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Major airlines face 30 Mt shortfall in CO2 allowances in 2012

London, 27 September 2011

Yesterday, the European Commission published the benchmark by which airlines will be able to work out how many allowances they are to get for free when they join the EU’s Emissions Trading Scheme (EU ETS) in January next year. According to Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets and RDC Aviation, the leading independent consultancy in aviation data modeling, this data shows that the largest ten airlines will face a 30 million tonne shortfall in CO2 allowances in 2012.

The EC’s benchmark implies that the revenue-tonne-kilometers (RTKs) reported by the 900 airlines for 2010 is 268 billion. According to Andreas Arvanitakis, who leads the aviation practice in the Advisory Department at Thomson Reuters Point Carbon, “the number of airlines to have reported, at over 900 out of around 5,000, is actually quite good; they include the highest emitters and represent a high proportion of the emissions in the scheme. However, it does suggest that around 4,000 airlines will not be given any allowances for free. Albeit small in scale, they will have to buy all of the allowances they need”.

The RTK total, at 268 billion, is higher than previously forecast by RDC Aviation and Thomson Reuters Point Carbon. A higher total implies a smaller share of free allowances for all airlines. As a result Thomson Reuters Point Carbon and RDC Aviation have increased their expected shortfall for all airlines.

The ten carriers, as defined by their IATA code, with the highest shortfall, face a shortfall of nearly 30 million tonnes of CO2 in 2012 alone. To illustrate what this means to airlines, taking this month’s average price for the headline contract in the EU ETS of €12*, the total cost to the top ten would be €360 million next year.

The top ten by shortfall in 2012 are: Air France, Alitalia, American Airlines, British Airways, Delta Airlines, Iberia, Lufthansa, Ryanair, United Airlines and Virgin Atlantic Airways.

“This is just an illustration of what costs the airlines may face. They can reduce this cost by looking carefully at their procurement of carbon credits, including for example Certified Emissions Reductions (CERs), which offer a substantial discount to allowances,” says Arvanitakis, adding, “airlines must bear in mind, however, that some CERs cannot be used for compliance in phase 3 of the EU ETS. So they need to avoid holding any surplus CERs after next year unless they know they are eligible from 2013”.  Arvanitakis thinks it is likely that airlines will pass on their costs to passengers and cargo clients where they can.

“The task now is to refine the carbon procurement and risk management strategies,” says Arvanitakis. “In such a keenly competitive industry, the emissions market may offer an advantage in terms of keeping costs below those of rival carriers.” According to Peter Hind, Managing Director at RDC Aviation “what analysts will be looking out for now is the impact of expected GDP slowdown on passenger numbers and whether this translates to fewer flights and lower emissions over the next 18 months”.

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