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Cost for airlines of joining EU ETS €1.1bn in 2012, says Thomson Reuters Point Carbon

Large European flag carriers will get more allowances relative to emissions than their US and Chinese counterparts

London (19 September 2011)

The cost for airlines of joining the European Union’s Emissions Trading Scheme (EU ETS) in 2012 will be approximately €1.1 billion using a carbon price of €12 per tonne*, or a total of €10.4 billion between now and the end of 2020, according to analysis released today by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets and RDC Aviation, the leading independent consultancy in aviation data modeling.

The European Commission is expected to issue 176 million allowances to airlines for free for the year 2012, worth approximately €2.1 billion at today’s carbon price*. Airlines are forecast to need to buy a further 88 million allowances, worth €1.1 billion.

On average, all scheduled carriers are to receive 56% of the allowances they need. However, the airlines in the scheme are treated very differently by the process of allocating allowances for free. Scheduled carriers get between 20% and 100% of the allowances they will need in 2012, according to the analysis. Some will have a very small shortfall, while others will have to buy nearly everything they need.

The 27 flag-carriers in the European Economic Area (EEA) will receive, on average, 61% of what they need. However, the larger European flag carriers with substantial long-haul networks fare better; Air France/KLM, British Airways, Lufthansa and Iberia on average will be allocated 81% of what they need in 2012. This is a smaller relative burden than that faced by their counterparts in the US and China.

Thomson Reuters Point Carbon and RDC Aviation expect the top six China-registered airlines, Cathay Pacific Airways, Air China, China Airlines, China Eastern Airlines, China Southern Airlines and Hainan Airlines, to get on average 63% of what they need.

The case for the large US carriers is similar. Counting Delta Airlines, American Airlines, United Airlines, Continental Airlines, US Airways and Northwest Airlines, Thomson Reuters Point Carbon and RDC Aviation find that the range is tight, at 57%-66%, with an average 64%. Again, they are less well served than their counterparts registered in the EEA.

According to Andreas Arvanitakis, Associate Director at Thomson Reuters Point Carbon, “long-haul carriers and those airlines with more efficient aircraft and higher load factors tend to receive more than the average.”
According to Peter Hind, Managing Director at RDC Aviation, “The ten largest airlines in terms of CO2 permit allocation will be British Airways, Lufthansa, Air France, KLM, Ryanair, Iberia, Delta, Easyjet, Virgin Atlantic and Alitalia. The top three US carriers will be Delta, United Airlines and American Airlines”.
“While the extra cost to airlines is minor compared to the cost of jet fuel, it eats considerably into the profits of the sector as a whole,” Arvanitakis says.
Arvanitakis continues, “The biggest unknown now is the treatment of dedicated freight carriers, UPS, DHL and so on. The specific data needed does not exist for them, and the leasing and other commercial arrangements muddy the waters further still, but we estimate their free allocation to be on average 52% of what they need in 2012”,

The costs will apply from 1 January next year to the vast majority flights landing or departing from EU airports, including intercontinental flights.

The EU will publish its official benchmark calculations at the end of September expressed as the number of allowances to be allocated for free, divided by the number of revenue-tonne-kilometers that the airlines submitted in their RTK reports in 2010.

From 2012, airlines in the scheme will have to surrender one allowance for every tonne of CO2 they emit. With this baseline, they have to buy about a third of what they will need at market prices. But the costs they face could be considerably reduced if airlines make full use of their quota to import Kyoto offsets, such as Certified Emissions Reductions (CERs), generated by Clean Development Mechanism (CDM) and Emission Reduction Units (ERUs), generated from Joint Implementation projects (JI). The quota is for up to 15% of their actual CO2 emissions in 2012. That quota could drop to a minimum of 1.5% of emissions from 2013.
In terms of the effect entry into the EU ETS may have on airfares, Peter Hind believes, “The bottom line is that emissions trading will certainly increase cost pressure on airlines and they will look to pass on at least some of this cost to passengers”

Aviation is the largest new sector to enter the scheme since its inception and it will be the first international transport sector to have had its greenhouse gas emissions regulated in a carbon trading scheme.

Note to editors

• Aviation generates at least 3% of the EU’s total greenhouse gas emissions and EU emissions from international air travel have doubled since 1990.
• The analysis detailed here used data from RDC Aviation, an independent data and consultancy in the aviation business, combined with Thomson Reuters Point Carbon analysis.
• *EUA Dec11 closing price 12.16 euros on 16 September 2011
• The Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in February 2005, resulted in the launch of the EU’s Emissions Trading Scheme (ETS). The EU ETS is the world’s first international greenhouse gas emissions trading scheme. It works on a cap - and - trade basis, where the total allocation is set at the start of a trading period. EU Allowances (EUAs) are the tradable units under the EU ETS. Up to a certain limit, companies regulated by the EU ETS are also allowed to import carbon permits from third countries (CERs and ERUs).
• Certified Emissions Reductions (CERs) are project credits generated from emission reduction countries in developing countries.