OPIS now publishes a jet fuel benchmark for airlines who want to manage their fuel and carbon together.
‘Clean’ benchmarks originated in the power market and combine the price of energy and carbon compliance. Airlines that fly into or within Europe are to join Europe’s emissions market on January 1. So OPIS now publishes carbon and clean prices as well as one-stop carbon, jet and oil market analysis every trading day.
Barclays Capital forecast EU carbon allowances will average 8.5 euros ($11.15) a metric ton in 2013, and just 9 euros ($11.8) a metric ton between 2013 and 2020. The revised forecast is just one euro higher than the bank’s previous estimate, with the EU cap-and-trade market buckling under a massive surplus of allowances and credits.
But the bank expects prices to edge higher on the assumption that 700 million EU allowances will be withdrawn from the market in 2013 and then reissued from 2018 onwards.
“We stress that these forecasts are sensitive to different volumes and profiling actually agreed than what is assumed, so the present is full of uncertainty,” said Trevor Sikorski, head carbon analyst at the bank.
Meanwhile, Barlcays Capital has revised its forecast for certified emission reduction credits (CERs) to 2.35 euros ($3) a metric ton in 2013, down from 3.5 euros a metric ton previously.
Between 2013 and 2020, the price of CERs will average just 1.5 euros (2$) a metric ton as the over-supply keeps growing.
CERs, which are credits issued by the United Nations to low-carbon projects in developing countries, can be used by companies regulated by the EU emission trading scheme to meet a small percentage of compliance requirements.
International airlines that touch down or take off from EU airports were brought under the regulation of the EU carbon market in January this year.
India has threatened to ban European airlines from its airspace if Indian carriers face sanctions for refusing to comply with the EU’s emission trading scheme regulation.
“Travelling is always a two-way traffic,” said Ajit Singh, civil aviation minister.
“If they can impose sanctions so can other countries.”
Last week, the European Commission issued figures showing more than 1,200 airlines had complied with its emission trading scheme.
But two Indian – Air India and Jet Airways – and eight Chinese airlines had refused to submit their 20111 carbon emission data.
EU Climate Commissioner Connie Hedegaard warned these ten airlines could face sanctions unless they comply by mid-June.
Beijing has already threatened a trade war over the carbon regulation issue, and has barred China’s airlines from participating in the scheme.
In March, European aircraft manufacturer Airbus said Beijing was blocking orders by China’s state-owned carriers for 35 new A330s jets with a total list price of $12 billion in a challenge to the carbon charges.
From January 1, all airlines that fly in and out of the EU were brought into the region’s cap-and-trade carbon market.
Under the scheme, airlines have been given a limit of how much carbon pollution they can emit annually. If they emit more than their limit, they have to buy extra carbon permits to cover their excess or face penalties. To soften the impact, airlines were given free carbon permits that amounted to 85% of their carbon pollution in 2005.
However, may countries have objected that the EU’s actions infringes on their sovereignty.
In December last year, the EU’s highest court, the EU Court of Justice, ruled the ETS law was valid and did not breach international treaties. It also agreed with the Commission that the ETS was a market-based mechanism, not a tax.
The EU first introduced the aviation legislation in 2008, but it was not until last year that countries began to object vehemently.
The legislation will allow a foreign airline to opt out of the scheme if their country introduces its own equivalent carbon cutting scheme.
Most parties are looking to the United Nations’ International Civil Aviation Administration(ICAO) to come up with a global approach to curbing emissions from airlines, although nothing has been tabled yet.
EU carbon prices are currently very depressed because the 2008 recession created a glut of permits in the market that failed to clear before another downturn this year.
The 2012 EU carbon allowance slipped below 7 euros ($8.75)a tonne Thursday compared to around $983.25 for a tonne of delivered jet into Le Havre in France.
As of 24 May, OPIS’s ETS “clean spread”, published in the OPIS Jet Fuel and Gasoil Report, stood at $27.36. It represents the amount an airline would pay per tonne of jet fuel burned to cover their extra carbon emissions. That adds 2.85% to the jet fuel bill.
Willie Walsh, chief executive of IAG, Europe’s third largest airline, said the ETS cost the group 15 million euros in the first three months of the year.
The first four or five years of Europe’s Emissions Trading System (ETS) will be bad for ticket prices and bad for competition, according to a group of small and growing airlines who say it sets them at a significant competitive disadvantage.
Unlike major established airlines, operators such as Poland’s Enter Air, Small Planet, which operates in Italy, Lithuania and Poland, and Lithuania- based Avian Express will receive no or very little in the way of free emissions allocations until the 2016/2017 period.
