Airlines could face a collective annual cost of over €1 billion ($1.4 billion) from 2012 under the sector's inclusion in the European Union's Emissions Trading Scheme (ETS), according to new independent research.

A report published by aviation consultancy RDC Aviation and energy sector market intelligence specialist Point Carbon estimates the aviation sector could face a shortfall of 77 million tonnes of CO2 when it enters the ETS in 2012. This equates to €1.1 billion at today's spot price of €14.40 per tonnes of CO2.

"The cost is just an indication," explains the report's co-author, and senior analyst at Point Carbon, Andreas Arvanitakis. "The actual cost will be whatever the carbon price will be in 2012." But he describes the €1.1 billion annual cost figure as "conservative" given current forecasts of the spot price for carbon in 2012 of nearer €20 per tonne.

Additionally the shortfall seems likely to grow in 2013 and over the rest of the next decade as the number allowances are reduced - in 2012 the free allowances to airlines will be 85% of 97% of the 2004-06 average emissions, moving to 85% of 95% of the 2004-06 average from 2013 - and as air transport continues to grow. The EC is expected to publish the baseline average figure for 2004-06, on which the sector's caps will be based, next month.

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Under the controversial expansion of the EU ETS to include aviation, all airlines operating flights into the EU regardless of their country of origin will be covered by the scheme from 2012. The EC is expected to publish a final list of the number of airlines covered shortly.

The next stage of the process for calculating each airline's free allowance will be for carriers next year to submit revenue tonne kilometres figures. "This will decide how big a slice of the cake each airline will get," explains Arvanitakis. To this end airlines have been required to show their plans for collecting this data by the end of August. But many smaller operators, including operators of business aircraft, are behind the curve in submitting monitoring plans.

"The big carriers I think are prepared," says Sebastian Gallehr, chief executive and founder of consultant energy and risk management consultancy, Gallehr and Partner. "But in the end there are 2,700 operators [on the EC's preliminary list] obliged to take part in the scheme and our assumption is maybe 2,000 are not prepared.

"This is all new for the airlines and the authorities concerned and it is understandable that there is still confusion and uncertainty," he says.

Gallehr says carriers which do not submit their monitoring plans, or do not have them fully approved by the national regulator, before the start of 2010, risk losing out on their share of free allowances. "They are the basis for the free allocation, it is only the one year - 2010 - which is defining the share of the cake you get," he notes.

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A final list of the carriers covered by the EU ETS is expected shortly, while there are already signs of slippage in the end of August deadline for submission of monitoring plans. The UK - which will be by far the biggest national regulator of the scheme handling most of the larger non-EU carriers in addition to UK operators - has already slipped the deadline for these plans to be submitted.

"I expect more delays in the dates of submitting plans," says Gallehr. "But it does not matter if the deadline is delayed or not, you have to begin monitoring from the beginning of 2010."

The UK, for example, says it remains committed to starting the scheme on schedule from 2012.

The RDC/Point Carbon study estimates that British Airways will face the largest shortfall of EU carriers at 3 million tonnes of CO2 in 2012, and that US carriers Delta Air Lines and United Airlines will face even higher levels. RDC Aviation managing director Peter Hind explains carriers that have had only a relatively gradual increase in growth by RTKs since 2006 are likely to face a disproportionately larger shortfall then those with faster growth over that period, as the faster growing carriers will now take a larger share of the available allowances.

Hind says US carriers could be particular hard hit if the transatlantic market remains weak next year but rebounds and they add capacity by the time ETS begins in 2012. Legacy carriers are also in general likely to be harder hit than low-cost rivals which have grown rapidly since 2004-06. "It's the impact of LCCs coming in and eating up the cake," says Hind.

Low-cost carriers though do face a challenge in that the allowances are based on weight, including freight. "As low-cost carriers take passengers only and no freight, they face a relatively larger shortfall," says Hind. "Many low-cost carriers have aggressive growth plans as well, which could increase that shortfall." But he also notes low-cost carriers with significant growth plans may be eligible for more allowances from a special reserve for new entrants and fast-growers.

A further option open to airlines to ease the cost burden is by investing directly in clean development mechanism (CDM) projects, allowable under the Kyoto Protocol, which provides a discount on carbon prices.

"In theory it will be possible for an airline to roll-up its sleeves and get in a CDM, and get them at a €4 to €5 discount. Pretty much half of the total shortfall could be covered by CDMs," says Arvanitakis. But he cautions airlines must be careful to ensure they choose the right CDMs, as the environmental gains of some such projects have been discredited.

Source: Airline Business