Fare Increases May Give Airlines A CO2 Windfall

January 10, 2012

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Airlines could reap windfall profits from a USD$3 passenger surcharge, introduced to cover costs from an EU law regulating greenhouse gas emissions, because the carriers will receive most of their CO2 permits for free.

Five US air carriers including Delta Air Lines and United Continental last week imposed the levy on their Europe-bound flights, just days after the EU on January 1 forced all airlines using its airports to pay for their emissions under the bloc's cap-and-trade system.

Yet, the current cost for complying with the scheme designed to tackle climate change is likely to be lower than USD$3 per passenger because in 2012 airlines will be awarded 85 percent of their permits for free and the price they need to pay for the remaining emission certificates is sitting near record lows.

Peter Hind, an aviation analyst from UK-based RDC Aviation, said if Delta were forced to buy every permit in the open market it would cost them around EUR$euro;3 per passenger, based on current EU carbon permit prices equivalent to a tonne of CO2 of around USD$8.55.

"That would, of course, cover all of their CO2 emissions and therefore you could work on the basis that their free permit allocations were a windfall - assuming that it doesn't damage demand, of course," Hind said.

EU rules for calculating emissions mean carbon costs can vary by airline and depend on the fuel efficiency of each aircraft and how many passengers are on board each flight.


A study part funded by the US government dated December 31 found that if airlines are able to pass to passengers all of the costs of the emission certificates they hand in to EU authorities they will pocket USD$2.6 billion over the next eight years because most permits will be given away for free.

"Windfall gains from free allowances may be substantial because, under current allocation rules, airlines would only have to purchase about a third of the required allowances," said the study by academics from the Massachusetts Institute of Technology and Muenster University, which was published in the Journal of Air Transport Management.


Many US airlines oppose the EU's unilateral regulation of emissions but savvy pricing practices could result in many carriers turning a profit from their participation in the EU ETS, according to Annie Petsonk, international counsel for US green group Environmental Defense Fund.

"We have urged airlines to be transparent about how much they are adding to the price of a ticket and what they are doing with the money," she said.

Despite believing airlines could increase fares by around 3 percent per passenger as a result of EU ETS costs, OAG, a second UK-based analyst group, said it was "highly unlikely" the companies would achieve a profit since EU regulators will be vigilant.

"The whole scheme is transparent with yearly reporting of usage etc. I suspect various EU regulators will be watching very closely," an OAG spokesman said.

The progressively lower EU emission limits imposed by the ETS mean that airlines will need to invest in cleaner methods of flying or face ever greater costs, although estimates of those costs vary considerably.

The European Commission that designed the scheme estimates that a trans-Atlantic ticket could increase by USD$7.65 with a carbon price of USD$19.15, while the American Aviation Institute, a commercial aviation think tank, told reporters last month that the EU's carbon law might add USD$70- USD$90 based on current oil prices.

It could be difficult for passengers to know how much of their ticket price is the cost incurred by the EU scheme, according to Rick Seaney of Farecompare, which monitors flight price data.

"The airlines will never admit to the reason for a surcharge because they will say they don't discuss pricing decisions."

Delta Air Lines was unavailable for comment.