Aviation’s quest for climate neutrality; Fed preview, AI bubble risks for households & a softer tone on tariffs (for now)

Nothing worth having comes easy. The aviation sector knows this well: Chasing net-zero skies by 2050 will take USD5.1 trillion, a fleet of futuristic planes, and more SAF than most of us have had cups of coffee this year—our comprehensive assessment of the aviation sector’s decarbonization pathway ranging from the scale-up of sustainable aviation fuels (SAFs) and emerging propulsion technologies to efficiency measures, carbon-pricing impacts and the investments needed.

For our What-to-watch sector, we remain on terra firma with the Fed plotting a gentle glide to 3.5% rates, US households feeling a bump after riding the AI stock surge, plus an easing of the tone when it comes to tariffs … for now. Better keep your seatbelts fastened!

High hopes, heavy footprint: Aviation’s quest for climate neutral skies

The complete analysis at your fingertips here.

Aviation remains a cornerstone of the globalized economy, shrinking distances and driving the movement of people and goods. Yet it is among the hardest sectors to align with climate-neutrality goals by 2050. In 2023, it produced roughly 1 gigaton of CO₂—about 2.5% of all human-made emissions including land-use change. When non-CO₂ impacts such as contrails and nitrogen oxides are included, aviation’s warming contribution rises to about 6%, underscoring the challenge.

Mitigating emissions requires measures across technology, fuels, operations, and policy. Sustainable Aviation Fuels (SAFs) are central, cutting CO₂ by 60–90% and working with existing fleets. But deployment is far below climate needs: SAFs supplied only 0.3% of global jet-fuel demand in 2024, limited by feedstock availability, high costs, and slow infrastructure build-out. Scaling SAFs demands major investment in renewable electricity, diversified feedstocks, and large-scale plants, supported by stable mandates. Yet SAFs alone cannot deliver climate neutrality, as contrails, NOx, and water vapor still drive warming. They must be paired with broader measures. Efficiency gains—retiring older aircraft, adopting more aerodynamic models, reducing weight, and electric taxiing—lower fuel burn. Novel propulsion technologies such as hydrogen, battery-electric, and hybrid-electric aircraft offer long-term potential but require major infrastructure and energy-system advances.

Market-based mechanisms help bridge the remaining carbon gap. CORSIA allows airlines to offset international emissions, with costs rising from USD7–20/ton CO₂ in the pilot phase to potentially USD100/ton by 2027—up to USD9.5bn (26% of sector net profits). The EU ETS imposes stricter regional obligations, requiring airlines to buy allowances, with projected needs of 70 million by 2030 at EUR80–150/ton, translating to EUR5.6–10bn in costs. Though still cheaper than SAF adoption, these costs will rise, affecting margins and ticket prices. Overall, carbon markets act as transitional tools, offsetting unavoidable emissions while incentivizing investment in SAF and low-emission technologies.

Decarbonizing aviation will require about USD5.1trn in investment by 2050. Roughly 40% will go to renewable electricity for synthetic fuels and future hydrogen or electric aircraft; 38% to scaling SAF; 16% to CO₂ capture and electrolysers; and 6% to next-generation aircraft. Despite the scale, the transition is economically favorable: without mitigation, carbon costs could reach nearly USD8trn. A transition pathway reduces this to USD2.6trn, eliminates carbon-price exposure after 2045, and strengthens long-term competitiveness.

Progress also depends on faster aircraft modernization. With retirement at just 1.7% and renewal at 3.7% in 2024, the global fleet’s average age has reached 15 years, while backlogs have grown to 17,000 units, stretching waits to nearly six years. Retrofitting older jets—via cabin, avionics, engine, and aerodynamic upgrades like winglets, which have cut more than 100mn tons of CO₂ since 2000—offers short-term gains, but deeper reductions require new aircraft. Current technology could cut fuel burn by ~20% by 2050, but only if production accelerates, supply chains diversify, certification streamlines, and governments support deployment. OEMs are investing in SAF-compatible platforms, hybrid-electric and hydrogen propulsion, and advanced aerodynamics, but CAPEX-to-revenue remains low at 3–5%. Achieving net-zero goals requires materially higher investment to bring next-generation aircraft into service at scale.

