Turbulence ahead: airlines and the EU emissions trading scheme

The EU Emissions Trading System, which began on 1 January 2005 covering energy-intensive industrial installations, is being extended from January 2012 to include air operators flying into and out of Europe — regardless of whether they are EU-based. Needless to say, the airlines are not happy.

Under the legislation, airlines will receive tradeable allowances covering approximately 15% of their CO2 emissions per year. At the end of each year, operators must surrender allowances equal to their actual emissions. If they have exceeded their allowance, they must pay. If they have used less, they can sell the surplus, creating an incentive for improved environmental performance.

Airlines collectively account for 2 to 3% of total global emissions annually, so it seems reasonable that they should take responsibility for at least some of their environmental impact. Their objection is jurisdictional: they argue the EU is overreaching by imposing EU regulation on non-EU enterprises. Even some non-EU governments' transport secretaries have threatened reciprocal fees for EU carriers. However, in the absence of any international agreement — delayed in large part by the stalling efforts of the very same airlines and governments now doing the complaining — the EU's move to force the issue is understandable.

One of the genuine perverse incentives driving unnecessary emissions is the practice of flying trans-Atlantic routes with only a third of a plane's capacity occupied — fairly common, and driven by an airline's desire not to lose a landing slot to a competitor. It can be financially rational to operate a loss-making, high-emission flight rather than cancel it and pass customers to a partner carrier.

At a time when airlines are already under financial pressure, will these additional costs be passed directly to passengers? Experts predict an average €40 ticket rise. Will airlines absorb some of the costs? Or will they, as the ETS intends, respond by tackling their environmental impact — reducing costs for everyone? The last of these outcomes is the one to hope for.