Emissions trading proves steep learning curve for airlines

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Airlines are having to go back to the classroom to prepare for their inclusion in the European Union's emissions trading system, and there is plenty for them to learn

Airlines are beginning to ­prepare themselves for their compulsory inclusion in the European Union's emissions trading ­system from 2012, but they are facing a steep learning curve to get to grips with it. The process of acquiring permits to emit carbon dioxide is in its infancy for aviation, but there are signs that carriers could save themselves some money by forward ­purchasing ­allowances through the futures market. But this will be a case of "learn as you go along" for the industry.

"The carbon economy is a new economy for aviation and we have to learn about the markets so we can evaluate the opportunities for hedging," says Pierre Albano, manager of carbon credits and renewable energy at Air France-KLM. "It could be interesting for us to start buying credits sooner rather than later. There is no initiative on the market yet but we will have to evaluate the opportunity to start buying credits before 2012 to find the most efficient way."

pierre albano 
"The carbon economy is a new economy for aviation and we have to learn about the markets"
Pierre Albano
Manager of carbon credits & renewable enregy
Air France-KLM
According to IATA chief economist Brian Pearce, a futures market for CO2 allowances has been in existence for three years and there is the potential for airlines to tap into that to meet their future requirements. "There has been a market in allowances since 2005, so there is already a well-established futures market," says Pearce. "There is an opportunity for airlines to manage their risk by ­hedging. There is no reason why airlines can't ­forward buy allowances for 2012."

In preparation for entering this new activity airlines will need to make certain evaluations and ensure that their employees are well-trained. "Airlines have to get in place the staff and infrastructure to be able to buy and sell allowances," says Pearce. "They need to measure their options: is it cheaper to invest in something that brings down emissions, or to buy an allowance?" The staff-training part shouldn't be too difficult though, adds Pearce, because "the skills for this are very similar to those used in the oil and jet fuel markets".

British Airways is in the process of "­evaluating what would be the most ­appropriate strategy" when it comes to ­forward purchasing CO2 allowances, says the carrier's climate change manager Andy ­Kershaw. "We need to understand the market and the best processes. Prices go up and down so it's important to make sure we're anticipating what the market for allowances will do."

At this stage it is difficult for airlines to determine how much emissions trading will cost them on an individual basis because there are still a number of uncertainties, ­particularly over the future percentage of emissions that will be subject to auctioning. The current level for auctioning is set at 15%, which means that in 2012 airlines will receive 85% of their emissions allowances for free while any additional permits will have to be purchased. But the European Commission reserves the right to review this figure at a later date and could increase it.

Despite these uncertainties, Finnair senior vice-president and chief financial officer Lasse Heinonen estimates that the cost of emissions trading to Finnair "will be like a 10% increase in the spot price of a barrel of oil - hopefully less, but it could even be more". Other ­carriers, however, are less forthcoming about what they expect the individual financial impact of ETS to be. "We've made a lot of ­different calculations to evaluate the impact on the airline," says Albano. "But it's very ­difficult. A lot of parameters are not yet set from 2013 and beyond, so it's very difficult to have a figure today. What's important for us is to anticipate not only the cost, but to arrange internal organisation to be ready to face ­hedging activity if necessary."

Kershaw is even less willing to disclose what BA expects the individual cost of ­emissions trading to be. "There are a number of variables involved - one is the price of allowances in the market. This is not s­omething we're sharing," he says. What is more readily available, however, is the amount that emissions trading is expected to cost the airline industry as a whole. IATA's Pearce says that, based on an allowance price of €33 ($47) per tonne, ETS will cost the world's airlines €3.5 billion in 2012, although he points out that this will rise over time because airlines will eventually have to pay for more allowances. "By 2020, if the amount to buy at auction stays the same, because of the growth in demand the cost will rise to €6.9 billion. If proposals for auctioning to rise to 100% are realised, this will rise to €12.8 ­billion, assuming the allowance price stays at €33," he explains.

In order to calculate and qualify for their free CO2 allowances when ETS takes effect in 2012, airlines are required by the EC to file data on their past fuel consumption. Association of Asia Pacific Airlines director general Andrew Herdman describes this as a "carrot and stick" approach. "The immediate ­challenge is that airlines are required to file reports on their emissions in the 2004-06 period - this is the basis on which free allowances are granted and is the carrot," he says. The stick is that airlines who dispute this face other penalties such as not being allowed to land at or take off from EU airports."

The emissions data collected by the airlines for future allowances also has to be externally verified before it is submitted to the EC, and there are several deadlines by which this information must be filed. "Airlines will have to report their tonne per kilometre ­information for the period of 2010, and the deadline for this is the end of March 2011," says Kershaw. "We also have to report our annual verified emissions - for 2012 this will be required by the end of March 2013. Prior to this, we need to submit our monitoring, reporting and ­verification plan."

Despite the fact that emissions trading has been signed into law and will become a reality in 2012, airlines are still ­voicing strong ­opposition to the way in which the scheme has been set up, particularly the amount of permits subject to auctioning. Albano says the 15% auctioning level is "a high level which doesn't have a beneficial impact on the ­environment", ­adding: "We don't have the chance other ­sectors had for a progressive implementation. We are jumping straight in to ETS without a test period, even though we haven't yet answered the questionnaire. The 15% ­auctioning level was imposed without taking this into account."

Kershaw agrees: "We feel that ­compared to the original proposals, the latest version is more financially burdensome. We don't ­consider that auctioning is appropriate - even a stringent cap on emissions will create a ­significant financial burden." BA believes the scheme should have been introduced on an intra-European basis only. The trouble with enforcing a climate change policy universally, says Kershaw, is that ­polluters can simply move their emissions to another part of the world to avoid paying for them. "For aviation, the same markets can be served by other carriers not affected by ETS. This is known as emissions leakage and it reduces the environmental benefits of the policy. Ultimately you could see a loss of jobs and a reduction in service as international passengers bypass European hubs."

The bottom line is that airlines will need to get to grips with how emissions trading works, and they'll have to learn fast. What is clear is that it will be another layer of cost that airlines will need to find a way of absorbing. As Herdman points out: "The industry has to get its head around what's going to be the carbon cost and the cost of fuel. It's the combined cost that we're going to be wrestling with."

For more on emissions trading and how it will affect airlines, go to: flightglobal.com/emissions