Europe's plan to include aviation in its emissions trading system will come into effect in 2012 amid fierce opposition
Emissions trading for airlines will become a reality in 2012 in Europe, and it is a reality that the industry is finding difficult to accept. With carriers already facing record fuel prices and an economic slowdown, airline groups are deeply concerned about the impact this additional cost will have on an industry that will likely be weakened by the time the new legislation takes effect.
Under the agreement, which was approved by the European Parliament in early July, all airlines operating to, from and within the European Union will be forced to include their greenhouse gas emissions in the EU emissions trading system from 2012. Aviation emissions will be capped at 97% of their average 2004-06 level in the first year of the scheme, but this will drop to 95% in 2013.
"[100% auctioning] has the potential to impose the highest possible cost burden on the industry"
Airlines will receive 85% of their emission allowances for free in 2012 any additional permits will have to be purchased. However, both the cap level and the amount of free allowances could yet be reduced as part of a general review by EU legislators, something that is causing even more concern to airline groups. "[EU environment commissioner] Stavros Dimas has called for 100% auctioning by 2020 - this has the potential to impose the highest possible cost burden on the industry," says Simon McNamara, director infrastructure and environment at the European Regions Airline Association.
David Henderson, manager information at the Association of European Airlines, says the 15% auctioning level included in the current agreement is "a real killer for us", adding: "Airlines have to spend a large amount on permits to buy fuel that they can't afford."
Henderson estimates that emissions trading will cost Europe's airlines about €5.3 billion ($8.4 billion) a year. "This is the average annual cost over the 11-year period of the first phase. The first year will be a bit less," he says. IATA puts the cost of ETS to the industry at €3.5 billion in the first year of operation, a figure it expects to rise year-on-year.
Meanwhile, the ERA believes including aviation in emissions trading will cost European carriers €7 billion in the first two years of the scheme, with estimated total costs over the 10-year period to 2022 standing at €90 billion.
The Cost Of The ETS
These forecasts are "based on the premise of continued growth, albeit at a reduced rate, and a carbon cost of €30 per tonne", explains McNamara. He adds that it is "very difficult" to estimate costs for individual airlines because "the process you have to go through to get allowances is much more complicated to work out" on an individual basis.
Nevertheless, British Airways has put an initial figure on what it expects ETS to cost. Speaking during a briefing at the Farnborough air show, BA chief executive Willie Walsh said he expects ETS to cost BA £200 million ($400 million) a year in the early years of the scheme, as it is currently designed.
McNamara advises airlines to start collecting detailed fuel burn data "on a flight by flight basis" from 2011. "They need to start planning what they think their output will be in terms of fuel burn so they can plan how many allowances they need to buy and when the best time is to buy them," he says.
According to Henderson, ETS will be "an incentive for airline consolidation", and "would appear to suggest that the industry will shrink in size. It will not shrink in an organic way, it will shrink by bits falling off the industry". Henderson also believes that permits received by airlines in 2012 may end up being worth more to them when traded, meaning "you could see a raft of voluntary liquidations".
Outside Europe, the EU proposal has come under fire for its unilateral approach, and court battles appear likely. For instance, James May, president of the US Air Transport Association, says ETS is "not only bad policy, it is illegal", adding that "the EU decision to move forward with this legislation is sure to spawn a legal challenge". May also says that including aviation in the ETS will be "counterproductive" because it will make it more difficult for airlines to invest in newer, more fuel-efficient aircraft: "The EU legislation will siphon away the very funds the airlines need to continue to reduce emissions within the industry."
The legislation has also drawn harsh criticism from the Asia-Pacific region. "One of the most offensive aspects of the scheme is that Europe is, in effect, appointing itself as tax collector-in-chief for international aviation," says Andrew Herdman, director general of the Association of Asia Pacific Airlines. "Like a number of purported green taxes and levies, there is absolutely no assurance that such funds will be directed towards meeting genuine environmental objectives."
Cathay Pacific chief executive Tony Tyler has also added his voice to the ETS opposition camp, pointing out the "competitive distortion" of the agreement. "Once the system comes into effect, our Cathay Pacific non-stop flights to Europe - London, for example - will attract an emissions charge from the moment of pushback in Hong Kong to touchdown at Heathrow and vice versa," says Tyler. "On the other hand, a Middle East carrier making the same journey on a two sector basis...will be charged only for the final sector from the Middle East on to Europe."
IATA head Giovanni Bisignani questions the legality of the EU's plan. "What right does Europe have to impose ETS charges on, for example, an Australian carrier flying from Asia to Europe for emissions over the Middle East?" he asks. "Article one of the Chicago Convention prohibits this. And it goes against Article two of the Kyoto Protocol. Fuelling legal battles and trade wars is no way to help the environment. Already over 130 states have vowed to oppose it."
On the plus side, Henderson says that one of the advantages of ETS is that it "puts a premium on management skills - you have to second guess the price of permits". This, he adds, means airline managers will "have to learn a whole new range of skills".