Carbon confusion

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Like well-trained hostage negotiators, the ranks of overpaid consultancy doomsayers have never had it so good, talking down airlines from the procedural ledge, dispensing their reassuringly expensive advice at a time when acute uncertainty over emissions trading prevails.

To recap, aviation's enforced entry into the world's largest carbon trading club from 2012 - the European Union emissions trading scheme (ETS) - means that any airline flying into an EU airport will soon be required to send details of how it will monitor and report its carbon emissions to an assigned supervising national authority.

No-one really knows when this will happen, however, not least these so-called "competent" authorities charged with managing the unwieldy and complex data maelstrom. The original deadline of 31 August was set by the scheme architects in Brussels. But now the green mandarins at the European Commission who are holding the world's airline operators to commercial ransom no longer seem as assured as to the readiness of the scheme.

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QUESTION MARKS

That hesitation is leaving national regulators, who need to know more about the basics governing the scheme's administration, with big question marks. And that is not to mention those airlines that pride themselves on efficient operations and which want to prepare themselves to exploit the maximum strategic advantage over their less environmentally sound competitors.

The delay could also have a serious knock-on effect as monitoring plans - under the original scheme - need to be processed and approved or rejected by national regulators by the end of the year.

The actual monitoring period for annual emissions and benchmark data is scheduled to start on 1 January 2010. It is this revenue tonne kilometres data gathering during the ensuing 12-month period that will form the basis of an airline's free allocation of emissions credits for the eight years following 2012. This will decide how big a slice of the cake each airline will get. If the competitive stakes are high, the costs of non-compliance are even higher.

Any airline which is unable to submit a carbon dioxide monitoring plan to its competent authority could face stiff penalties while failure to file a tonne-kilometre monitoring plan will preclude an airline from applying for the free permits that the EC is committed to distributing.

This could have steep financial consequences, warns the RDC aviation consultancy, which says that at the top end, for a major flag carrier, free allowances could be worth over €100 million ($145 million) a year at current prices.

Another warning comes from Sebastian Gallehr at consultancy Gallehr and Partner. "Even a small operator with carbon dioxide emissions of 15,000t a year could stand to lose a free allocation with a value of around €300,000," he says.

Airlines could be looking at a collective annual cost of over €1 billion from 2012 under the sector's inclusion in Europe's emissions scheme, according to a new report published by RDC and market analyst Point Carbon.

They estimate the aviation sector could face a shortfall of 77 million tonnes of CO2 when it enters the scheme in 2012 meaning €1.1 billion of extra costs at today's spot price of €14.40/t of CO2.

This could be a conservative estimate. With current forecasts of the spot price for carbon in 2012 nudging €20/t, costs are only going one way.

Do not forget that this is a growth industry, so the need to buy in extra carbon credits seems likely to increase after 2013 and similarly over the rest of the next decade, especially as the number allowances will be reduced within the scheme. In 2012 the free allowances to airlines will amount to 85% of 2004-6 average emissions capped at 97%, reduced to 95% after 2013.

All in all it represents a nightmare of critical commercial uncertainty that not many industries facing such a seismic adoption of the polluter pays principle could withstand. This has been evidenced by the many anecdotal reports that smaller operators are well behind the curve in submitting monitoring plans even at this late stage.

Fred Falise, Sita's head of environment programmes, spelled out the threat at a recent airline conference on the European scheme. "We like stable systems in the airline industry and this inherently is not a stable system," he said.

He further warned that in future trading scenarios starting in 2020 things could get a lot worse. "Allocation of free credits at 85% of a reduced 95% cap after 2013 may well be revised further downwards as the world gears up for more ambitious Kyoto Protocol targets," he said.

He went on to remind everyone about the prospect of additional economic instruments to harness other greenhouse gas effects caused by aviation, such as NOx and contrails that the EC has vowed to deal with in time.

