Including aviation in the EU ETS – the burning question

Executive Summary

The potential inclusion of aviation in the European carbon trading scheme continues to be highly contentious with ongoing law suits and threats of trade sanctions. Amongst the war of words hugely varying figures have been produced on the possible financial impact on the aviation sector. This Research Note reviews the evidence to date and provides an independent assessment of the likely effects on the industry.

● Published estimates of costs to the aviation industry from inclusion in the EU Emissions Trading Scheme (EU ETS) have varied from €18bn loss to a €20bn gain over 2012 to 2020.

● Our analysis shows that at current carbon prices the “out-of-pocket” costs faced by the aviation industry under the EU ETS are small compared to other costs the industry has to contend with. They represent less than a quarter of a percent of revenue from the routes covered by the EU ETS in 2012 and around half a percent in 2020. Specifically:
– The aviation industry will face a deficit in emission allowances of around 35% of its expected emissions throughout the course of 2012 to 2020.
– At current carbon prices this translates to an “out-of-pocket” cost of €762m in 2012 and €2,170m in 2020. These costs reduce to €629m in 2012 and €2135m in 2020 when the capacity to import cheaper international carbon offsets (CERs) are taken into account.
– They are also dwarfed by other recent costs applied to aviation in Europe – the UK Air Passenger Duty (APD) and the German Air Passenger Tax (APT). Out-of-pocket costs of the EU ETS in 2012 represent 1.4% of the UK APD and 5% of the German APT.

● Two factors prevent full cost pass-through to consumers: (i) competition from non EU ETS regulated operators on some international routes, (ii) potential contraction in demand from higher prices. We estimate that non EU ETS regulated competition will limit full cost pass-through on around 10% of routes. In terms of demand response we estimate that because of the wide geography covered by the EU ETS, any reduction in demand will be less than the increase in price.

● In the short term it will also be more difficult for some operators to pass on costs due to a high proportion of fixed costs. Over time though the economic value of all carbon allowances should feed through into operational and pricing decisions.

● In our opinion, in the long run covered airlines should be able to pass through around 60% of the combined out-of-pocket and opportunity costs. This is more than the out-of-pocket costs of buying allowances. In the short run we estimate the airlines will be able to pass through around 30% of the combined costs. This is just under the full out-of-pocket costs.

● There will certainly also be winners and losers within the industry as the ability to pass on costs will vary by route flown and customer profile. We have not looked at the distribution of costs and benefits as part of this analysis.

Please download the full report for more detailed analysis.

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