Published on January 12th, 2012 | by Ravinder Casley Gera1
Much Ado About Nothing? Report Suggests Airlines Might Profit from EU Carbon Levy
January 12th, 2012 by Ravinder Casley Gera
The new year brought with it a new regime for air travel in Europe. Starting on January 1, all air flights taking off or landing at an airport within the European Union are included in the EU’s emissions trading system that limits the carbon emissions of pollution-intensive industries. Airlines must buy permits on the carbon markets to cover the emissions their flights produce.
As you might expect, the airlines are fighting this tooth and nail. A coalition of American airlines (including, yes, American Airlines) recently went all the way to the European Court of Justice to argue that the ban, when applied to non-European based airlines, was illegal because it infringed the sovereignty of non-EU states. (They lost.) China’s airlines have gone further, saying that they’re simply not going to pay, raising the prospect of a legal stand-off that could see them barred from EU airports.
But if a new study is correct, the airlines are making a lot of fuss for nothing. Inclusion in the emissions trading scheme won’t cost them a penny — and could actually lead to a €2 billlion windfall.
This slightly counter-intuitive conclusion was reached by a group of US-based academics, funded by the FAA. They calculated the effect of inclusion on the ETS on airlines, and the results were surprising. As EurActiv explains:
The study’s models make three key assumptions:
• A carbon price of €15 a tonne that increases by 4% a year
• A 35% increase in the airlines’ CO2 emissions between 2011 and 2020
• A full ‘pass-through’ of costs to the consumer
If all three happened, the report concludes that airlines could receive a $2.6 billion (€2.03 billion) bonanza.
Confused? Allow us to explain. For all the fuss about the ETS, the scheme is only actually going to require airlines to pay for 15% of their emissions. They get the rest of the allowances for free. If they pass more costs on to the consumer than they’re actually paying, they could make a tidy profit.
Not surprisingly, perhaps, the methodology of this study has been controversial. EurActiv goes on:
… even some staunch supporters of the ETS, questioned the methodology used in the report.
John Hanlon, the secretary-general of the European Low Fares Airline Association (ELFAA), said the central contention that allowance costs could be passed back to the consumer was a “canard” and a “fallacy”.
“I see no evidence to support that,” he told EurActiv. “There is an enormous sensitivity to airfares and the component most adversely affecting that is the price of fuel.”
So, who’s right?
It certainly won’t be as simple as the study claims for airlines to whack consumers with the full cost — and more — of the EU carbon levy. Europe’s air industry is fiercely competitive, thanks in large part to the low-fares airlines that Hanlon represents.
But it does seem certain that airlines will manage to pass most of the cost — of the 15% of permits that they actually need to buy — on to ticket prices. After all, the levy affects all those using European airlines equally, so there’s no reason why one should be able to afford to undercut rivals by swallowing the costs. A good guide to this is energy prices under feed-in-tariff systems, where the extra cost of paying the agreed rate for renewable energy is designed to be passed on to consumers, and usually is.
We doubt that the ETS is going to cost airlines that dearly or give them windfall profits. What it might do is compel them to take more steps to ensure planes are full — which is good news for emission reduction.
Still, we doubt all the studies in the world will stop American and Chinese airlines acting like the EU levy is going to bankrupt them. Fortunately, EU politicans don’t seem to be heeding them.