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EC sets benchmarks for EU ETS free emission allowances but Hedegaard upsets airlines over investment remarks

EC sets benchmarks for EU ETS free emission allowances but Hedegaard upsets airlines over investment remarks

Fri 30 Sept 2011 – The long-awaited publication by the European Commission of the benchmark values from which aircraft operators joining the EU ETS can calculate their free emission allowances has been overshadowed by European airline industry anger over comments by Climate Action Commissioner Connie Hedegaard. She said that the free allowances, potentially worth €20 billion ($27bn) over the 2012-2020 period, would allow airlines to invest in new aircraft, improve fuel efficiency and use alternative fuels. Three airline associations condemned the remarks as grossly misleading and a blatant misunderstanding of economic reality. From an original list of over 4,000 potential operators identified by the Commission, around 900 operators have been allocated free allowances. The UK has today published a list of the 249 operators it has been assigned and their allowances. British Airways, Emirates, easyJet, Virgin Atlantic, American and United are the biggest ‘beneficiaries’.

 

There are two benchmark values set by the Commission, expressed as the number of aviation allowances per tonne-kilometre (TK) of activity, with the first for the 2012 trading year and the second for the 2013-2020 trading period. It is calculated by dividing the total number of allowances to be distributed free of charge by the sum of all TKs reported by aircraft operators. In 2012, an operator will receive 0.6797 allowances per 1,000 TKs and for 2013-2020 the number will decrease to 0.6422 allowances per 1,000 TKs. The submissions by operators are based on independently verified TK activity data recorded in 2010.

 

The formal allocation of free allowances to each operator will be carried out by their assigned EU member state, which will determine individual allocations over the next three months and transferred to operators’ accounts by 28 February 2012. Operators will be required to hand over sufficient free and purchased allowances to cover their reported 2012 CO2 emissions by April 2013.

 

The UK has been quick off the mark and the Department of Energy and Climate Change (DECC) has published today a provisional list of the 249 aircraft operators it has been assigned who qualify for free allowances, along with their allocation for 2012 and 2013-2020.

 

Across the 249 operators, a total of 56,095,037 free allowances have been provisionally allocated for 2012, dropping to 53,000,200 for the 2013-2020 period. As would be expected, British Airways will take the lion’s share – it will receive 10,344,000 for 2012 and 9,773,307 for 2013-2020 – followed by Emirates, easyJet, Virgin Atlantic, American and United. A list of the top 40 airline allocations and a link to the full DECC list can be found at the end of the article.

 

“With the benchmark values, airlines now have certainty how many allowances they will receive for free each year up to 2020,” said Hedegaard on the Commission announcement. “At current market prices these free allowances represent more than €20 billion over the decade. With these potential revenues, airlines could invest in modernising their fleets, improving fuel efficiency and using non-fossil aviation fuel.”

 

She was echoing the Commission’s belief that the financial situation of airlines is likely to be strengthened by the free allocation since it expects, as has been the case with other sectors that have already joined the EU ETS, airlines will likely pass on the allowance value to their customers.

 

However, airlines have previously indicated that in a highly competitive and price-sensitive market, they will be unable to pass on the costs, although few airlines have so far publicly announced their intentions.

 

Hedegaard’s comments have been met with “outrage” from three European airline representative bodies: the Association of European Airlines (AEA), European Regions Airline Association (ERA) and International Air Carrier Association (IACA).

 

“To refer to carbon permits as revenue is totally absurd,” said AEA Secretary General Ulrich Schulte-Strathaus. “This is simply not true. The allocated certificates have to be surrendered; this is not money which airlines can reinvest.”

 

An average airline will need to acquire 27% of its permits from the market, said ERA Director General Mike Ambrose. “The Commission has got this completely wrong. Contrary to its statement, this will hamper industry investment in new technologies and biofuels.”

 

The three associations, based on a carbon allowance price of around €28 by 2020, estimate the industry will be saddled with EU ETS costs of €17.5 billion between 2012 and 2020.

 

“Companies depend on air links to do business. Adding costs against a backdrop of economic uncertainty will only hinder the recovery,” said Sylviane Lust, Director General of IACA.

