Study: Carbon trading may raise efficient carriers' profitability

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Operators of more efficient aircraft could see a 40% advantage in relative profitability over other carriers under the European Union's emissions-trading scheme, according to research by UK advisory group Carbon Trust.

Carbon Trust, an independent company set up by the UK Government to help accelerate moves to a low-carbon economy, estimates that the most efficient airlines could increase profitability in markets where they are able to pass on full carbon costs in ticket prices while gaining from the free carbon allowance permitted under the scheme.

Flights operating to, from and within the EU will be covered under the emissions trading scheme from the start of 2012, although the unilateral introduction of the scheme has raised criticism and threats of legal challenges from non-EU states affected.

"It's very hard to say which airlines will necessarily lose, gain, or stay at the same level [under emissions trading]," says Carbon Trust head of investor engagement Bruce Duguid.

But he suggests that airlines operating on more price-sensitive and competitive routes, where there is little room to increase fares - such as short-haul leisure markets - look more exposed than airlines operating in less price-sensitive markets.

"What we can be certain of, is the most-efficient players should win," he adds. "The more fuel-efficient operators will be 20-40% higher [in relative profitability] than the average."

Airlines are widely expected to be among the prime buyers of carbon allowances under scheme and Duguid says they could buy as much as all other sectors put together. "Airlines will be hungry buyers of allowances compared with other sectors," he says, estimating they will buy allowances of around €23-€35 billion ($34-52 billion) over the course of 2012-20.

A study earlier this year by aviation consultancy RDC Aviation and energy sector market intelligence specialist Point Carbon estimated the aviation sector could face a shortfall of 77 million tonnes of carbon dioxide when it enters the scheme in 2012. This equates to €1.1 billion at today's spot price of €14.40 per tonne.

Carbon Trust says that emissions trading is unlikely to be the regulatory end-game for tackling airline emissions. "Regulators are likely to end up looking at other methods to reduce airline growth unless there is a breakthrough in technology or biofuels," says Duguid. This could range from measures such as taxation, the auctioning of free allowances or limiting runway capacity.

The Carbon Trust study, which will formally be published tomorrow, will coincide with the UK's Committee on Climate Change releasing its vision on the future development of aviation.

It also comes as world leaders gather in Copenhagen for a United Nations climate change summit.

Aviation industry groups have put forward their own targets to reduce aviation emissions and are pressing for a global sectoral approach rather than regional schemes such as the EU's emissions-trading scheme.