Emission trading to impose over €1bn bill on aviation sector

Pressure on airlines and their passengers to curb carbon emissions is expected to increase significantly from 2011, according to an imminent new report that predicts the aviation sector could face a bill of over €1bn (£607m) as a result of its inclusion in the EU emissions trading scheme (ETS).

The report from air industry consultancy RDC Aviation and analyst Point Carbon used aviation emission data from 2004 to 2006 and the methodology set out in the European Commission's directive on aviation emission trading to calculate the likely emission caps for airlines covered by the scheme.

It concluded that the sector could exceed its emission cap by 77 million tonnes of CO2 when it enters the ETS in 2011, equating to a bill of more than €1.1bn at the current spot price of €14.40 a tonne. The eventual costs could be higher still if, as expected, the spot price of carbon climbs as the economy recovers and demand for EU emission allowances (EUAs) from other industries increases.

The report predicted US airlines would face the largest shortfall in carbon allowances, with Delta Air Lines and United Airlines expected to have to buy EUAs worth 3.5 million tonnes and 3.3 million tonnes respectively. BA is expected to fare worst among EU operators with a shortfall of three million tonnes, while Qantas and American Airlines come in with predicted shortfalls of 2.6 million tonnes and 1.7 million tonnes respectively.

Speaking to BusinessGreen.com, report co-author and senior analyst at Point Carbon Andreas Arvanitakis said airlines should be preparing now for inclusion in the ETS. "Some of the larger carriers are fairly well positioned and have been investing in more efficient fleets and preparing for compliance with the scheme," he said. "But there is still a lot of ignorance among smaller airlines about the implications of this, and they have been very passive about preparing."

He added that any airlines hoping that a threatened legal challenge against the EU from US operators could delay the introduction of the legislation are likely to be disappointed. "It is too late now for any legal challenge to stop it coming into effect," he said. "It is on the statute book and will happen."

However, he downplayed fears that the need for airlines to buy extra carbon allowances will lead to big hikes in ticket prices, arguing that when spread across the number of flights taken in and out of Europe each year, the €1.1bn bill will have a relatively small impact on prices.

But the report predicted low-cost, short-haul carriers would be disproportionately affected by inclusion in the scheme, leading to a likely increase in ticket prices and further pressure on passengers to look for alternative forms of transport.

Peter Hind, managing director of RDC Aviation, explained that under European Commission rules, airlines will be issued allowances based on how much weight they carry – including freight and passengers – and the distance of flights. " As low-cost carriers take only passengers and no freight, they face a relatively larger shortfall," he said. "Many low-cost airlines have aggressive growth plans as well, which could increase that shortfall."

He added that low-cost carriers with significant growth plans such as Ryanair and Easyjet may be eligible for extra allowances through a special reserve of EUAs for fast-expanding companies and new entrants to the EU market, but the low-cost sector is still likely to face greater challenges relative to long-haul operators.

The report also predicted that the inclusion of aviation in the ETS could lead to increased financing for emission-reduction projects in the developing world, noting that airlines could cut the bill they face by buying UN-backed offset credits, rather than EUAs, to cover any shortfall.

Under the legislation, airlines can buy up to 39 million CERs and ERUs through the UN-approved Clean Development Mechanism and Joint Implementation schemes. Based on current market prices, this approach would deliver a saving of €1.50 per tonne compared to EUAs, delivering potential total savings of more than €58m for the industry. The report also noted that savings could be higher if airlines decided to invest in CDM projects directly themselves.

The EU had been expected to set out its own emission caps for the aviation industry from 2012 to 2020 next week, but it announced recently that publication had been delayed until the autumn as it seeks to ensure that baseline emissions for all the airlines covered by the scheme are accurate.