By contrast, competitors such as Polish Airlines or Lufthansa are expected to be handed the large majority of the allowances they need to operate free of charge, as part of the phase-in of the scheme.
The small airlines involved have all seen their operations grow substantially since emissions were measured in 2010, indeed some of the entities involved were only founded that year.
The ETS allocates a cap to the total aviation industry by measuring the historical emissions of airlines in 2010. A special reserve of 3% of the capped allowances is being held back for new entrants and fast growers. These companies will measure their emissions in 2014 and will likely receive an allocation of free allowances during the course of 2016.
An executive at one small operator that does not wish to be identified ahead of meetings with emissions trading regulators in its home country, estimates that being denied free allowances will disadvantage the company by some 4-5 million euros during the first five years of the scheme.
“It feels very unfair — like a protection for the established operators,” said an executive. “For five years, when a route opens up, established operators will be able to come to the table with an entirely different level of costs,” he added.
The company said it had identified several other companies in the East and South of Europe who are assessing how to cope with a major threat to their business model.
“We think some companies will face a disadvantage of perhaps 10 million euros per year,” the executive said.
Warsaw-based Enter Air, which was founded in April 2010, was estimated by one nearby competitor to be facing the same annual carbon costs for its eight Boeing 737s as Polish flag-carrier LOT.
A UK environment agency official told OPIS he agreed with the operator that “this is anti-competitive.” Other officials OPIS spoke to described the impacts as “collateral damage” of a scheme that was not meant to hinder new entrants.
However, at the European Commission, the spokespersons’ department defends the situation faced by new or growing airlines as a matter of fair treatment. All growth in aviation is treated in the same way, it says. Officials point out that existing airlines are not being allocated free emissions allowances to cover growth, but to cover a portion of existing operations. It’s consistent, they argue, that there should be a level playing field between the emissions costs of putting on a new route for a new airline and for an existing airline.
They also emphasize the very small costs involved for both airlines receiving free allowances, and even for those that get none, and they point to the 25 Eurocent surcharge being raised by RyanAir as proof. If the market is being temporarily distorted, then they clearly feel that the industry-friendly free allocation system is the distorting factor, not that all airlines must pay for their growing emissions.
Compared with the wider assault on the ETS by countries opposed to the system, the problem new entrants feel they face is not getting as much attention in Brussels, but there is an awareness that the situation is far from ideal.
OPIS understands that one non-EU long-haul airline faced with the same quandary was even advised by officials to take up the matter with DG Competition. The special reserve of free emissions allocations will become available, based on 2014 measurements, in 2016-2017, but critically for the airlines involved, it will not be retrospective. It’s not intended to compensate for any disadvantage during the opening four to five years of the system.
Neither should the airlines concerned hope to modify the legislation concerned during an existing revision process. The Emissions Trading Directive was last changed to include aviation in 2008, but it is not intended to revisit it in the near future. According to officials, there is no leeway at member state level to help the airlines affected. At current prices, these operators, some of whom say they have already concluded contracts dictating future income from operating flights, will find themselves paying the close to the full U.S. $37 carbon costs associated with burning a tonne of jet fuel. If they had a small number of aircraft already in operation in 2010 then they are eligible to receive a proportion of the emissions of those aircraft. A European major airline on the other hand, already operating a flight since before 2010 on the same route will be receiving perhaps $24 worth of the permits required for that flight for free. In addition, they’ll receive and be able to monetize the permits up to eight months before the allowances are due for surrender to authorities.
On Thursday, March 8, OPIS assessed the price of one tonne of wholesale jet fuel in the spot cargoes market at $1105.25/mt. OPIS cargo Clean Jet Fuel, including ETS carbon costs, $1,140.51/mt. The clean spread, representing the premium to jet fuel without carbon costs covered, was $35.26.
India may have lifted a lightning ban on an EU charter operator, but it will soon sit down with Chinese and Russian counterparts to discuss practical retaliation over the EU’s emissions trading system – and summer landing permits for all EU airlines will be on the agenda.
A senior official in the Delhi Ministry of Civil Aviation told OPIS Europe should not be surprised by Friday’s action to refuse a landing permit to a European airline. The official said the Ministry warned airlines in November of possible action.
“We had suspended the granting of summer permits while we took a view on how best to act,” said the official. “The airline on Friday fell into the category of people who needed on ahead of time. We have resolved this situation for now, but I can’t guarantee what the situation will be in the future.”
The official said that he and his colleagues will be sitting down shortly with Russian and Chinese officials to discuss further measures: “There will be countries who are going to do something about this,” he said. “Regulation of overflights in Russia I’m sure will be affected,” he added.
