Air Ticket Prices May Increase by 3% on EU Carbon Plan, OAG Says

The inclusion of airlines in the European Union’s carbon plan will cost the industry 3.5 billion euros ($4.5 billion) and may increase ticket prices by an average of 3 percent, aviation information provider OAG said.

The EU, which wants to lead the global fight against climate change, decided that flights to and from European airports should become as of 2012 a part of the bloc’s emissions trading system, or ETS, after airline carbon-dioxide discharges in the region doubled over two decades and international organizations failed to enact pollution curbs.

“This will create new costs for the entire sector of about 3.5 billion euros per year assuming a price level of 30 euro per allowance,” according to Luton, U.K.-based OAG, which gathers statistics on the global aviation industry. “It is forecasted that air fares will increase approximately about 3 percent due to carriers’ additional carbon tax that may lead to demand suppression on certain markets.”

The first expansion of the EU emissions cap-and-trade program abroad has drawn fire from countries including the U.S., Russia and Japan, which said the measure was inconsistent with international law. China’s carriers said last week they won’t comply with the rules and India signaled it may attempt to scupper the European plan.

Started in 2005, the EU ETS imposes pollution quotas on more than 11,000 utilities and manufacturers. Emitters that produce less carbon dioxide than their quota can sell surplus allowances, and those exceeding their limits must buy additional permits or pay a fine of 100 euros per ton of CO2.

Preferred Choice

The European Commission, the 27-nation bloc’s regulatory arm, has repeatedly said that while its preferred choice is a worldwide solution to cut greenhouse gases from aviation, it won’t give up the expansion of the system to cover airlines. The EU law offers a possibility of exempting incoming flights from a particular country if that nation implements equivalent measures to cut pollution from its air transport sector.

To avoid the EST compliance costs, international airlines may also opt to use non-EU points as intermediate stops, OAG said in a report published today on its website.

“Whilst this is not an option for EU-based passengers, European airports may become less competitive for passengers coming from outside the EU to transit through to an end destination outside Europe,” OAG said. “This would benefit those airports in non-ETS affected countries just outside the EU as well as those airports such as Dubai, Abu Dhabi and Doha that have configured their businesses around the transfer of passengers across the globe.”

Cost-Free Allowances

International carriers will be given emission permits making up 85 percent of the industry cap in 2012 and will have to buy the remaining 15 percent at auction. EU permits for delivery in December rose 3.6 percent to 6.84 euros as of 1:41 p.m. on the ICE Futures Europe exchange in London, still 53 percent down from a year ago.

The European plan favors most-efficient carriers, which are due to receive proportionally more cost-free allowances based on benchmarks published by the commission last year. The extent to which individual airlines will be able to pass ETS-related costs into consumers will depend on the efficiency of its route network, market pricing and price elasticity of the route, according to OAG.

“Those airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to passengers, as these costs will be a proportionately lower percentage of the ticket price than for lower priced economy passengers,” OAG said. “Low-cost and short-haul airlines that have lower premium revenues, and particularly those with older aircraft fleets, will be more affected by ETS scheme across their business.”

To contact Bloomberg News staff for this story: Ewa Krukowska} in Brussels at ekrukowska@bloomberg.net;

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net

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