Exclusive: Emissions trading to drive up price of long-haul flights

The inclusion of aviation in the European Union's emissions trading scheme (ETS) will have a wide range of impacts, harming the profitability of some operators while providing a sizable windfall for the most fuel-efficient airlines.

That is the conclusion of a major new report from the Carbon Trust to be released tomorrow, which will argue that investors need to be more aware of the potential impact of the extension of the ETS from 2011 on airlines' financial performance.

The report will argue that airliners operating on price-sensitive short-haul routes will struggle to push up ticket prices, and as a result many are likely see their profitability impacted by their inclusion in the ETS, which will require them to purchase emission allowances if they exceed an emission cap.

However, it predicts airlines operating less price-sensitive routes, such as long-haul and business flights, are likely to pass on the cost of complying with the scheme to passengers, driving up ticket prices.

The report also argues that the scheme will have the desired effect of encouraging airlines to curb emissions, predicting that the more efficient operators will see their profits outperform those of their less-efficient rivals by between 20 and 40 per cent.

"The scheme really will reward the most efficient players and have the intended impact of incentivising people to look at alternative means of short-haul travel," observed Bruce Duguid, head of investor engagement at the Carbon Trust.

He added that investors also had to be aware that without major technological breakthroughs in the development of low carbon aviation technologies, the ETS was unlikely to prove sufficient at delivering the deep cuts in emissions required by the EU's targets. "Policy-makers will have to look at other measures, such as taxation or incentivising alternative rail routes," he predicted.