Euromonitor Comment: The impact of the Emissions Trading Scheme

Established back in 2005, the European Union Emissions Trading Scheme (EU ETS) fights climate change by setting a carbon limit to industrial activities with high emissions including those related to energy generation, the production and processing of ferrous metals, mineral extraction and pulp and paper manufacturing.

Its main goal is to cut carbon emissions by 21% compared to 2005 levels within the European Union by 2020.

With its eyes on the fast-developing rates of carbon emissions from airlines, the EU ETS has decided to include airlines within the scheme from January 2012.

The decision has raised much conflict, given it will place an estimated additional cost of US$10 billion during the next eight years on the struggling air transportation industry, according to Thomson Reuters Point Carbon.

Lisandra Minussi, Travel and Tourism Analyst at Euromonitor International, investigates the impact:

EU ETS for airlines

Starting in January 2012, all airlines, including foreign carriers, flying in or out of Europe will be given a limit and permits for emissions.

According to European Union officials, airlines will only have to buy allowances if they exceed the limits or fail to cut their own emissions.
Those with efficient carbon emission strategies in place may have a surplus of permits to sell.

The initiative is supposed to encourage airlines to use more efficient aircraft and look for different ways to reduce carbon emissions in the short term. It is worth noting, however, that airlines already have programmes in place, such as United Continental’s “United eco-skies” programme, to offset carbon emissions, but they do not guarantee these will be sufficient to avoid the purchase of allowances.

According to foreign carriers, the free allowances, which are worth close to US$1.6 billion, are expected to be distributed unevenly and favour European carriers, like Air France KLM, British Airways, Lufthansa and Iberia.

In other words, Chinese and US airlines will have to buy more allowances to cover projected 2012 emissions. If this happens, passengers will be the first to pay the price, as airlines will most likely raise airfares on European flights by 2-5% to offset higher costs.

Trading scheme faces government retaliation
Aside from airlines, countries worldwide, like China, India, Russia and the US, are opposing the scheme with protests and threats of retaliation.

The US authorities, for example, believe “this is the wrong way to pursue the right objective”, meaning that countries should have their own carbon schemes instead of other countries or regions imposing them.

The China Air Transportation Association (CATA) mentioned it would initiate a legal battle if the European Union decided to go ahead and include airlines in the trading scheme.

To lessen the conflict, the airline industry is coming up with alternatives through the International Civil Aviation Organisation (ICAO), which managed to gain the approval of 190 governments in 2010, including the US, to reduce carbon emissions.

EU ETS will not cave in
Despite all the resistance, the EU ETS is not likely to change its decision and will include airlines in the trading scheme from early 2012.

Higher airfares stemming from the trading scheme are likely to impact tourism flows to and from Europe and, consequently, reduce tourist expenditure in the short term.