Analysis shows 84m tonnes of aviation CO2 covered by EU ETS in 2012 as cargo airlines reap windfalls

Analysis shows 84m tonnes of aviation CO2 covered by EU ETS in 2012 as cargo airlines reap windfalls | Sandbag

Thu 9 Jan 2014 – According a Sandbag analysis, over 1,000 participating airlines and aircraft operators reported between them a total of 84 million tonnes of CO2 emissions for the first year of aviation’s inclusion in the EU Emissions Trading Scheme (EU ETS). Around 89 per cent of eligible operators fully complied with the scheme, representing 98 per cent of intra-EU aviation emissions. Although the one-year ‘Stop the Clock’ (STC) derogation allowed operators to opt out from having to surrender allowances for extra-EU international flights, a number of major air cargo carriers based inside and outside the EU chose to comply with the full scope of the scheme, enabling them to end 2012 with a surplus of free allowances representing a windfall, says Sandbag. Although denied by the airline, Sandbag estimates Europe’s biggest emitter, Ryanair, stood to reap a windfall in 2012 of around 8 million euros ($10.9m) through its passenger EU ETS levy.


An analysis of the EU Transaction Log (EUTL) by Sandbag, a UK-based not-for-profit research and campaigning organisation that focuses on emissions trading, shows that a total of 1,169 airlines and aircraft operators participated in the first year of the EU ETS, with 1,043 fully complying. Two-thirds of the participants were international, non-EU operators with the United States having the largest country representation – 470 in all – but the great majority were small emitters, such as business jet operators. Around 89% (75 million tCO2) of 2012 emissions came from EU airlines and operators, with 42% of all emissions coming from just 10 EU airlines.


Under the full scope of the EU ETS, just under 174 million free allowances were allocated to the 1,169 operators but the number was subsequently lowered to around 71 million following the reduced intra-EU/EEA scope of the STC derogation. Thus 103 million free allowances were to be returned by the operators.


The majority of operators have incurred a cost as a result of their inclusion in the EU ETS but, claims Sandbag, there have also been airlines that have incurred a windfall through surplus free allowances as well as the opportunity of passing through the cost onto customers.


The table below ranks the Top 10 airline operators according to their 2012 emissions and includes the number of free allowances they received, the size of their surplus or deficit and the number of international offsets they surrendered.

Top 10 emitting airlines in the EU ETS in 2012, including estimated cost of compliance (source: Sandbag)



In 2012, operators were permitted to use carbon credits, or offsets, for up to 15% of their emissions, which will be reduced to a maximum of 1.5% from 2013-2020. Offsets come from clean development mechanism (CDM) and joint implementation (JI) projects located mostly outside of the EU, and are a cheaper form of compliance compared to surrendering EU aviation allowances (EUAAs). The bigger airlines were quick to take advantage and nearly 11 million offsets were surrendered, representing 87% of the total 2012 offset budget.


The overwhelming majority of CER credits (75%), which amounted to 5.6 million, were assigned to CDM projects in China, while 41% of ERUs (the remaining 5.3 million) originated from Russia JI projects – countries implacably opposed to the Aviation EU ETS.


Sandbag admits that estimating airline costs incurred by the EU ETS is difficult, with the bigger airlines likely adopting strategies that include a degree of hedging, swaps and offset usage to capitalise on arbitrage opportunities. It has therefore based its numbers in the above table on a conservative average of EUA, CER and ERU prices in 2012.


As the table shows, Thomson Airways’ free allocation was larger than their 2012 emissions, demonstrating the airline's historical average is greater than its current emissions, says Sandbag, and indicates a reduction of capacity, an increase in fuel efficiency, or a combination of both. On top of this, it reports, the airline has also used international credits to meet its compliance obligation, freeing up free allowances in the process. Sandbag estimates the airline ended 2012 with a surplus of allowances worth €300,000 ($400,000).


Analysis of the EUTL by Sandbag reveals an interesting cross-section of carriers ending 2012 with a surplus of free allowances. One obvious reason for a surplus is that the initial free allocation was too generous. Another reason, suggests Sandbag, is that the benchmark used for setting the free allocation was disproportionately generous to airlines flying long haul, with some – mainly cargo operators – choosing not to opt for the STC derogation and instead participate in full with the scheme. This allowed them to retain and make use of all allocated allowances.


“The exact compliance strategies of these companies are not known, but it is obvious that their decision to comply with the scheme is influenced by this financially lucrative windfall,” says the report. “Airlines will be quick to point out that these allowances were given for free and will be needed for compliance at some stage. Nevertheless, these allowances represent a financial asset on the books of companies and are a windfall profit.”