 

In 2012, 85% of aviation allowances will be allocated for free, reducing to 82% in the period 2013-2020. The free allocation is made on the basis of the airline’s share of total amount of passengers and cargo transported in 2010, measured in TKs. However, airline emissions have steadily increased since the 2004-2006 emissions cap so the percentage of free allowances airlines will receive has reduced accordingly. The Commission estimates that in 2012, aviation emissions covered by the EU ETS will have risen 9% above 2004-2006 levels and the increase in CO2 emissions above total free allocations will be 60.1 million tonnes. By 2015, the figures will have risen 16% and 86.6 million tonnes respectively.

 

Analysts Point Carbon have calculated airlines will receive 60-70% of their allowance requirement for free. However, VerifAvia CEO Julien Dufour believes that although this might be the industry average, there will be a wider than expected variance between operators. “While some airlines will receive 20-30% for free, some airlines may receive up to 90-100% for free,” he said.

 

Since the free allocation benchmarking announcement, Dufour has carried out an assessment on behalf of VerifAvia’s aircraft operator clients, basing his calculation on an assumed increase in emissions of 10% between 2010 and 2012.

 

The chart below from VerifAvia shows the percentage of free allowances for its 70 clients ranges from a few per cent to nearly 100%, with an average of less than 60%.

 

 

 

(source: VerifAvia)

 

 

“The EU ETS will definitely penalise regional and medium-haul airlines,” he said. “Long-haul and charter airlines will be better off, which makes sense because long-haul airlines have a better fuel efficiency as the fuel burn during the landing/take-off (LTO) cycle is spread out over a greater distance. In addition, long-haul flights generally have a higher load factor.

 

“Charter airlines are also on the high side because they generally depart fully loaded. Medium-haul and regional airlines typically have a lower load factor and can only spread the LTO cycle fuel burn on a shorter distance, which penalises them.”

 

The big losers, points out Dufour, will be the non-commercial operators – the so-called small emitters – who will average only around 4% of allowances free of charge.

 

Consultants ETSverification has made available a spreadsheet calculator on their website (link below) for operators to calculate their allowance exposure.

 

Airlines are already planning their carbon allowance strategy and Air Berlin, Germany’s second largest carrier, announced on Monday it had concluded the first trade of European Union Aviation Allowances (EUAAs) with Commerzbank. EUAAs are the allowances that will be given for free and sold at auctions by EU member states. Along with EU Allowances (EUAs) and, up to a pre-defined limit, Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs), EUAAs make up the permits that will be required by airlines to fulfil their EU ETS obligations.

 

The transaction is for a “substantial” volume of EUAAs at an undisclosed price with delivery in December 2012.

 

“We are very pleased to have been able to execute our first EUAA transaction,” said Steffen Roesler, Head of Treasury at Air Berlin. “Trading EUAAs beside EUAs, CERs and ERUs will give us more flexibility and the opportunity to minimise our cost of compliance.”

 

Commerzbank’s Ingo Ramming commented: “The EU ETS will bring new challenges to the aviation sector and a pro-active approach is required to manage carbon-related risks. We are pleased that we were able to support our client in this field and have been the first bank to enter into an EUAA transaction.”

 

As Andrew Pozniak of Green Aviation Solutions explains, EUAAs do not come into existence until the end of February 2012 but he speculates that Air Berlin may be realising now the future estimated cash value of its allowances.

 

“If, hypothetically, they were to receive one million free allowances and the bank is willing to pay €10 each, then that is a nice cash injection of €10 million,” he said. “However, the benefit may only be temporary because that number of allowances, plus growth, will need to be submitted in April 2013 for their 2012 verified emissions. If in 2013, the carbon price is lower than this deal with Commerzbank then they will profit but if higher then it will, of course, cost them more. Commerzbank needs to make similar forecasts and have speculated accordingly.”

 

Pozniak reported airlines are approaching him now to discuss carbon strategies and said it was important to minimise EU ETS cost impacts but advises carriers not to rush and make the wrong financial decision.

 

 

 

Links:

European Commission – Benchmark on free emissions allowances for airlines announcement

European Commission – Benchmark Q&A

DECC

AEA/ERA/IACA statement

VerifAvia

ETSverification – Exposure calculator

Green Aviation Solutions

 

 

Free allowances of the top 40 airlines assigned to the UK (source: DECC):



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