Airlines to Be Second-Biggest Sector in EU CO2-Trading System

Airlines will be the second-largest sector in the European Union’s emissions-trading system, after power generators, when aviation joins next year with a carbon- dioxide limit of 213 million metric tons.

The industry-wide cap on airlines aimed at fighting global warming will fall to 208.5 million tons of CO2 a year in 2013 under the decision today by the European Commission, the EU’s regulatory arm in Brussels. The inclusion of aviation in the cap-and-trade system may push up fares.

Europe’s emissions-trading program, the world’s biggest greenhouse-gas market covering more than 11,000 power plants and factories, requires companies that exceed their CO2 quotas to buy spare permits from businesses that emit less or pay a fine. The wider curbs will apply to carriers ranging from Air France- KLM Group and Ryanair Holdings Plc (RYA) to AMR Corp. (AMR)’s American Airlines and Singapore Airlines Ltd. (SIA)

“Firm action is needed,” Climate Commissioner Connie Hedegaard said in a statement. “Emissions from aviation are growing faster than from any other sector, and all forecasts indicate they will continue to do so under business as usual conditions.”

Roundtrip air fares within Europe may rise between 1.80 euros ($2.52) and 9 euros as a result of the new restrictions, the commission said today. A roundtrip flight from Brussels to New York at current carbon prices of around 15 euros could cost an additional 12 euros, it estimated.

Billions of Euros

The industry has countered that the rules, adopted in 2008, would reduce profit by billions of euros because operators would have difficulty passing on the costs to travelers. Airlines will add 32 million tons of demand for EU carbon allowances in 2012, Bloomberg New Energy Finance said today. That would be valued at 508 million euros at today’s prices.

EU permits for delivery in December rose 0.7 percent to 15.93 euros as of 14:21 p.m. in London and were 12 percent up this year. The EU emissions trading system is known as the ETS.

“Fact is that EU ETS means additional costs for Lufthansa up to 350 million euro a year,” said Peter Schneckenleitner, a spokesman for Cologne-based Lufthansa, Europe’s second-biggest carrier. “We still see the EU ETS very critically, a lot of legal prerequisites are still open. For us the ETS means a huge distortion of competition; especially non-EU airlines will benefit from it.”

The caps are based on a commission estimate that the European and foreign carriers to be covered by the trading program emitted a total of 219.5 million tons of CO2 a year on average in 2004-2006 during flights to and from EU airports.

Emissions-Trading System

Under the EU law extending the system to airlines in 2012, the annual limit will begin at 97 percent of 2004-2006 emissions and fall to 95 percent of those “historical” discharges starting in 2013. Airlines account for about 2 percent of global CO2 discharges.

“The inclusion of airlines into the emissions trading- system was necessary,” said Sanjeev Kumar, an associate at climate-protection group E3G in Brussels. The cap for 2012 was still “too generous,” he said.

The EU decided in 2008 that internal and external flights to and from the bloc’s airports should be added to the emissions-trading system as of 2012 after airline discharges in Europe doubled over two decades. Under the legislation, 82 percent of the emission allowances making up the airline- industry cap will be allocated for free and 15 percent will be auctioned. The remaining 3 percent will be put into a special reserve for later distribution to fast growing airlines and new entrants to the system.

Benchmarking Year

Permits for this decade will be handed out based on the efficiency of carriers in 2010, a year when fuel prices surged and Icelandic volcano ash, freezing weather and labor strikes disrupted travel. The EU said it has no plans to change the benchmarking year, a step that would require amending the law.

“We have not seen data to suggest that the impact of the ash cloud will have a material impact on the distribution of free allowances,” the commission said.

The EU will by Sept. 30 decide on the number of allowances to be auctioned, to be distributed for free and to be allocated to the special reserve. Member states should use the revenues from the auctions of permits to tackle climate change.

The permits that make up the airline caps will be on top of a supply already fixed through 2020 for energy and manufacturing companies. The EU cap-and-trade system started in 2005 with a three-year trading period, is now in a second phase that ends in 2012 and will enter a third stage from 2013 through 2020.

The inclusion of aviation into the ETS will save 183 million tons of carbon dioxide per year by 2020, a 46 percent reduction compared with business as usual, the commission said.

Carbon Program

“Some of these reductions are likely to be made by airlines themselves,” it said. “Participation in the EU system will also give them other options: buying additional allowances on the market or investing in emissions-saving projects” carried out under the United Nations carbon program.

The annual overall cap for installations currently in the system is due to fall by about 11 percent on average in 2013- 2020 from 2008-2012. In 2008, the commission said the annual average cap for those polluters would decline to 1.85 billion tons in 2013-2020 from 2.08 billion tons in 2008-2012.

Last October, the EU raised the cap in 2013 for power plants and factories by 6 percent to 2.04 billion tons to take account of the entry of aluminum and chemical makers into the trading system that year.

To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; Ewa Krukowska in Brussels at ekrukowska@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net; Stephen Voss at sev@bloomberg.net

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