Airlines face possibility of €1 billion carbon trading costs from 2012

A new report by RDC Aviation and Point Carbon has calculated that the aviation sector could face a shortfall of 77 million tonnes of CO2 when it enters the European Union Emissions Trading Scheme (EU ETS) in 2012. Based on the price of CO2 on July 21 2009, this could cost the industry €1.1 billion (£86 million) and it warns that low cost airlines could be particularly badly hit.

The EU ETS – the world’s first international emissions trading scheme – works on a cap-and-trade basis, where the total allocation is set at the start of a trading period. In broad terms this will mean that from 2012 any airline wishing to exceed its individual allocation will only be able to do so if it ‘buys’ extra quota from elsewhere.

 The report’s authors expect at least some of this cost to be passed on to consumers, adding to the price of a ticket.

“Airlines won’t go out of business as a direct result, but it will place an increased pressure on yields and demand, particularly at the ultra-price sensitive end of the market,” said Peter Hind managing director of aviation data modeling consultancy RDC Aviation.

Under EU ETS, airlines are to be issued allowances based on how far they fly and how much weight they carry, taking into account both freight and passengers. “As low-cost carriers take passengers only and no freight, they face a relatively larger shortfall,” Hind explained.

The report suggests Ryanair alone could face a 2.8 million tonnes shortfall in CO2 in 2012 – a worse position than any of the Spanish or all Italian airlines. EasyJet could be 1.8 million tonnes short.

The only EU registered airline expected to be in a worse position than these two low cost carriers is British Airways which, the report suggests could face a CO2 shortfall of three million tonnes, equivalent to €43 million, based on the  July 21 price. This is more than the total shortfall for all Spanish airlines, the report suggests.

However, it says it is the US airlines that will face the largest bill of all – although the EU ETS is a European scheme, it covers all flights that land or take off within the EU.

“The American carriers in the scheme will be the first sector in the US to be drawn into mandatory international emissions trading, even though it is implemented by the EU,” explained Andreas Arvanitakis, co-author of the report and a senior analyst at Point Carbon, which provides market intelligence for the energy and environmental markets.

The reports figures are, of course, only estimates. The European Commission (EC) was due to publish the total number of allowances that will be available between 2012 and 2020 by August 2, but this week it announced it would not meet this deadline – promising, instead, to publish the figures “sometime in the autumn”.

So in producing their report, RDC Aviation and Point Carbon have had make certain assumptions about the figures the EC will eventually come up with in calculating the cap individual airlines will face – as well as forecasting their CO2 emissions.

“We thought it would be useful to have a robustly modeled take on what the EC may publish, as it was clear a delay was coming,” said Arvanitakis. “It is a phenomenally complicated business, especially working with imperfect historical data and pulling out what you need in a usable form."

He added: “It now seems that the aviation ETS will have a drawn out take-off, with delays and information flow – just like the mainstream emissions trading scheme. But even with delays, the CO2 emissions will be regulated from January 1 2012, whether or not airlines are prepared. This report is meant to provide some markers so that people can work and prepare and gain early mover advantage.”

The report's findings are likely to increase calls from within the aviation industry for a global sectoral approach to carbon emissions from international aviation.

While some in the aviation industry have lobbied for the aviation’s inclusion in the EU ETS, the Aviation Global Deal (AGD) Group – whose expanding membership includes Air France, British Airways, Cathay Pacific, Finnair, Qatar Airways and Virgin Atlantic, as well as airport operator BAA and international NGO The Climate Group –  has made the case for aviation emissions to be tackled through a global sectoral agreement, rather than a patchwork of regional initiatives. The AGD Group is concerned that the airline sector will be unfairly hit compared to other industries by 'overlapping' ETS. It is, therefore, seeking a new global aviation agreement on carbon at the UN Climate Summit in Copenhagen in December.