If the move on summer permits were to go ahead, it would prevent all EU airlines from operating into or over Indian territory from 25 March, and would represent the first major piece of retaliation over European’s carbon cap and trade system.
On Friday, OPIS reported that a permit had been denied to a European operator, with officials locally citing the carbon trading system as the cause.
EU offices were inundated with emails from concerned European airlines, and later that day officials received a statement from the Indian government saying they had “held a review meeting and had decided to clear all pending and in-process applications on a case by case basis.”
OPIS understands that there is continuing concern in Brussels that India’s intention is to apply the same withdrawal of permits from the 25 March. European operators flying into the country would expect to receive their so-called summer permits just a few days before the 25th.
A European airline has been denied a winter season permit for landing in India, and a question mark hangs today over all EU flights into the country from March 25. The move looks like being the first shot of retaliatory action fired over Europe’s unilateral introduction of carbon emissions trading on flights into Europe.
Several European airlines have been informed by Indian officials that the issue of new landing or overflight permissions will be abandoned until the Emissions Trading System (ETS) dispute is resolved.
Many European majors have yet to be issued with their summer season permits enabling them to land in the country from March 25.
EU officials are said to be aghast at the prospect of the move being an official government sanction, and airlines and bureaucrats in Europe are anxiously awaiting an official announcement by the Indian government that was promised for today.
“It may be the action of a rogue official in the country,” said one airline fuel manager, “but it could affect all airlines that have not yet received their summer season permit. We’re all waiting to find out at the moment.”
An EU source in Brussels confirmed to OPIS reports from the aviation industry that flights to or over India could be in question already from the 25th of this month.
“We are trying to get confirmation of this from the Indian government,” said the official, “but we can confirm that a number of European airlines have been informed today that new permits will not be issued.”
Since a meeting of aviation carbon trading opponents in Moscow on 22 February, EU airlines have been bracing themselves for the first signs of actual retaliatory action.
The move from India does not affect the bilateral traffic rights negotiated between Mumbai and European states per se. Instead, it’s understood that India would suspend the issue of new seasonal permits. These kind of permits are part of the workload of the IATA slots committee, which met in September.
To date, the controversy surrounding the EU’s trading system has been marked more by rhetoric than action.
If India goes ahead and issues its directive, then it will be the first significant shot fired in a trade war that is of increasing concern to airlines like IAG, and other European operators. The important trans-Siberian route to Beijing may be the next battle ground. Moscow has a history of imposing overflight charges.
“We are watching developments concerning Siberian airspace nervously and impatiently,” said one of the airlines concerned to OPIS.
BA’s environment chief, Jonathan Counsel, recently called for the EU to plan to exempt from the ETS any routes EU airlines operate where they face competition from an airline that is not in compliance with the system. That said, environmental groups are quick to point out that so far all the airlines that fly into Europe are fully in compliance with the scheme.
On Thursday 1. Feb, one tonne of wholesale jet fuel in the European spot cargoes market cost $1078.50/mt. OPIS’s European cargo Clean Jet Fuel assessment, including ETS carbon costs, was $1115.73/mt.
The largest five Chinese airlines would face a bill of around 8.5 million euros ($11.3 million) in 2012 to pay for their excess carbon emissions in Europe’s carbon market, according to analysts at Thomson Reuters Point Carbon.
The sum is tiny compared to the billions of euros invested by EU companies in carbon reduction projects in China over the past decade.
Earlier this week, the Chinese government barred its airlines from complying with the EU emission trading scheme, or raising fees and fares to pay for it.
The move is the latest protest in a series of international disputes over the EU carbon regulation that reaches into foreign airspace.
Airlines which take off or land at an EU airport have been a set a limit of the volume of carbon emissions they can emit annually calculated over the entire journey.
Air China, Cathay Pacific, China Eastern Airlines, China Southern Airlines and Hainan Airlines together face a shortfall of 990,000 metric tons of carbon dioxide, accord to Andreas Arvanitakis, an analyst at Thomson Reuters Point Carbon.
Each EU carbon allowance covers one metric tons of carbon dioxide and was trading at around 8.50 euros today.
“If they make full use of the Certified Emissions Reduction (CER) quota, the cost is cut to 7.9 million euros at today’s prices,” added Arvanitakis. CERs are carbon credits generated by the United Nations for companies that invest in green projects in developing countries, and are currently cheaper than EU allowances.
Around 60% of the 1.3 billion CERs created today have come from green projects in China.
Overall, airlines face a bill of 505 million euros ($670 million) this year to pay for their excess carbon emissions in Europe’s carbon market.
