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Tuesday, 7 February 2012

The airlines and the EU ETS: by the numbers

Source: efreebackgrounds.com    
The contentious relationship between industry and government is a tale as old as time and a new feud kicked off this week over the EU Emissions Trading Scheme or ETS.  On 1 January 2012, the EU enacted its controversial legislation that requires any airline using EU airports to participate in EU ETS by purchasing carbon allocations to account for emissions.  On Monday 6 February, Chinese air regulators announced that Chinese airlines are prohibited from paying any of the fees associated with the EU ETS.  The Chinese reaction kicked off fears of strained relations between China and the EU that could hurt trade and inhibit crucial Eurozone debt talks. 

New regulation almost always produces a knee-jerk reaction from industry, but critics of the EU ETS aviation regulation may want to take a closer look at the actual numbers before they go jeopardizing international markets.

For the first year of the plan, airlines will be given 85% of their allocations for free and will have to purchase 15% of the remaining carbon permits.  From 2013-2020, airlines will receive 82% of their allocations for free and have to purchase the remaining 18%.  Most airlines will pass on these costs to customers by adding a surcharge tax for the permits they buy and the permits they are allocated for free.

The Gulliver travel blog over at the Economist did some quick math on the potential benefit of these green taxes, using Ryanair as an example.  Ryanair has added a 25 euro-cent surcharge to all its ticket prices in the wake of the new EU ETS regulation for the airline industry.  According to a report by Aviation Advocacy, this is how the numbers play out for Ryanair.

“Ireland's environment agency has announced that Ryanair will receive just under 5.6m permits; since these must represent 85% of its needs, it therefore must need to buy about 980,000 further permits, equivalent to the balance of 15%. At the moment the permits are trading at just under €8 ($10.5) each, but suppose that their price might go up to, say, €8.50. If so, the cost to Ryanair for this year's permits will be €8.3m. Last year the airline flew 76m passengers. Supposing it flies at least as many this year, that 25-cent charge will rake in at least €19.1m, which means that Ryanair will enjoy a profit of at least €10.8m from the supplement after buying the permits.” (The Economist Gulliver blog, 6 February 2012)

In an industry that operates on razor thin margins and constantly struggles to contain costs, the reaction against the new regulation seems misguided.  Perhaps the airline industry should take a closer look at the numbers and quietly thank the regulators for giving them a way to pass more costs on to customers that they can blame on the government, at least until 2020.

Post by Krista Stellavato

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