Airlines set to net billions under greenhouse gas plan
Costs are likely to be passed on to consumers, without a drop in emissions.
The world's airlines, including many firms who have lobbied aggressively against climate-change legislation, could make billions of euros from a planned emissions-reduction scheme, say economists studying the situation.
The resulting rise in cost to individual airline tickets will be too small to deter customers, they add, so the reduction in greenhouse gas emissions will be miniscule at least in the short term.
Aviation trade organizations reacted angrily when the European Commission said last month that it planned to include the industry in the continent-wide market for greenhouse gas emissions a proposal intended to bring rising emissions from aviation under control. US government officials said the move was illegal, and some airlines suggested that they would fight it in the courts.
But an economic analysis of the European Commission's proposals, due to appear in the March issue of the economics journal CESifo Forum1, suggests that the short-term effect will be that the aviation industry is handed several billion euros.
The result doesn't mean that adding the aviation industry into the scheme is in itself a bad idea. Far from it, experts say, as this helps to make airlines accountable for their emissions. But the way it is being done amounts to giving the industry a subsidy, say John Fitz Gerald and Richard Tol, economists at the Economic and Social Research Institute in Dublin.
The windfall is a consequence of the way emissions trading works. Industries in the scheme are allocated carbon dioxide permits that are traded in as emissions are generated. The permits can be sold if a firm emits less than its allowance, or bought if they wish to exceed it. Because industries are initially given almost enough permits to cover their usual amount of emissions, they should be able to continue business much as usual.
But experience with other industries already in the scheme shows that they treat permits as assets the permits are currently worth around 4 (US$5) per tonne of carbon. To compensate for having to lose the assets when accounting for their emissions, the firms charge extra for products. In the case of the electricity sector, this is estimated to have generated an extra £800 million ($1.5 billion) in annual profits for British firms between 2005 and 2007.
Tol says the same will happen in the aviation industry if the European Commission's plans proceed and airlines join the trading scheme in 2011. At current carbon prices, the industry would net 3 billion annually, according to his model. This could even increase, because carbon has traded at around 30 per tonne eight times the current value in recent years.
The situation could change if the industry was given a severely curtailed amount of credit, forcing them to raise prices substantially or make technological fixes to reduce emissions. Another option would be to auction off credits instead of giving them away, so that any extra income from raised ticket prices would effectively pass to governments rather than airlines.
The European Commission's environment directorate defends the decision to give away the permits, saying that it would be unfair to treat the aviation industry differently to other sectors. An official told email@example.com that the plan has already helped to lock potentially unwilling industries into the scheme in the first place. "If no one had been at the table it wouldn't have been much of an experiment," he says.
The official says that from 2013 onwards up to 10% of permits might be auctioned off to airlines rather than given away. He also points out that emissions for the whole industry will be capped at the average for the period 2004-2006. Since passenger numbers are growing at around 5% per year, this will motivate airlines to increase fuel efficiency and to buy credits from other industries that have made bigger savings.
In the short-term, however, the impact on emissions is likely to be small. A flight between two European cities is likely to become just a few euros more expensive due to emissions trading, which is too little to put significant numbers of people off flying, Tol says. He estimates that initial reduction in total worldwide emissions will be just 0.01%.
But others note that future benefits could be much greater.
Alice Bows, an expert on the aviation industry at the University of Manchester, UK, says that including aviation in the scheme will reduce the incentive for airlines to extend the budget flights model, which is responsible for much of recent growth in passenger numbers. And if carbon prices rise significantly, transatlantic flights might increase by a few hundred euros, which would have a bigger impact on passenger numbers.
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- Fitz Gerald J.& Tol R. S. J. CESifo Forum, (in the press).