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Lufthansa, Delta Jockey for Free Carbon Permits: Energy Markets

Lufthansa planes sit on the tarmac at the airport in Frankfurt. Photographer: Ralph Orlowski/Bloomberg
Lufthansa planes sit on the tarmac at the airport in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Jan. 28 (Bloomberg) -- The biggest expansion of Europe’s carbon market is pitting Deutsche Lufthansa AG against Japan Airlines Corp. and Delta Air Lines Inc. in a contest for free permits as traders struggle against computer hackers.

Airlines serving the European Union face caps on their greenhouse-gas emissions starting next year, when they join almost 12,000 factories and power stations in the world’s largest carbon market. The EU regulator, which pushed back an August 2009 deadline for setting the limits, said Jan. 18 it needs more time to verify airline emissions data and “respond to questions raised by the industry.”

The European Commission, already contending with an unrelated halt to spot CO2 trading because of hacking attacks, faces criticism from airlines over the way it plans to allocate a limited supply of free permits. The EU decided in 2008 to hand out permits for this decade 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.

“Due to these external effects, there is a distortion of competition within Europe, and we have to live with these unbalanced results until 2020,” said Peter Schneckenleitner, a spokesman for Cologne-based Lufthansa, Europe’s second-biggest carrier. Carriers that were less affected by the disruptions will get more free permits than they deserve, he said.

The EU, which last week tightened security rules after the alleged theft of emission permits in at least three countries, has yet to verify and publish historical airline emissions data that will determine the annual caps. The airlines’ limit will begin next year at 97 percent of the average 2004-2006 level, dropping to 95 percent in 2013.

Filled to Capacity

Airlines will have to buy 15 percent of the permits set by the EU cap for 2012. The rest will be distributed for free based on the loads that planes carried, whether passengers or freight, for every kilometer flown in 2010.

“Filling planes to capacity in 2010 would have helped them get more free allocation and is exactly the type of behavior the emissions trading system is designed to incentivize,” said Matthew Cowie, a Bloomberg New Energy Finance analyst in London.

The value of trades in the EU market, started in 2005, was 80 billion euros ($110 billion) in 2010. Including airlines will add about 270 million tons of emissions a year, according to New Energy Finance. That compares with the 115 million-ton enlargement in 2007, when Romania and Bulgaria joined. The EU handed out 2.1 billion tons of allowances last year.

Boost for Prices

Airlines will emit more than their caps and end up paying for about 37 percent of all the allowances they need in 2012, rather than the 15 percent included in the cap, New Energy Finance estimates. For the period through 2020, they will buy an additional 880 million tons, enough to boost EU permit prices, according to Cowie.

December 2011 carbon permit prices reached a seven-week high of 15.03 euros a ton and traded at 14.74 euros as of 4:45 a.m. today on the ICE Futures Europe exchange. Barclays Capital forecasts carbon prices will average 28 euros next year.

The alleged theft last week of 1.3 million tons of allowances from the registry tracking ownership of permits in the Czech Republic forced ICE to close its market for next-day permits for more than two weeks starting Jan. 20. The overall prompt market accounted for 12 percent of EU carbon trading on exchanges last year, Prospex, the London research firm, said.

“What happened in the Czech Republic may show the EU’s plans are ahead of its capabilities,” said Anthony Concil, a Geneva-based spokesman for the International Air Transport Association, the lobby group based in Montreal. EU airline emissions rose half as fast as passenger growth last year, indicating that carriers already are curbing greenhouse gases, Concil said Jan. 26 by phone.

‘Incentive’

About 1.5 billion tons of free permits will be distributed to airlines through 2020, Cowie estimates. Those would be valued at 22 billion euros, based on current prices, meaning carriers had an incentive to minimize disruptions last year.

British Airways, part of International Consolidated Airlines Group SA, lost about 3 percent of its annual capacity last year because of strikes, 1.4 percent due to volcanic ash and 0.5 percent as a result of unfavorable weather, according to Paul Butler, an aviation analyst at Macquarie Group in London.

“2010 has been an unprecedented year for us in terms of disruption to our operation,” Cathy West, a London-based spokeswoman at BA, said last month in an e-mail. “We are therefore disappointed that it is 2010 that will be used as the baseline for the EU emissions-trading system.”

For Lufthansa, the ash disruption alone will probably force it to spend at least 10 million euros on emissions permits it otherwise would have gotten for free, Schneckenleitner said.

Jet-Fuel Surge

For every ton of fuel burned in a jet engine, planes emit more than 3 tons of carbon dioxide, requiring three permits, according to Peter Hind, managing director of RDC Aviation Ltd., a Nottingham, England-based research consultant. That would cost about 45.60 euros based on yesterday’s 2012 futures prices.

“Obviously we are doing the resource investment needed to stay competitive,” said Michael Powell, chief financial officer of Wizzair, the biggest low-budget airline in central and eastern Europe, based near Budapest. “We will approach this cost element very much as the jet-fuel question, where the volatility of the prices also needs to be properly managed.”

The cost of 3 tons of carbon permits is the equivalent of $62.48, or 7 percent of a ton of jet-fuel. Jet fuel in northwest Europe rose 36 percent in the past year and traded today at $891 a ton in the Amsterdam-Rotterdam-Antwerp region barge market, show data compiled by Bloomberg.

Round-trip air fares may rise 9.60 euros to 39.60 euros on average as a result of the new limits, according to the EU.

Cutting Costs

Airlines may burn less fuel, reducing spending on that and emissions permits, Hind said. EasyJet Plc said on Jan. 20 it hedged 70 percent of its fuel needs for the year to September at $734 a ton. Jet fuel in northwest Europe averaged $783 a ton since September last year.

“We are currently working with aviation clients, helping implement hedging strategies and access the market,” Andrew Ager, the London head of emissions at Prudential Financial Inc.’s Bache Commodities Ltd, said by e-mail.

Emissions trading will benefit carriers with hubs just outside the EU, because customers using them will have shorter flights subject to emissions caps, Schneckenleitner said.

Turkish Airlines, while impacted by the volcano and bad weather, “has not been affected like other European carriers, that’s for sure,” spokesman Gokalp Yazir in Istanbul said by e-mail on Jan. 7. The airline is using newer planes and other low-emitting technology to boost fuel efficiency and comply with emission laws, he said. Turkey is not a member of the EU, giving it lower carbon costs when flying to non-European countries.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net; Catherine Airlie in London at cairlie@bloomberg.net; Ewa Krukowska in Brussels ekrukowska@bloomberg.net

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

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