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Special report: the EU Emission Trading Scheme and how it will affect air travel

23 Dec 2009 by BusinessTraveller

Business Traveller asks the experts what will happen when aviation is included under the EU Emission Trading Scheme.

Climate change is in the air, but how much progress is being made? The recent talks at Copenhagen were described by Sebastian Gallehr, CEO of both the European Business Council for Sustainable Energy, and sustainable risk management consultancy Gallehr and Partner as “a disaster in terms of the organisation, the process and the outcome”. The coming months will see if any further progress can be made, but in the meantime, the aviation industry, among others, is preparing for the introduction of the EU Emission Trading Scheme in 2012.

Aviation is responsible for about 3 per cent of greenhouse gas emissions in the EU, but, some commentators believe airlines could be responsible for up to 50 per cent by 2050 if they are left unchecked. What’s more, the percentage of CO2 emitted in the UK is closer to 7 per cent, meaning that as a wealthy nation that does a lot of flying, we really need to tackle the situation fast if we are going to make a difference.

In a move to curb the increase in harmful pollutants, the EU Emission Trading Scheme (ETS) – which already requires energy-intensive enterprises such as steel plants, oil refineries and factories to monitor and report their CO2 emissions – will require all airlines that fly to, from and within the EU to do the same. If they go over the emissions cap set, carriers will have to purchase additional carbon credit allowances from those who pollute less.

The scheme is designed to reward those who emit less, since the more fuel-efficient a company is, the fewer carbon credits it will need to use, and consequently, the more they can sell. On the flip side, as a report from the Carbon Trust (carbontrust.co.uk) highlights, the least fuel-efficient airlines could see profits drop by as much as 40 per cent, as they will need to splash out on more carbon allowances.  

In anticipation of the ETS, the International Air Transport Association (IATA) has proposed a number of measures, including to improve fuel efficiency by an average of 1.5 per cent per year to 2020, to make all industry growth carbon-neutral by 2020, and to reduce CO2 emissions by 50 per cent (compared with 2005 levels) by 2050. (These goals are more ambitious than the government’s aim of capping CO2 emissions at 2005 levels for the next 40 years.)

The inclusion of aviation under the EU ETS is an important step to achieving these targets, because as Tony Grayling, head of climate change and sustainable development for the Environment Agency, says: “If aviation doesn’t do anything [to cut its emissions], the other sectors are going to have to cut their emissions by perhaps 90 per cent by 2050, which will be very hard to do.”

In the beginning, when the scheme comes into play, airlines will be given the majority of their carbon permits free of charge, but if they are a high polluter they will need to buy additional ones. So how much will they cost? Gallehr says: “The volatility of the price of the permits is very high at the moment  – we have seen prices of €30 per tonne of CO2 and now we are at €12 after Copenhagen but we have also see prices of €8 last year [2008]. The analysts at the moment are predicting a mid carbon price of €12 in 2010, about €20 in 2012 and then about €25-30 in 2013.”

Jonathon Counsell, head of environment for British Airways, says, “The price of carbon depends on how quickly we can galvanise the global parties at play here – the human race – to solve this problem. The quicker we can solve climate change, the lower the price of carbon will be. The longer we take to do it, the higher it will be. The price of carbon is a sign of the balance between how much we produce and how much we need to reduce it. And the more those get out of balance, the higher the carbon price.”

So what about the wider implications? BA’s Counsell says: “The Stern Review, which is the seminal work [on the economics of climate change], says we can solve this problem, but we have to act now. If we act now, the cost to the global economy is approximately one per cent of the GDP. The later we act, the higher the cost to the global economy. Most of our forecasts are based on a carbon price of about €20-30 a tonne. If you compare that against most airfares that would not have a significant impact on their price.”

The Carbon Trust has claimed that the aviation industry is likely to purchase €23-35 billion of additional allowances (assuming carbon costs between €25 and €50 per tonne of CO2) between 2012 and 2020. However, critics are warning that given that they will be getting a large percentage of them free in the first place, if the airlines pass on the full price of these permits to passengers, they may well end up making huge windfall profits.  

In response to this, Karlheinz Haag, head of group environmental concepts for Lufthansa, says: “I think that’s nonsense. One of the key risks that we have is that emission trading is producing additional costs that the airlines will not be able to pass to the passengers. The calculation that you just mentioned is assuming that you have 100 per cent costs passed through, and most of the studies I have seen make a significant question mark on that assumption.

“The cost passed through is hard to estimate because there are different passenger groups. It also depends on the competitive situation route by route and as we have a strong competitive situation, especially in Europe, you cannot estimate 100 per cent costs passed through, and therefore the so-called ‘windfall profits’ are not very likely to occur. In fact, there has also been a study, which was done by the AEA, that says just the opposite might be the case.”

So how will it affect the price of tickets for the individual traveller? Grayling from the Environment Agency says: “To start with, it won’t have a huge effect on prices but over time, as the cap becomes tighter, the price of allowances will go up and it will, in turn, have a significant effect on the price of flying. This means flying will probably continue to grow, but the rate of growth will slow.”

What other challenges are associated with the EU ETS? Counsell says: “In the EU, airlines will start paying for carbon from 2012, but as it is not a global scheme, airlines will be affected differently. For example, all BA’s emissions will be included, but for US airlines, only their emissions from the US to the EU will be affected. So there is a different dynamic in terms of what they are going to do with their airfares versus what we will do with ours. It’s almost impossible to predict what will happen to airfares due to the EU ETS because we don’t have a level playing field, and there will be competitive distortion.”

Inka Pieter, director of corporate social responsibility and environmental strategy for KLM, is also concerned. She says: “We are afraid that the EU ETS will have a negative effect on the competence and competitiveness of the airline industry. I have no clue how it will affect passengers. If the EU ETS is only implemented in Europe we believe it will have a negative impact on our position in Europe. We would like to have a global deal but that might take some time.”

So is the US – one of the world’s greatest emitters of CO2 – doing anything to confront the problem of harmful emissions from aviation? Gallehr says: “There is no emission trading scheme in the US but they are planning to set up a carbon tax system. However, this could be a main problem for US airlines as they will potentially be double counted – on the one hand in the US under its tax scheme and then, on the other, under the ETS in the EU.” He adds: “It’s a real shame that there has been no outcome at all from Copenhagen. I don’t think there will be a global ETS for the aviation sector until 2020.”

Other than the primary goal of slashing emissions, are there any other positive side effects from the EU Emission Trading Scheme we can expect? Grayling from the Environment Agency says: “In the long term, the ETS will create greater incentives for improving aircraft technology, so that aircraft use less fuel per passenger km – that already is happening to some extent but it needs to be accelerated.”

For more information visit the websites of the European Commission (ec.europa.eu), European Business Council for Sustainable Energy (e5.org), Gallehr and Partner (eng.gallehr.de), International Air Transport Association (iata.org), Environment Agency (environment-agency.gov.uk), AEA (aeat.co.uk). Visit the Office of Climate Change (occ.gov.uk) to read the Stern Review.

Report by Jenny Southan

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