Budget airlines are best placed to deal with the aviation industry’s entry into the EU carbon-trading scheme, writes Mike Scott

When it comes to carbon footprints, not all airlines are the same. According to a recent report, The Business of Climate Change II by investment bank Lehman Brothers, an unpublished calculation of CO2 emissions in relation to turnover for a sample of European airlines “revealed one company as being 64% above the average, while another was 20% below”.

These figures suggest that some airlines are better prepared than others for the inclusion of aviation into the European Union’s Emissions Trading Scheme (ETS). This is due to happen on January 1, 2011, though the Environment Committee of the European Parliament (whose decision has no legal force) is expected to vote next month for it to be brought forward to 2010.

Aviation is widely considered to be responsible for only about 2% of global emissions, but its rapid growth, the impact of emissions being released at high altitude and perceptions that it is subsidised compared with other forms of transport have made it a target for environmentalists, as has the fact that it is excluded from the Kyoto Protocol.

The ranking of large publicly listed airlines carried out by environmental research group Trucost shows that budget airlines Ryanair and easyJet are best placed to deal with the ETS, while Italian carrier Alitalia, and British Airways are the worst performers.

What kind of regime?

“Despite a tendency to resist ‘green’ pressures, Ryanair and easyJet are the most efficient airlines when you look at emissions per revenue passenger kilometre (RPK). This is due to their modern and efficient fleets, and high load factor,” says Trucost analyst Morgan Jones. “Lufthansa stands out amongst long haul carriers, and is 6% more carbon efficient on a RPK basis than British Airways.”

The details of how the cap will work are still being worked out. The European Commission’s current proposals limit ETS allowances for CO2 emissions to 100% of airlines’ average annual emissions between 2004-2006. However, the Environment Committee of the European Parliament said the limit should be 75% of the 2004-2006 average.

The committee also wants the ETS to cover all flights within the EU and between the EU and third countries by 2010 – the commission had proposed that the scheme cover all intra-EU flights as of 2011, but that flights between the EU and third-country airports should come under its scope only as of 2012. MEP Peter Liese said: “It is difficult to explain that a flight from the UK to Morocco is not covered by the scheme while a flight from the UK to the Canary Islands [would] be covered.”

In addition, while the commission proposed no specific values for the number of permits to be auctioned, MEPs did, deciding on an initial figure of 50%.

The next stage is for a vote by the full European Parliament, which is set for mid-November. For the proposal to become law, the parliament must reach an agreement with member state environment ministers. They will discuss the proposal at their December meeting in Brussels.

US resistance

BA, bottom of Trucost’s table, is a keen advocate of carbon trading and says that “for the last eight years, we’ve pushed for airlines to be included in global carbon trading. We’ll continue to campaign for its practical and timely implementation.”

BA’s emissions figures are likely to be much improved by the time it enters the ETS thanks to an €8bn order for the most fuel-efficient aircraft on the market, the Airbus A-380 and the Boeing 787. If the emissions cap is based on 2004-2006 average emissions, the new aircraft will make it easier for BA to comply.

The US and its airlines are opposed to the EU scheme (which under current proposals will include flights from the EU to the US from 2012). According to Alessandro Bruno, airlines analyst at Innovest Strategic Investors, there are two reasons for this: US aircraft are much older than those of European airlines; and US airlines are financially far weaker than their European counterparts and so less able to buy more efficient aircraft. They are likely to remain at a disadvantage because of restrictions on foreign takeovers of US airlines.

Windfall profits

Some analysts say that even the airlines that have spoken out in favour of the ETS are not really enthused about it – they are merely responding to customer pressure or believe that some kind of environmental measures are inevitable. The ETS is the least economically damaging option for them, compared with a tax on aircraft fuel, which is currently exempt, the introduction of VAT on air tickets, or just a straight tax on air travel.

Fuel already comprises about one-quarter of airline costs, but is also increasing in price rapidly, another incentive to improve the environmental efficiency of planes.

Meanwhile, Giovanni Bisignani, director general and CEO of the International Air Transport Association, argues that the EU could cut aviation emissions by 12% by creating a more unified air traffic control system. This system, would organise airspace uniformly, with air traffic control areas based on operational efficiency, not national borders.

Current plans call for 50% of allowances to be auctioned. A report by Ernst & Young for the airline industry concludes that at a price of €30/tonne of CO2, “the costs of purchasing allowances needed for traffic growth would be €45bn in the period to 2022. If auctioning is included, this lifts the cost by 44%,” and the ETS would hit growth in the budget airline sector, cargo and scheduled flights.

However, The UK’s Institute for Public Policy Research says that giving airlines any emissions credits for free will lead to windfall profits. “If the airlines are simply given the credits they will pass on costs to passengers, leaving the industry to pocket up to £2.7bn in windfall profits,” it said last year. Separately, WWF estimated that EU airlines would make up to €3.5bn per year from inclusion in the ETS.

Whether the ETS is able to cut total airline emissions remains to be seen. According to the UK climate change research body, the Tyndall Centre, EU aviation emissions could have already grown by 25-60% between 2005 and when the full ETS comes into operation in 2012. The Tyndall report also predicted that the small rise in price of air travel under the ETS will do little to deter flyers. The EU may find itself under increasing pressure to demonstrate than caps on aviation under an EU cap and trade scheme will lead to the overall reduction of emissions from the airline industry.

The Figures:

• The aviation industry is likely to pass through the full costs of these credits to passengers. This could mean ticket prices going up by between 14p and £6.04.
  
• The industry could make £0.9 billion-£2.7 billion windfall profits if all emissions credits were given away for free to the airlines and EU ETS market prices were between €10 and €30.
  
• The UK power sector made £1 billion windfall profits in the first year of the EU ETS. “A combination of free allocations with a full pass through of marginal costs is estimated to result in increased profitability for the UK power sector,” said economic consultants IPA.
  
• Higher plane ticket prices might lower passenger demand by 0.1-1.4 per cent. But with European airlines growing at 4-5 per cent per year until 2020, these extra costs seems unlikely to restrain the aviation industry’s growth. Some countries’ airlines are growing as fast as 14 per cent.
  

These figures are based on calculations made in a report written for the European Commission, CE Delft (2005), Giving Wings to Emissions Trading.

Airline CO2 emissions
Company Rank ————————CO2/RPK(Revenue Passenger KM)
RYANAIR HOLDINGS PLC ————–1 
EASYJET PLC ———————–2 
SAS AB —————————-3 
DEUTSCHE LUFTHANSA AG ————-4 
AIR FRANCE ————————5 
ALITALIA-LINEE AEREE ITALIANE SPA -6 
BRITISH AIRWAYS PLC —————7