Aviation in the EU ETS

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Air travel is a clear environmental policy target due to its increasing contribution to anthropogenic climate change. 2
Emissions trading is an administrative approach used to control pollution by way of economic incentives 2
Air travel makes a significant contribution to global warming 2
The aviation industry is one of the few sectors where carbon emissions are still growing despite climate change concerns 3
Air traffic is anticipated to grow at an average rate of 4.6% per year through to 2025 4
In the past 15 years, aviation's contribution to the transport sector's carbon emissions increased tenfold 6
Emissions trading critics often point to problems associated with complexity, monitoring, enforcement and the initial allocation methods and cap. 7
Progress to combat the aviation sector's climate change impact is yet to be seen on the international stage 7
Copenhagen climate talks failed to set global targets to limit emissions from international aviation 8
Emissions trading schemes around the world in varying stages of development will likely affect aviation in the future 9
Should an international ETS be created for the aviation sector, whether through the UNFCCC or the ICAO, the European Commission would consider amending the directive as necessary in order to avoid double counting. From 2012 the international aviation sector will be included in the EU ETS. 9
From 2012 the international aviation sector will be included in the EU ETS. 10
The EU ETS is currently the largest and most developed emissions trading system 10
In its third phase, the EU ETS will undergo significant expansion 11
From 2012 all airlines operating in the EU will be subject to caps on their carbon emissions 11
Monitoring and reporting of carbon emissions in the aviation sector began in January 2010 12
Emissions caps facing the aviation sector will tighten over time to encourage continuous emissions reductions 13
The rules facing the aviation industry differ from those for other sectors participating in the EU ETS 14
Despite current legal challenges, aviation will be included in the EU ETS 14
Article 2(2) of the Kyoto Protocol asks parties to 'work through' the ICAO in order to address the aviation sector's climatic impacts. The ICAO has been investigating the issue of aviation emissions since 1998, but progress has been slow. Aircraft operators have only a few easily achievable abatement opportunities. 15
Aircraft operators have only a few easily achievable abatement opportunities. 16
Aviation emissions are a function of the energy efficiency of travel, the carbon intensity of fuel and the distance of flight 16
Potential fuel efficiency gains will not keep up with growth in demand for air travel 17
Several airlines have conducted test flights making use of biofuels 18
Improvements in operational efficiency offer one-off, near-term potential carbon emissions reductions 19
Inclusion in the EU ETS will have differential effects across the aviation industry. 20
Pricing an airline's environmental impact introduces a range of new risks for those operating in the sector 20
The inclusion of aviation in the EU ETS will have a significant financial impact on an industry already struggling to make profits 21
Current low carbon prices will not have a large impact on airlines' operating costs 22
Any change to an airline's operating costs due to carbon pricing will vary depending on the market segment served 23
To achieve carbon-neutral growth in the aviation sector by 2020 would cost €1.3 trillion 24
Future alterations to the EU ETS will increase compliance costs facing airline operators 25
Better-prepared operators will be able to take advantage of opportunities to profit from aviation's inclusion in the EU ETS 26
Carbon prices faced by other EU ETS market participants will rise as a result of the planned expansion of the scheme. 28
The aviation sector will be a net purchaser of carbon allowances, putting upward pressure on carbon prices in the EU ETS 28
In the long term, carbon prices faced by fixed installations will increase, but not as a result of aviation's inclusion in the EU ETS 28
APPENDIX 29
Definitions 29
Ask the analyst 32
Datamonitor consulting 32
Disclaimer 33
List of Figures
Figure 1: Air travel contributes to climate change through the release of CO2 3
Figure 2: Global emissions from aviation have increased 109% in the past 20 years 4
Figure 3: Following a substantial drop in 2009, aviation traffic is set to return to pre-recession levels in 2010 4
Figure 4: Global air transport demand could grow by a factor of four over the next three decades 5
Figure 5: Air travel is one of the world's fastest growing sources of greenhouse gas emissions, and is therefore a clear policy target 6
Figure 6: The International Air Transport Association (IATA), which represents 93% of international air traffic, has set several environmental goals in the absence of progress from the ICAO 7
Figure 7: Without international agreement individual regions will implement unilateral measures to reduce emissions, resulting in patchwork regulation and an international airline's nightmare. 9
Figure 8: From 2012, the EU ETS will be expanded to incorporate new sectors and cover new gases, in addition to tighter emissions caps for current participants. 11
Figure 9: Airlines should be aware of important compliance dates as penalties are severe 12
Figure 10: Submitting accurate emissions data is extremely important due to the potential for airlines to secure free carbon allowances 13
Figure 11: In order to cut emissions, airline operators can increase energy efficiency of travel, lower the carbon intensity of fuel or reduce distance travelled. Under the EU ETS, operators will also have the option of buying carbon allowances 16
Figure 12: Aviation has seen a long series of gradual cuts in fuel usage as a result of increasing engine efficiency and the use of lightweight materials for the body 17
Figure 13: Progress has been made on the development of aviation biofuels, with several successful test flights carried out. The focus has been on 'drop-in' fuels that can be used in the existing aircraft fleet 18
Figure 14: Aircraft operators subject to emissions caps under the EU ETS should be aware of the number of new risks with which their business model now has to contend 20
Figure 15: In the past decade the aviation industry has lost $50 billion, $11 billion of which in 2009 alone 21
Figure 16: At current levels, carbon pricing is unlikely to significantly affect the operating costs of airlines 22
Figure 17: A number of factors may change the course of carbon prices, and thereby the costs of compliance for airline operators 23
Figure 18: IATA's target of carbon neutral growth will be costly for the aviation industry 24
Figure 19: Revisions to the emissions cap and auctioning proportion are due in 2014, which will increase costs incurred by the aviation sector due to participation in the EU ETS 25
Figure 20: Using a cheapest credits first approach, airlines can minimize compliance costs by taking advantage of the difference in carbon allowances prices 26
Figure 21: EU emissions are projected to increase as the region returns to economic expansion following the global economic downturn 29