While European aviation sorts out the details of joining the EU Emissions Trading Scheme, there are warnings about more to come
Scandinavian Airlines' (SAS) Hans Ollongren is philosophical about the rationale behind his airline group's ambitious strategy to reduce total carbon dioxide emissions by 20% by 2020.
Speaking to Flight International as Boeing 737-600 pilots prepared to demonstrate one of their famous green approaches from top of descent into Stockholm-Arlanda airport, Ollongren admits that allied to a suitably Scandinavian sense of climate-inspired altruism, the strategy also forms part and parcel of preparations for the European Union ETS.
From a financial perspective, the main thrust of the effort launched in early March is to reduce the number of carbon credits the group will need to buy once air travel starts trading on the world's largest carbon market.
SAS's new environmental target, which assumes annual passenger growth of 4%, means each group airline will need to actually halve CO2 emissions per passenger seat by 2020. That will be achieved through short- and long-term activities, with emission reductions achieved equally between technological developments including alternative fuels, next-generation aircraft and engines and operational measures.
Ollongren, senior vice-president corporate public affairs and environment and SAS's big picture vizir, says European legislators appear on track to include aviation within the existing ETS framework before 2012 and that an ambitious French EU presidency has already declared this one of its tricolor-waving objectives of its tenure during the second half of 2008.
"Most carriers have now formed relatively similar views and generally would support an open scheme and a limit to the level of auctioning, a later baseline for average annual emissions, a generous cap on that baseline and benchmarking on either a ATK or RTK basis depending on the business model," he says.
What the airline industry did not quite prepare for, however, was a mid-stage game changer in the guise of a review of the overall trading scheme launched in January by the European Commission, an overhaul that carries with it the fearsome prospect that all sectors could be subject to painfully high levels of auctioning from 2013.
"A high level of auctioning is bad news in any industry's book, especially so since aviation is a global industry and would lead to an acute competitive imbalance between European airlines and operators outside Europe that are able to spread the cost of flying into Europe through its extra-EU network. Unlike them, SAS Group would be completely exposed to the scheme," says Ollongren.
Why the change? After all, the latest official figures show that the 15 EU members who originally signed up to the Kyoto Protocol had by 2005 achieved a 2% cut in carbon dioxide compared to 1990 levels with forecasts indicating that, based on existing policies, this should rise to 7.4% by 2012 - just short of the Kyoto target.
Since then, however, more ambitious 2020 goals to cut overall greenhouse gas emissions by 20% compared to 1990 levels would, as Brussels admits, require a "much steeper reduction path" for industrial emissions.
This is precisely the aim of the latest ETS reform proposal for the post-2012 period. The 2013-2020 regime would not only mean an enlarging of the scope to new sectors, including aviation, petrochemicals, ammonia and the aluminium sector, but also to two new gases (nitrous oxide and perfluorocarbons), so that around 50% of all EU emissions will eventually be covered.
Critically, the proposal also foresees a huge increase in auctioning as early as 2013. While today, 90% of pollution allowances are given to industrial installations for free, the January 23 text says that "around 60% of the total number of allowances will be auctioned in 2013".
Carbon Leakage
Some energy-intensive sectors may, however, continue to be granted all their allowances for free if the commission determines that they are "at significant risk of carbon leakage" - relocation to third countries with less stringent climate protection laws. Sectors concerned by this measure are, however, yet to be determined.
Distribution of free allowances will be determined later by expert panels within the EC, although it reserves the right for allocations to be based on benchmarks, eg a number of allowances according to historical output, thus rewarding operators that have taken early action to reduce greenhouse gases. This, the commission believes, would better reflect the "polluter pays" principle and would give stronger incentives to reduce emissions, as allocations would no longer depend on historical emissions.
Those European businesses at risk of "carbon leakage" could be eligible for compensatory measures - dependent on whether or not an international agreement subjecting all countries to similar climate change mitigation measures is reached.
It therefore delays any decision on eventual compensation measures until 2011, when the commission will have to present a review of the situation. If no global pact is reached by then, some sort of "carbon equalisation system" will be introduced - whether in the form of additional free allocations or through the inclusion of carbon-heavy imports from third countries in the ETS.
Here, EU leaders appear more optimistic about the future US presidency, which looks likely to give a warmer reception to emissions trading. While the outgoing US administration has threatened legal action against European efforts to include in its scheme all carriers operating to and within Europe, those vying for the presidency - Republican John McCain and Democrats Hillary Clinton and Barack Obama, exhibit an "acceptance of a cap and trading system", according to EU Environment Commissioner Stavros Dimas.
Speaking in Washington at recent high-level talks on climate change and sustainable development, Dimas said he "sincerely believes [an] international agreement will be achieved," over global emissions trading. "Emissions trading is the best way to fight emissions from aviation," he says, noting that an international agreement would circumvent unfair advantages from airlines in non-participating nations.
Aviation is certain to be included in the EU's overhauled ETS and will be effective in 2012, he says, adding the EU is working toward an international agreement pertaining to aviation with ICAO and the United Nations.
Assuming a global climate change deal is eventually reached, the directive foresees that EU member states will continue to be entitled to meet part of their target by financing emission reduction projects in countries outside the EU such as through the Clean Development Mechanism (CDM), although the use of such credits will still be limited to 3% of member states' total emissions in 2005.
The prospect of the landscape shifting so radically and quickly at a time when aviation is still coming to grips with the current proposal fills the industry with dread.
The International Air Carrier Association , representing 38 leisure carriers, has always maintained that the ETS has to ensure non-discrimination, growth both for the sector and the EU economy, manageability and affordability.
A legislative environment that has two parallel tracks - firstly, the amendment to the ETS Directive to include aviation and secondly, the revision of that "Mother ETS Directive" from 2013 with its possible increase to 100% auctioning by 2020 - means airline organisations such as IACA need to maintain a high level of pressure to ensure the scheme adopted is sustainable. "The Mother Directive combines all the bluntness of taxation and the costs and administrative burden of the ETS," says Koen Vermeir, IACA's director of industry and aeropolitical affairs.
Assuming allowances cost €30 ($47), IACA estimates that the cost impact to aviation in 2012 - under the original ETS amendment proposals which would include aviation into the scheme - could range anywhere from €2.3 billion to €7.0 billion, depending on whether the Council's or the Parliament's amendments to the Commission's proposal will be adopted.
With the industry emitting 289 million tonnes of carbon dioxide and emissions growth forecast to grow at 4% per year, under a revised regime where an allowance could cost €30, the Mother ETS Directive could end up costing aviation €62 billion between 2013 and 2020 - €8 billion per year.
100% Auctioning
As the EU, under the Mother Directive, is however considering imposing 100% auctioning by 2020 to other sectors, pressure on the carbon market could make an assumption of a €30 allowance cost level far less realistic and may lead to a yearly bill of €16 billion for airlines, assuming a €60 level.
No surprise then when Vermeir declares that the airline industry has no other option but to continue in earnest to secure an ETS framework within which the sector "can survive".
Citing IATA, which in December dramatically lowered its industry profit forecast for 2008 from $7.8 billion to $5 billion, he says all signs now point to the fact that there is little fat on the airline beast to absorb these huge costs.
"There is simply no understanding of aviation's business model. Cost pass-through assumptions made by the commission through its impact assessment are simply without foundation. The sector just cannot pass through these ETS costs to the customer by increasing the ticket prices," says Vermeir. "We have to challenge the commission's assumptions because if the scheme is badly designed we will simply be put out of business.
Source: Flight International