Of the 1,169 operators in the EUTL, 132 have a surplus of allowances of some degree, totalling just over 10 million, and worth around €39 million based on a recent EUAA price of €3.88. However, Sandbag has some concerns over the accuracy of the EUTL in this respect and estimates the number of airlines with a surplus as closer to 70.


Some of the international carriers complying with the full scope of the EU ETS include Korean Air, FedEx, Airbridge Cargo, Nippon Air and Lufthansa Cargo. Lufthansa has been one of most vocal critics from within Europe of the EU ETS but Sandbag estimates its cargo subsidiary had a surplus of 752,193 allowances valued at nearly €3 million ($4m). Cargolux was found to have had the largest surplus of allowances, which are valued at €3.15 million.


Sandbag expresses concern that airlines passed on the cost of complying with the full scope of the EU ETS to customers but subsequently took advantage of the STC opt out, leading to a potentially bigger source of revenue for airlines than a surplus of allowances. However, establishing the size of these revenues is difficult since nearly all airlines have been less than transparent over cost pass-through. Ryanair, Europe’s largest airline in terms of passengers and intra-EU flights, is a commendable and notable exception, points out Sandbag.


Ryanair was the only carrier to publicly announce a flat EU ETS fee of €0.25 per passenger per flight. Using what it describes as a conservative calculation, Sandbag estimates the actual cost to Ryanair passengers was €0.13 in 2012, netting the airline a €8 million ($10.9m) windfall, but pointing out that Ryanair’s 2012 annual report stated that any windfall would be used to pay future compliance costs.


The airline rejects the Sandbag figures. “We don’t comment upon, or engage in, rumour or speculation. Like many such claims from environmental lobbyists, they are factually inaccurate and untrue, which is why we don’t comment on them,” a Ryanair spokesman told GreenAir, who pointed out that the €0.25 levy was only charged on non-promotional tickets, approximately 60% of total tickets, and “not all tickets, as wrongly claimed”.


In 2012, Delta Air Lines announced a $3 surcharge each way on fares between the United States and Europe, a move followed by other US main carriers, although this was not publicly linked with the EU ETS. The charge was added ahead of STC, which subsequently led to Delta only being required to pay for emissions from intra-EU flights that totalled 3,433 tonnes of CO2 in 2012. Sandbag says it is unclear whether the charge was, or still is, being levied on passengers, noting only that since STC, Delta had said it was monitoring and evaluating developments.


“Our hope is that Delta did not levy this charge,” says Sandbag. “As for other international airlines who complied with ‘Stop the Clock’, the cost was, as described by Air Canada in its annual report, insignificant.”


Identifying those airlines and aircraft operators who should have complied but did not is difficult, admits Sandbag. A failure to provide data and open a registry account effectively makes operators invisible from public scrutiny as they do not appear in the EUTL, although the European Commission has put a figure of 12 million allowances against these operators. As was well publicised, all Chinese and most Indian airlines did not comply following instructions from their authorities.


A second form of non-compliance is that of operators reporting emissions data and having a registry account, thus appearing in the EUTL, but then failing to surrender allowances. Such operators are given a non-compliance status in the EUTL and Sandbag has identified 126 of them, but there may be factors that make this status unreliable due to issues such as technical errors or late submissions, it says.


Sandbag urges EU Member States to enforce the statutory fine of €100 for every tonne of CO2 operators have failed to surrender during 2012, as well as to have to make up the shortfall, as set out in the EU ETS directive. “We fail to see why exceptions should be made for airlines just because they dislike this particular EU legislation. Member States’ failure to enforce the ETS for airlines in 2012 would simply give the impression that they are a special case and merit special treatment. This is far from the truth. Evoking the ‘polluter pays’ principle on which the ETS is based, all companies should pay for their externalities,” says the report.


The organisation backs current proposals by the European Commission to replace the one-year STC derogation with new legislation that would see all emissions occurring in European airspace regulated. “The EU must, as a bare minimum, control pollution in its own sovereign airspace,” says Rob Elsworth, Sandbag Policy Analyst, who also calls for a reinstatement of the full, original scope of the EU ETS “as soon as politically possible”.


Sandbag’s Phil MacDonald, who co-authored the report, added: “Until the international community can agree on a global measure for tackling aviation pollution, the scheme remains an important trailblazer. The EU must not back down any further if it wishes to retain international credibility. An airspace-only approach is a fair and workable compromise for now, and is the best route towards global action on aviation and climate change.”




Sandbag report: ‘Aviation and the EU ETS – What happened in 2012 during Stop the Clock?’ (pdf)





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