EU ETS allowance shortfall will cost airlines up to 1.4 billion euros next year, say carbon market analysts
Tue 8 Mar 2011 – With the release yesterday by the European Commission of the baseline figure to be used for capping aviation emissions under the EU Emissions Trading Scheme (EU ETS), an analysis by Thomson Reuters Point Carbon and RDC Aviation shows airlines will face a shortfall of allowances that is likely to cost them around 1.4 billion euros ($1.95bn) when the scheme starts in 2012. This shortfall is likely to rise to 7 billion euros ($9.7bn) by 2020. The top 10 airlines, which also includes US carrier Delta, are likely to make up 23 per cent of the overall industry shortfall. The analysts suggest that if airlines make full use of their 2012 quota to import cheaper Kyoto offsets, they could save 575 million euros. RDC expects airlines to pass on at least some of their EU ETS costs.
Data released yesterday by the Commission (see article) shows the average annual CO2 emissions for flights that would have been covered by the EU ETS for the period 2004-2006 amounted to 219.5 million tonnes. The sector’s 2012 cap will be set at 97% of this baseline figure for 2012 – which will be reduced to 95% from 2013 – meaning a total of 212.89 million allowances will be created (one tonne of CO2 equals one allowance). Of these allowances, 15% will be held back for auctioning to the market and a further 3% will be reserved for new entrants and fast growing carriers.
The remainder will be issued to airlines for free, but in almost all cases they will not be enough so the sector as a whole will have to buy credits to cover the shortfall, say the analysts, who estimate the gap at 88.5 million allowances. With the current December 2011 EUA closing price standing at €15.48, the cost of these allowances could reach €1.4 billion.
“We now know the total number of allowances that will be issued for free to airlines will be 175 million in 2012. But what the official cap does not show is by how much each airline will be short,” said Andreas Arvanitakis, Associate Director at Thomson Reuters Point Carbon. “Our analysis suggests that while there are no absolute winners, some airlines fair better than others.”
Arvanitakis said airlines could reduce their costs considerably if they make full use of their quota to import Kyoto offsets, such as Certified Emissions Reductions (CERs), generated by the Clean Development Mechanism (CDM), and Emission Reduction Units (ERUs) generated from Joint Implementation projects. The quota is for up to 15% of their actual CO2 emissions, but this only applies to 2012, after which the quota could drop to a minimum of 1.5% of emissions from 2013.
“If all airlines were to make the most of their quota to use CERs for compliance, they could save €575 million in 2012, leaving a total bill of €825 million,” he said. “Savings could be even higher if airlines decide to invest in CDM projects directly. However, most airlines are unlikely to have the appetite or ability to access those credits and make the most of that discount.
“Because the quota is expected to be much tighter from 2013, the lower end of the cost range will almost double in that year to €1.6 billion.”
Added Arvanitakis: “Airlines are pretty efficient already due to their high jet fuel costs. This is an incremental increase for them, and until biofuels are widely available and at the right quality, emissions trading will be their main way of complying with the EU ETS.”
Aviation data modelling consultancy RDC Aviation says the ten largest airlines in terms of CO2 permit allocation will be Lufthansa, Air France, British Airways, KLM, Ryanair, Iberia, Delta, easyJet, Virgin Atlantic and Alitalia, in that order. The top three US carriers will be Delta, American Airlines and United Airlines.
“The top 10 will be in line for 74 million free allowances, equivalent to 43% of the total,” said Peter Hind, Managing Director. “We expect this group of airlines to be 21 million short, which accounts for 23% of the total industry shortfall. We also see the top three US carriers will be 5.4 million short.”
Operators will be considering whether their reduction commitments can be passed through. “The bottom line is that emissions trading will certainly increase cost pressure on airlines and I suspect that airlines will look to pass on at least some of this cost to passengers,” believes Hind.