EU CO2 Scheme May Cost Airlines EUR€2 Bln By 2020

October 26, 2011

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Airlines are likely to be out of pocket by around EUR€2 billion (USD$2.8 billion) in 2020 from taking part in the EU emissions trading scheme (ETS) as not all carriers will be able to pass on the costs to customers, a report said on Wednesday.

From January 1 2012, about 4,000 airline operators will face emission limits on all flights into, out of or within the European Union -- regardless of nationality or operator -- and must submit emission permits for each tonne of carbon dioxide (CO2) released.

Several airlines and industry groups in the United States, China, India and elsewhere are challenging the EU legislation.

The aviation sector will have a total deficit of 844 million carbon units over the period 2012 to 2020, after taking into account the free allowances handed out to airlines and their carbon emissions over that period, said the report by Bloomberg New Energy Finance.

The total deficit is 35 percent of the sector's expected carbon emissions of 2.4 billion tonnes over the nine-year period, it said.

The report gave low medium and high scenarios for the costs, but in its conclusion it highlighted the medium figure of EUR€2.17 billion in 2020, with a medium projection for the carbon price of EUR€17.9 a tonne. Benchmark EU Allowances are currently trading at around EUR€10.15.

"At current EUA market prices this translates to an annual 'out-of-pocket' cost of EUR€762 million in 2012 and EUR€2.17 billion in 2020," said the report.

These costs represent 0.24 percent of the revenue associated with flying the routes covered by the EU ETS in 2012 and 0.54 percent of revenue in 2020, BNEF said.

"There will also be winners and losers within the industry as the ability to pass on costs will vary by route flown and customer profile," the report added.

Guy Turner, an analyst at BNEF and author of the report, was unable to identify the potential winners and losers, saying that would require very complex calculations.

These include comparing how many EU allowances each airline gets in relation to the miles they fly, as well as the ability of each carrier to pass on costs to their customers.

"On the aggregate we think the industry is going to benefit in the long run, at least up to 2020, by the inclusion of the sector in the EU ETS," he said.

"The long-haul carriers might be better off in terms of the relative distribution of allowances, but they may be less able to pass on those costs to customers."

He said the estimated costs and benefits for carriers taking part in the EU cap-and-trade scheme have varied greatly between those made by industry and the European Commission, the EU executive that proposes carbon market legislation.

For instance, the International Aviation Transport Association (IATA) has said the cost of compliance would amount to USD$17.7 billion over the 2012-2020 period, while the Commission has said the industry could reap a profit of USD$20 billion over the same period.

Airlines' free allocation also differs widely, depending on the carrier, according to a Point Carbon report in September, which said scheduled airlines will receive between 20 and 100 percent of their 2012 permit requirement for free.