Isra-Mart srl: Carbon Plan May Weaken EU Airlines’ Position, Deutsche Bank Says

www.isramart.com
The European plan to impose carbon limits on aviation could undermine the competitiveness of the region’s airlines as they may not be able to shift to passengers all the related costs, Deutsche Bank Research said.

The EU, which wants to lead the battle against climate change, decided in 2008 to include flights to and from the region’s airports in its emission-trading system as of 2012 after airline discharges in Europe doubled over two decades. The plan is under fire from airlines and governments outside the bloc, who claim it breaches international law.

“Fundamentally, emissions trading is an appropriate instrument to limit and/or reduce carbon emissions in aviation,” Eric Heymann and Joachim Hartel, analysts at Deutsche Bank Research in Frankfurt, wrote in a report dated yesterday. “However, the international orientation of the sector means that if the EU goes it alone on this issue the result will be competitive distortions to the detriment of European carriers.”

Carriers including American Airlines Inc. and United Continental Inc. are already challenging the law in an EU court, and China’s airline association said earlier this year the European initiative may prompt trade conflict. The United Nations aviation body adopted last week a non-binding resolution at the urging of 26 nations, including India, Japan and Russia, calling for the exemption of non-EU airlines from the cap-and- trade program.
Not Giving Up

The EU is not planning to give up or amend its plans in face of international opposition, Climate Commissioner Connie Hedegaard told a committee hearing in the European Parliament today. Her vow follows a non-binding opinion by an adviser to the EU court handling the U.S. airlines lawsuit that the bloc’s emissions measure is compatible with international law.

When international carriers join the system next year they will be given emission permits making up 85 percent of the industry cap and will have to buy the remaining 15 percent at auction. The free allocation will fall to 82 percent from 2013 to 2020. Since the annual limit for the aviation industry was based on 2004-2006 pollution and the sector’s emissions rose by around 15 percent through 2011, airlines will have to buy permits to cover 30 percent of their discharges, Deutsche Bank Research estimated.
Most Efficient

The European plan will favor most-efficient carriers, which are due to receive proportionally more cost-free allowances based on benchmarks published by the commission, the bloc’s regulatory arm, in September. Member states are obliged to calculate the number of permits for each aircraft operator that applied for them by Dec. 26.

All “commercial carriers with significant operations to or from Europe” have so far complied with deadlines set in the EU legislation even as the industry voices opposition to the plan, Hedegaard told the European Parliament’s transport committee.

While the EU’s favored choice is a global solution to cut greenhouse gases from aviation, Europe decided to act after more than a decade of international talks on the issue brought no international deal, she said. The bloc’s law offers a possibility of excluding incoming flights from a particular country if that nation implements equivalent measures to cut pollution from its air transport sector.

“I would just recommend we should stay calm, we should work with different partners, seek solutions,” she said. “Don’t believe that Jan. 1 is the clash date, it’s not.”

1.1 Billion Euros

The actual costs being faced by the airlines next year will be around 1.1 billion euros ($1.5 billion), assuming a carbon price of 15 euros, according to the Deutsche Bank Research report. EU allowances for December 2012 were 1.9 percent down at 10.11 euros today, losing 31 percent this year on oversupply concern and speculation that the European debt crisis may worsen.

“The financial burden on the airlines will depend on the extent to which the additional costs can be transferred to customers,” Deutsche Bank Research said. “Due to the fierce competition in the sector, airlines will probably have to bear part of the costs themselves. True, the additional burden is likely to be moderate at first, but it affects a sector that for structural reasons only generates low margins.”

Any increase in air fares related to the inclusion of airlines in the ETS will be “modest at most,” ranging from $1.40 to $8.60 per ticket each way on long-haul flights at current CO2 prices, according to the European Commission.

EU airline ticket prices will probably increase faster on intercontinental flights than those of foreign peers, and a potential consequence could be shifting of passenger flows from European hubs, such as London, Paris or Frankfurt, to non- European airports, Deutsche Bank said.

“In the near future, traffic flows will be diverted only little because of the integration of the aviation sector in emissions trading,” it said. “Nevertheless, non-European airlines and airports stand to benefit in intercontinental traffic. The growth of the sector will be curbed.”