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10/11/2012

Difficult start for the integration of the aviation industry in the European carbon market

The official entry of the aviation industry in the European Emission Trading Scheme beginning of 2012 was accompanied with heavy opposition and was shielded off by the sector, leaving leaving some doubt about the exact details of its implementation.
The associated cost is the main argument of the critics of the system, but is the EU ETS really a threat to the industry? Other causes, deeply rooted in the industry, but less known, are in reality the driving force behind this resistance.

Carbon markets and CO2 quotas: a complex system already implemented for the heavy industry

The European CO2 trading market exists since 2005 and affects some 13,000 industrial facilities (eg power plants, paper mills, ...) which are among the most polluting in Europe. The goal is to create a price signal, taking into account the degradation of the environment related to human activities, and penalizing the most polluting activities. On the basis of historical emissions and reduction targets set for 2020 by the government, each member state calculates a total amount of allowances available for all installations on its territory. A part of this amount, which varies depending on the sector of activity and the time variable is distributed free. The rest available on the CO2 market, is subjected to the law of supply and demand.

Structure of the European CO2 market

At the end of each year, each facility included in the system, must justify a number of allowances to cover its emissions, otherwise it is liable to financial penalties. Therefore, in addition to allowances received free of charge, these facilities must buy on the market, at the market price, the number of allowances they need to level out their balance as carbon emitter.

A scalable, yet little deterrent system that must be set up over time

The share of free emission rights, distributed for each installation, varies depending on the activity and time. While this was little restrictive in 2005, it is likely to become restrictive and it is expected to have the totality of the quotes traded on the market (after 2013). In parallel, the total amount of emission rights needs to decrease (note 1) over time. However, this theory is not corresponding with the reality because the drop in industrial activity since 2008 has led to a saturated market (due to the economical crisis) and therefore a considerable drop in the price per ton CO2 (note 2). The emission price is now historically low, at less than €6 per ton, a price level which is not deterrent enough to ensure the CO2 savings are met desired by the countries that signed the objectives for 2020.

Evolution of the historical prices, Source : MEDDTL (Click to enlarge)

Despite the low level of deterrence imposed by the ETS scheme, it has the possibility to deploy an effective and unified environmental strategy over a wide area.
The aviation industry, that accounts for 3% of the global emissions and has an increasing traffic flow of over 6% per year, cannot remain long time out of the ETS system. The low carbon price is currently an asset to gently integrate the aviation sector into the carbon market.

A brute entry with little real impact on the sector's emissions.

The commercial airline industry entered the EU ETS early 2012. According to an equality principle, the imposed regulation includes all flights taking of or landing in Europe, so the regulation applies for both European - & foreign airlines. While the system was imposed unilaterally by the European Community, the regulation instantly sparked reactions from non-member countries to be excluded. The main argument was the excessive cost that it would entail. But this argument does not withstand the analysis.
In fact, the energy efficiency (note 3) of the European airline industry increased with an average of 2.7% each (note 4) year over the last decade. Also, the energy needs, and therefore the CO2 emissions of the airline industry In Europe, augmented with 6% in comparison with the period 2004-2006. Based on the same period, the calculation of the quotas available for the aviation does not risk to introduce a lot of tension on the carbon market, especially since the price signal is weak. Keeping in mind the traffic growth assumptions commonly accepted by the stakeholder (+5,5% each year) and assuming that the energy intensity will drop on the same rate for the years to come, the financial impact in 2020 for the entire airline industry in Europe is estimated to be 1.3 billion euro each year and only 4,5% of the toal carbon market. This additional cost, which will certainly be integrated in the airline fares, will therefore only represent approximately €0.90 per 1000km round trip, which is considerably less than an increase of a barrel crude oil of 3% (note 5).
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Provision of the evolution in terms of quotes for the aviation

In fact, the countries that opposed to the ETS in the aviation industry (China & US) mainly opposed due to sovereignty considerations. On the other hand, the heavy traffic between those countries and the European Union give them a strategic advantage in the commercial negotiation with the aviation industry in Europe (namely the constructors) because these countries are of strategic importance for the health of the sector.
The cost argument is therefore diplomatically acceptable, but it is not viable. However, this blocking jeopardizes the whole system since it might withdraw a portion of its substance and offers European players some weight in the discussion to reduce the maximum impact of the system on their activities. Although the system is heavily attacked, the European Union and its member states remain firm in their positions so the battle is not yet over.

Notes

0 : 100 €/tonne
1 : -1,74% par an après 2013
2 : 1 quota carbone = 1 tonne de CO2
3 : consommation de carburant par passager transporté au kilomètre
4 : principalement grâce au renouvellement au sein des flottes des avions les plus énergivores
5 : en retenant un prix de 100€ par baril

Sources :
MEDDTL Boeing: http://www.boeing.com/
http://eur-lex.europa.eu/fr/index.htm

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