New Zealand airlines become the first in the world to operate under a mandatory national carbon ETS
(photo: Hamilton International Airport)
Fri 2 July 2010 – The first major carbon emissions trading scheme to affect airlines started in New Zealand yesterday and is expected to add around three New Zealand cents (two US cents) to a litre of jet fuel. Unlike the European model, which starts in 2012, emissions obligations under the New Zealand Emissions Trading Scheme (NZ ETS) are accounted for ‘upstream’ so fuel suppliers bear the responsibility for compliance and they in turn pass the costs on to the user. However, a large fuel user, such as an airline, can voluntarily ‘opt-in’ to the scheme and take on the responsibilities for carbon emissions accounting. Of the three major airlines operating in the country – Air New Zealand, Jetstar and Pacific Blue – only the former has decided to shoulder the obligations and liabilities from the beginning. The scheme applies only to domestic air travel and jet fuel used on international flights is exempted.
Fuel suppliers in New Zealand – or airlines, if they opt in – will have to purchase emissions units through the commercial trading market to cover their emissions. The primary unit of trade for the ETS is the New Zealand Unit (NZU), created and issued by the New Zealand government. One NZU is equivalent to one tonne of carbon dioxide equivalent.
Another difference from the EU ETS is that the government is not expected to sell any units, so fuel suppliers and/or airlines will have to buy them from other sources. Any revenues will therefore not go to the government, a sore point amongst many airlines participating in the European scheme. According to the strategies of the participants, some may purchase overseas, others may prefer to buy NZUs originating, for example, from forestry activities.
As the scheme is linked internationally, Kyoto units can be used to meet obligations, including emission reduction units (ERUs) generated by Joint Implementation projects, certified emission reductions (CERs) generated by Clean Development Mechanism (CDM) projects and removal units (RMUs) awarded to Annex B countries on the basis of net removals by carbon sinks in the land use, land-use change and forestry sector.
Jörn Scherzer, an adviser with the Environment team at the New Zealand Ministry of Transport, says the NZ ETS and the fuel price increases present an incentive for consumers and companies to review areas where they can increase efficiencies, optimize operations and reduce fuel usage.
“By increasing efficiency, businesses can get better value for money and manage the effect of the ETS,” he says. “For instance, an airline may wish to invest in more efficient planes to increase fuel efficiency in the shorter term and invest in biofuels to reduce its reliance on fossil fuels in the longer term.” Biofuels are exempted from the ETS, he confirms.
Scherzer finds it interesting that only Air New Zealand has decided to opt in to the scheme so far. “A key reason for an airline to opt in may be to pursue a particular carbon trading strategy,” he says. “For instance, they may want to buy only particular types of carbon units in line with their branding. In a way, this may not be dissimilar from different airlines having very different oil price hedging strategies.”
Air New Zealand spokesman Mark Street told GreenAir Online that the airline has been evaluating the marketplace and formulating its carbon strategy.
“Air New Zealand has opted in as we believe we’re best placed to minimize the ETS cost to our business and to our customers,” he says. “It was for this reason Air New Zealand encouraged the government to include the ability for airlines to assume direct liability for their jet fuel related emissions.”
In the first 30-month transition phase of the scheme, the airline expects to face an additional NZ$6 million ($4.16m) cost on its domestic jet fuel consumption. It notified customers in May that domestic fares would rise on July 1 as a result of the introduction of the NZ ETS, coupled with higher jet fuel prices, with an increase of NZ$1 or NZ$2, depending on fare class.
“While we don’t favour anything that increases the cost of travel for customers and feel the ETS results in an inequitable allocation of costs between sectors, we would rather focus on actual climate change reduction initiatives than endless discussions on regulatory frameworks,” says Street.
Pacific Blue says it supports a cap on emissions and “an equitably applied emissions trading scheme that avoids distortion”. The airline has decided not to opt in to the scheme during the transition phase, during which there is a cap on permit costs.
Colin Lippiatt, Public Affairs Manager for the airline’s parent Virgin Blue, explains: “In the current circumstance, we are taking the time to develop a long-term strategy which best suits us going forward.”
Pacific Blue has not yet announced a fare increase as a result of the introduction of the NZ ETS but Lippiatt warns: “As with any airline operating cost, it is likely that over time fare levels will be adjusted accordingly.”
Qantas-owned Jetstar says that despite the introduction of the NZ ETS, it remained committed to offering the lowest fares in the market for its New Zealand customers whilst still meeting its obligations under the scheme. However, the airline claims the scheme will impose “significant” compliance costs on it and the other domestic airlines.
"An internal carbon readiness taskforce has been preparing the Qantas Group for the commencement of mandatory carbon trading and reporting regimes,” reports Tom Woodward, a Qantas spokesman. “Jetstar has decided to adopt the ‘default’ position in the initial phase of the scheme, meaning costs will be passed on to the airline from its fuel supplier rather than being managed directly by the airline.
“Opting in would lock Jetstar into a commitment period of four years, at a time of regulatory and competitive uncertainty for the aviation industry in respect of climate change policy, as well as continued volatility in operating conditions more broadly. However, Jetstar does have the flexibility to opt in at any stage, contingent on global carbon market developments.
“More broadly, the Qantas Group has a comprehensive environmental strategy in place designed to increase the fuel efficiency of our operations and mitigate our carbon footprint. We regard this as both a commercial and an environmental priority, particularly as new climate change policies are introduced in different jurisdictions where we operate.”
The aim of the New Zealand ETS is to cut carbon emission levels back to those of 1990. In 2008, aviation was responsible for 1.3% of New Zealand’s carbon emissions.