Airline emissions scheme deadlines loom

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With the first reporting stages for Europe's inclusion of aviation into its emissions trading system just months away, the process is already facing delays, concerns many smaller operators are not ready and the continued possibility of legal challenges.

Under the controversial expansion of the European Union's ETS to include aviation, airlines operating flights into the EU regardless of their country of origin will be covered by the scheme from 2012. The European Commission has now published a revised list, covering nearly 4,000 air operators, which historically wouldhave come under the scheme, to assign a member state to administrate their contribution.

The first stage of the process for calculating each airline's free carbon allowance is for carriers next year to submit revenue tonne kilometres figures as well as emissions figures, which will dictate how the free carbon allowances will be split. To this end airlines must submit plans for collecting this data bythe end ofAugust. But this is already mired in delays. The EC only published the final list in mid-August, and delays have filtered to national regulators. The UK, which has among the mostnon-EU carriers to handle, has already slipped the deadline for these plans to be submitted.Germany, Sweden and Italy have sincefollowed, .

IATA assistant director, aviation environment, Quentin Browell says implementation is causingconsiderable concern, as the competent authorities are moving at different speeds. "For airlines in Europe, it is clear who their authority is. For those outside Europe, it's not so clear.Many are ready to submit their plans, but others are struggling to understand what is required."

Sebastian Gallehr, chief executiveofenergy and risk management consultancy, Gallehr+ Partner, says while the big carriers are prepared, the many smaller operators are behind the curve. He says: "This is new forairlines and the authorities concerned and it is understandable that there is still confusion and uncertainty."He says carriers which do not submit monitoring plans, or do not have themapproved, before the start of 2010, risk losing out on their share of free allowances.

"But it does not matter if the deadline is delayed or not, you have to begin monitoring from the beginning of 2010," says Gallehr. The EC for its part stresses the 2010 start to the emissions monitoring requirement is law and will not change.

Aviation consultancy RDC Aviation and energy market intelligence specialist Point Carbon estimate the aviation sector could face a CO2 shortfall of 77 million tonnes when it enters the ETS in 2012. This equates to €1.1 billion ($1.6 billion) at today's spot price of €14.40 per tonnes of CO2. "The cost is just an indication," says senior analyst at Point Carbon, Andreas Arvanitakis. "The actual cost will be whatever the carbon price is in 2012." But he describes the €1.1 billion annual cost figure as "conservative" given current forecasts of the spot price for carbon in 2012 of nearer €20 per tonne. Indeed the shortfall seems likely to grow over the decade as the terms of the scheme toughen in 2013 and air transport grows.

IATA estimates a cost€2.4 billion at a carbon price of €30 per tonne in the first year, 2012. Browell adds: "We do not know what the cost of carbon will be in 2012, and how it might change between 2012-20."

LARGER SHORTFALL

RDC Aviation managing director Peter Hind says carriers with only a relatively gradual increase in growth by RTKs since 2006 are likely to face a disproportionately larger shortfall then those with faster growth over that period, as the latter carriers will now take a larger share of the allowances. He says US carriers could be particular hard hit if the transatlantic market remains weak next year but rebounds by the time ETS begins in 2012, while legacy carriers are in general likely to be harder hit than the faster growing low-cost rivals. Low-cost carriers though face their own challenge in that the allowances are based on weight, including freight.

Airlines may be able to ease the cost burden byinvesting directly in clean development mechanismprojects, allowable under the Kyoto Protocol, which provide a discount on carbon prices. "In theory it will be possible for an airline to roll-up its sleeves and get in a CDM, and get them at a €4 to €5 discount. Pretty much half the total shortfall could be covered by CDMs," says Arvanitakis.

Europe's unilateral imposition of the ETS on non-EU carriers has prompted talk of an overseas challenge, such as from the US. While the White House favours domestic cap and trade, Air Transport Association vice-president of environmental affairs Nancy Young expects the US to mount a legal challenge against the EU ETS. However, a legal challenge cannot occur until after EU member states incorporate ETS into their laws.

In addition, she expects the US to wait on possible legal action until after the DecemberUNClimate Change Conference in Copenhagen, which will set general greenhouse gas emission targets to take effect after the Kyoto Protocol expires in 2012. Browell adds: "We don't know what may come out of Copenhagen, but we are calling on governments to adopt a global sectoral approach to aviation emissions."

Meanwhile though the Obama administration has pushed for a domestic cap and trade system, it remains to be seen if this will survive the senate this year and how it pertains to airlines. The Senate, which rejected earlier cap and trade legislation, only narrowly passed this bill even with the Democrats majority in the House. While a key Senate committee has started holding hearings on climate change, the Senate has become preoccupied with healthcare reform andYoung suggests healthcare will take up most of their bandwidth.