scheme EUROPA (2009), Aviation and climate change – Consolidated Version of the EU ETS Directive 2003/87/EC, European Union http://ec.europa.eu/environment/climat/aviation/index_en.htm Hendricks, R.C. (2008), Alternate-Fueled Flight: Halophytes, Algae, Bio-, and Synthetic Fuels, National Aeronautics and Space Administration Hileman, J.I., Ortiz, D.S, Brown, N., Maurice, L. & Rumizen, M. (2008), The Feasibility and Potential Environmental Benefits of Alternative Fuels for Commercial Aviation, MIT, RAND Corporation & Federal Aviation Administration Hileman, J.I., Ortiz, D.S., Bartis, J.T., Wong, H.M., Donohoo, P.E., Weiss, M.A. & Waitz, I.A. (2009), Technical Report: Near-Term Feasibility of Alternative Jet Fuels, Partnership for AiR Transportation Noise and Emission Reduction & RAND Infrastructure, Safety, and Environment International Air Transport Association (2008), IATA 2008 Report on Alternative Fuels International Air Transport Association (2008), IATA Economic Briefing: Outlook for Oil and Jet Fuel Prices, IATA

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International Civil Aviation Organization, Putting Aviation’s Emissions in Context http:// www.icao.int/Act_Global/Aviation_Emissions-in-Context.pdf International Energy Agency (2009), World Energy Outlook 2009 Kanellos, M. (2009), Algae Biodisesl: It’s $33 a Gallon, Greentech media http://www. greentechmedia.com/articles/read/algae-biodiesel-its-33-a-gallon-5652/ Kinder, J.D. & Rahmes, T. (2009), Evaluation of Bio-Derived Synthetic Paraffinic Kerosene (Bio-SPK), Sustainable Biofuels Research & Technology Program, The Boeing Company Nygren, E. (2008), Aviation Fuels and Peak Oil, Uppsala Universitet http://www.tsl. uu.se/uhdsg/Publications/Aviationfuels.pdf Oilgae Blog (2009), Biofuels Digest released summary of US venture capital investment in biofuels http://www.oilgae.com/blog/2009/01/biofuels-digest-released-summaryof-us.html Owen, B. & Lee, D.S. (2006), Study on the Allocation of Emissions from International Aviation to the UK Inventory – CPEG7: Final Report to DEFRA Global Atmosphere Division: Allocation of International Aviation Emissions from Scheduled Air Traffic –Future Cases, 2005 to 2050 (Report 3 of 3), Manchester Metropolitan University Patil, V., Tran, K.Q. & Giselrod, H.R. (2008), Towards Sustainable Production of Biofuels from Microalgae, Int. J. Mol. Sci., Vol. 9, pp. 1188-1195 Rutherford, D. (2009), Stagnation in Aircraft Efficiency Improvement Highlights Need for Comprehensive Carbon Dioxide Standards, The International Council on Clean Transportation Sims, R., Taylor, M., Saddler, J. & Mabee, W. (2008), From 1st- to 2nd-Generation Biofuel Technologies: An Overview of Current Industry and RD&D activities, International Energy Agency & Organisation for Economic Co-operation and Development Wallace, L. & Macintosh, A. (2008) International Aviation Emissions to 2025: Can Emissions be Stabilised without Restricting demand?, Centre for Climate Law and Policy, The Australian National University Cover page image: Renewable Fuel and Power, LLC

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Report contacts
Max Tam
Research Analyst

EQ2

Gregory Elders
Director of Research

London Washington Boston enquiries@eq2.eu.com UK: 0845 371 2520 International: +44 7786 893 123

Steve Burt

Chief Executive

About EQ2
EQ² is a sustainability economics company. We provide organisations with the most accurate and up-to-date information relating to their environmental impacts, sustainability risks and financial performance implications. EQ² has developed Evolution, an Enterprise Carbon, Environmental and Financial Accounting Software-as-a-Service (SaaS) solution, that helps organisations to identify and map their environmental impacts to their financial metrics using real-time measurement of resource inputs including energy, water and raw materials and production outputs of goods, emissions and waste. Evolution provides business changing information to decision makers and employee teams.

The contents of this report may be used by anyone providing acknowledgement is given to EQ2. The information herein has been obtained from sources, which the authors and publishers believe to be reliable, but the authors and publishers do not guarantee its accuracy or completeness. The authors and publishers make no representation or warranty, express or implied, concerning the fairness, accuracy, or completeness of the information and opinions contained herein. All opinions expressed herein are based on the authors and publishers judgment at the time of this report and are subject to change without notice due to economic, political, industry and firm-specific factors. © 2010 EQ2.

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