Demand-side measures also matter. Air travel grew from 0.4bn passengers in 1970 to nearly 5bn in 2025 and may reach 12.4bn by 2050. Europe will grow more moderately—from 1.19bn passengers in 2023 to 1.81bn in 2050—but even this 52% rise strains net-zero pathways. Over half of EU passengers fly domestically or within the EU-27, and short flights offer the clearest mitigation opportunity: routes under 300 km make up 19% of national travel, and those under 500 km account for 45%. Rail can replace many of these trips but requires major upgrades. Europe plans to expand high- and very-high-speed rail from 12,000 km today to nearly 49,400 km by 2050, requiring over EUR890bn in investment. Complementary measures, such as aviation ticket taxes reducing intra-EEA demand by around 9%, can further support a fair and effective modal shift.

The complete analysis at your fingertips here.

What to Watch this week

Fed preview, AI bubble risks for households and a softening tone on tariffs – for now

The full set of stories for you here.

Fed: Nearing the end of the road for rate cuts? After several weeks of mixed messages and internal disagreement, Federal Reserve officials now appear aligned on delivering a 25bps rate cut at the next meeting on 10 December. With the unemployment rate likely to rise a little further through Q1 2026 and persistently weak job creation, we expect another 25bps cut in the first half of 2026 (most likely in March) as the Fed continues to prioritize labor market risks. However, sticky core inflation and strengthening underlying growth momentum – generated by loosening fiscal and financial conditions as well strong AI-related capex – should eventually keep the Fed on a prolonged hold, with the Federal Feds funds rate expected to settle at our long-standing view of 3.5% (upper bound). Our financial conditions indices show that ’risky’ financial conditions (credit spreads, equity markets) are particularly loose in 2025 relative to historical averages. Historically, financial conditions have helped to predict near-term future economic activity, and they signal an increasing growth-boosting impulse in the quarters ahead.

US households: On the front line of an AI stock market correction. US households have significantly benefited from the AI-driven stock market surge, with the S&P 500 rising 74% over the past three years, largely powered by a small group of AI stocks. Because households hold 65% of their financial savings in equities, pensions and mutual funds, their gross financial assets rose nearly +28% (USD30.6trn). This heavy exposure to equities likely boosted confidence and spending during the rally but it also creates vulnerability: A market correction could quickly reverse sentiment and in turn weigh on GDP. Economic fragility is worsened by the increasingly k-shaped structure of the US economy, with the top 10% of households owning 87% of total assets invested in corporate equities and mutual fund shares, and 67% of total net wealth, while driving about half of retail spending. In our baseline scenario, we expect a short-lived 15% correction in the S&P500 in early 2027, driven by earnings misses, to shave -0.2pp off annual GDP growth. In a downside scenario mounting fundamental concerns about the AI business case, triggered by more significant earnings misses of US chipmakers and cloud providers, would result in a -25% correction. This would wipe out USD16trn in household wealth – equivalent to an almost -8% drop in total net worth – and reduce US GDP growth by -1.6pp, sending the economy into recession.

Trade war: A softening tone on tariffs – for now. The effective US tariff rate likely remained around 11-12% in October, still at the highest level since the 1940s, and the lag in tariff implementation is likely to push it up to 14% at most by year-end. Our proprietary indicator confirms a visible softening in the tone of US trade policy in the past month, especially in favor of many Asian countries. In contrast, roadblocks seem to remain when it comes to the EU. In this context, global trade will likely continue to show resilience through the end of 2025 and beginning of 2026, with annual growth now expected at +3.5% and +1.3%, respectively, with potential upside on this latter number as uncertainty persists. Half of the upward revision in our forecast for 2025 (+0.7pp) is due to a more contained trade war impact than initially expected, while the rest is explained by the boost in global services, as well as the AI boom triggering higher exports of both goods and services.

The full set of stories for you here.