EU ETS likely to bite over time

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European low-cost, short-haul carriers will be most affected by the European Union's emissions trading scheme (ETS) when it is introduced next year, according to credit ratings agency Standard & Poor's. Although initially there will only be a "marginal" impact, it says, airline credit ratings will be hit in the long term.

With carriers chiefly operating in Europe affected the most, S&P expects global network carriers will be best-placed to cope with the ETS.

Budget and short-haul airlines, which have lower premium revenues, "may be somewhat more adversely affected", it notes.

This cost disadvantage for EU-based long-haul airlines could result in more European passengers choosing to fly with non-EU carriers on intercontinental routes, and global long-haul passengers bypassing European transfer hubs altogether.

S&P estimates the EU ETS will generate additional costs of about €1.1 billion ($1.53 billion) for the global airline industry during its first year (2012-13).

Based on the current carbon dioxide price - €15 per tonne of CO2 - the emission charges would not make a large difference when compared with today's fuel costs and aircraft lease payments or depreciation charges. However, the burden is set to grow as air traffic increases in the future. This is chiefly due to the fact that the amount of free carbon allowances will remain constant, with airlines having to pay to cover their total emissions.

As their traffic grows, the proportion of free allowances will gradually become smaller in the overall carbon calculation.

Initially, it is expected that airlines will have to buy allowances for at least 20.5% of their carbon dioxide output, with the remainder being free.

The free carbon allowances are calculated as a proportion to a CO2 cap based on average annual aviation emissions between 2004 and 2006. How much free allowance each airline will finally receive will be determined using their revenue-tonne-kilometres as monitored during 2010-11.

The Carbon Trust in the UK estimated in late 2009 that airlines would have to buy allowances worth €23-€35 billion between 2012 and 2020, although this calculation was based on a carbon price of €25 per tonne of CO2.