Turbulent times

Jonathan Isted and Robert Murphy find out why emissions regulations may mean a bumpy ride for the aviation industry

While aviation growth projections may be music to the ears of the sector,
environmentalists aren’t impressed. The international community is largely in agreement that global CO2 emissions must be reduced. How can the two be reconciled?
The aviation industry’s success has amplified demands for a re-evaluation of its fuel tax exemption, which some argue amount to an unfair subsidy. The spectre of a tax appears with increasing frequency in European Union discussions.

Some industry leaders agree that emissions will need to be addressed if the industry is to grow at the rate it envisages. British Airways has taken steps to reduce its CO2 emissions and is a proponent of the inclusion of aviation emissions in the European trading scheme from 2008.

Some form of regulatory control of emissions is inevitable. If the choice for industry is a kerosene tax or emissions trading, emissions trading may be the lesser of two evils, being cheaper and more flexible. Until firm proposals are on the table, however, uncertainty remains.

The European Commission has recently recommended the inclusion of more sectors, aviation among them, in the EU’s post-2012 strategy against climate change, and the UK government has pledged to take forward any proposals to incorporate aviation into the EU emissions trading scheme during its presidency of the EU Council.
The introduction of the current EU emissions trading scheme has illustrated how many conflicting interests are involved, with criticisms rallied from and against industry sectors (whether directly or indirectly affected by the scheme), non-governmental organisations, member states, internal ministries and the Commission itself.

Resolving differences

As the white paper on air transport noted in December 2003, a number of key issues need to be resolved before aviation emissions can be included in the trading scheme.

Unlike industrial installations, which are firmly rooted in one state or another, Member States would have to agree who would be responsible for flights. Would these be accounted for in the same way in each state’s NAP?

A decision would be needed on how allowances would be allocated to the sector. How much would they be squeezed? Would aviation’s allocation be unevenly weighted so as to factor in the greater impact of gases emitted at altitude or would they be treated the same as ground-level emitters?

A decision would have to take account of the industry’s reliance on kerosene. Unlike a power generator which could switch from coal to gas to reduce emissions, an airline would be left with little choice but to buy allowances on the market.
Aside from the differing ability of airlines to bear increased costs, the introduction of an trading scheme could impact on some more than others. Larger airlines will find it easier to pass on costs to their business class customers or non-EU routes than their budget competitors, which have a different customer base and concentrate on intra-EU routes. Budget airlines also have greater aircraft utilitisation and so emit more CO2 per aircraft than their larger competitors, increasing the potential burden of emissions allowances.

Further hurdles

There is also the hurdle presented by the Kyoto Protocol itself, which obliges the European Community to work through the International Civil Aviation Organisation when pursuing a limitation of CO2 emissions from aviation.
The EU and ICAO may have reached a compromise at present, but if the USA’s sceptical stance on climate change continues, the EU might face turbulence if it presses
an EU-wide solution to what is ultimately a global problem.

Given the orphan status of aviation emissions, it is difficult to see how EU allowances would slot into the international emissions trading mechanism envisaged by Kyoto. Players in the aviation sector might view EU emissions trading in a less favourable light if they found themselves the only buyers in an illiquid and expensive emissions allowances market.

As the situation develops in the coming months and years, players in the aviation sector can draw on the lessons learned during the introduction of the first phase of the emissions trading regime, but also face significant and unique challenges of their own.

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