The challenge of harnessing CO2 was always thought to be a relative no-brainer - its greenhouse gas effect was well known, certainly in scientific terms, and its quantitative effect arrived at by a simple factoring up of fuel burned.

BUREAUCRATIC PROBLEMS

Unsurprisingly, it is the bureaucratic arrangements around the scheme that seem to be causing problems, with the EC still not in a position by mid-August to disclose several crucial elements that operators need to know. These include a final list of operators assigned to specific EU member states that will police them and a baseline average figure for 2004-6 aviation emissions on which the cap will ultimately be based, generated from a new fuel burn tracking tool called the Eurocontrol ETS Support Facility. This will also be used to check the robustness of data supplied by airlines.

Neither of these is ready, which means the 31 August deadline will come and go without much in the way of activity.

Consultants must be rubbing their hands in glee with the prospect of cashing in on even more new business opportunities due to the inertia and confusion created by such an administrative vacuum.

This lack of vital information on the complex procedures governing how airlines report their carbon emissions has already forced the UK to postpone the August deadline.

Most airlines - around 750 - will be allocated to the UK, including the majority of the large US carriers such as American Airlines, Continental Airlines and United Airlines, Middle East airlines such as Emirates and Etihad, Asian airlines such as Cathay Pacific, Japan Airlines and Singapore Airlines, as well as Air New Zealand, Qantas and South African Airways.

The government says there first needs to be a "firm and agreed" list of operators to be regulated by each EU member state before it is legally able to lay the first stage of regulations transposing the directive. Operators, it says, will be required to submit their plans within 11 weeks of the regulations being laid before their national parliaments.

And, as was thought likely, other member states will follow the UK's lead given its leading role in the scheme's implementation.

Hans-Jürgen Nantke, head of the German emissions trading authority at the Federal Environment Agency, has signalled that the deadline for the submission of airline monitoring plans will be six weeks after the list of operators and the administering EU member states is published in the German Federal Bulletin - once the relevant list is compiled by the EC.

"The Commission will presumably complete the list in August so that it will be published in the Federal Bulletin in August," he says, noting that "we will keep you posted on the schedule and any further developments".

France for now looks likely to honour the 31 August deadline, but it will adopt a sympathetic approach to any airline failing to file its plan on time.

Gallehr stresses that in such situations, airlines must maintain an active dialogue with their likely competent authority. "Communication is very important in this process. Even if the deadline is delayed, it doesn't change the fact that airlines will still have to start monitoring on 1 January 2010 and if the plans are delivered late it may be that the authority will not have time to approve them before then."

The EC, it is understood, will not announce the crucial 2012 emissions cap of 97% of average 2004-6 aviation emissions until the third quarter of this year.

Point Carbon believes this will be pegged by the EC at 218 million tonnes in 2012, while the Association of European Airlines predicts a slightly tougher cap - although again no-one knows for certain.

Even with so much prevailing uncertainty, however, consultants are in general agreement about the overriding strategic principles of thriving in an emissions trading environment: analyse and adapt frequencies, fleet composition and route planning over the monitoring period to do well once reporting goes live from 2012.

CARBON CAKE

Sita's Falise explains those principles: "Revenue tonne kilometres next year will determine your cut of the carbon cake over the following eight years of the trading period. Is it therefore worth flying passengers for free? Perhaps not, but is it worth flying the last seat at cost? Possibly, as operators with high load factors in 2010 will gain a competitive advantage for the full trading period.

"The focus then will switch to the efficiency of your fleet to exploit your cut of the cake from 2012."

Implementation of the scheme has won few friends in the USA, where bitter opposition continues.

Nancy Young, Air Transport Association of America vice-president of environmental affairs, says the scheme fails international aviation: "Europe's experience with emissions trading is limited to stationary suppliers," Young says.

"Rules you might apply to a single fixed facility don't really work. They haven't sufficiently tailored the requirements for the way we actually operate," she adds.