“This cost has come down since our last forecast as the price of allowances has fallen significantly and economic woes dent our emissions forecast for the sector,” said Arvanitakis.
He added, “if the aviation sector were to use its full offset quota, the forecast cost for the industry as a whole would fall further, to 360 million euros.”
Airlines can make money out of Europe’s carbon market, a conference in London heard today.
The aviation industry is set to receive 183 million free EU carbon permits this year worth over 1.5 billion euros ($2 billion) at current market values, which can be used in “repo” deals or as a deposit for trading on exchanges.
The repo or repurchase agreement allows the airline to generate short-term cash from the free allocation of EUAs at a fixed rate of interest.
Under the rules of the EU emissions trading scheme, airlines will receive their free allocation of EUAs on Feb. 28, although they will not be able to access the permits until July, according to the EU Commission. These aviation carbon permits, known as EUAAs, will be held in the “Union” registry account.
Airlines will not have to declare their 2012 carbon emission volumes until March 31, 2013, and will not have to surrender carbon permits and credits to meet their limits until the end of April.
As these are electronic permits, there is no cost of carry, and the airline can sell the EUAAs after fixing to buy the short back at a higher price in the future.
“We have several institutions that sell their permits at the start of the year to generate cash,” said Andrew Agger of trading firm Jefferies Bache.
ICE Futures Europe is also working to allow carbon allowances to be used as a deposit for margins calls when trading future contracts on the bourse.
The facility was withdrawn last year, but should be introduced before July with the EUA value taking a haircut of 25%.
The conference also heard how the European power industry has made windfall profits from the EU ETS by passing the cost of carbon onto consumers, including their free allocation of EU allowances.
In a separate research note, Dutch analyst group CE Delft claim that up to 14 billion euros ($18.6 billion) of windfall profits were made between 2005 and 2008 by the European companies who originally claimed the EU carbon market would hurt their businesses.
Finally, James Atkins of the broker firm Veritas added that anomalies in the carbon market structure can also provide opportunities.
He noted that the price of CERs, which are credits generated by investing in carbon reduction projects in developing countries, briefly fell into backwardation last week.
“If you are long carbon credits, you just sell and then buy futures,” he pointed out.
Under the rules of the ETS, airlines can surrender 32 million CERs in April 2013 to meet this year’s carbon compliance needs.
CERs are currently trading at around 4 euros ($5.3), around half the price of EU allowances. But the rules change from 2013 to 2020, when airlines will only be allowed to use 32 million CERs over the whole eight-year stretch.
China’s decision today to bar its airlines from complying with the EU’s Emission Trading Scheme (ETS) may have been more bluster than bludgeon because the carriers have already signed the paperwork.
Tensions are running high between Beijing and Brussels, and commentators are claiming Europe’s unilateral carbon market regulation could spiral into a trade war.
China first threatened to boycott the EU carbon market in early January. Today the Chinese Civil Aviation Administration notified all the country’s airlines that without government approval, they cannot join the EU emission trading scheme or use the scheme as a reason to raise fares or fees.
But the inclusion of aviation into the ETS happened on 1 January this year, and airlines that wanted to receive free carbon allowances have already submitted the paperwork to join the scheme, the European Commission pointed out today.
This included submitting details of flights in and out of Europe during 2010.
“Fact, all Chinese airlines to date have complied with regulation, and have applied for free allowances,” said European Commission spokesperson, Isaac Valero Ladron.
Failure to comply with the ETS results in penalty fines, but these will not be imposed until after 31 March 2013, the deadline day for meeting the 2012 carbon cap.
The Chinese announcement today is the latest in a string of criticisms, legal actions, and threats made to the European Union for its decision to regulate the carbon emissions of airlines that fly in and out of its territory.
Countries around the world have responded angrily to a scheme they see as a violation of their sovereignty.
An airline that takes off in New York or Beijing will have to pay a penalty to EU governments for their carbon emissions over the entire journey if they land at an EU airport.
US airlines attempted to avoid the scheme through the courts, but lost the case in the European High Court of Justice.
The US Congress is now expected to pass a bill preventing US airlines from joining the scheme in coming weeks.
China has claimed that the EU carbon market could cost Chinese airlines 95 million euros ($124m) in extra annual costs.
Under the terms of the scheme, an airline is set a cap, or limit, on the volume of carbon dioxide it can emit in a year. If the airline exceeds this cap, it has to buy EU carbon allowances or credits from the market.
The impact of the scheme was cushioned by giving airlines a certain amount of EU allowances, each worth a tonne of carbon dioxide, for free every year.
In 2012, the aviation sector will receive around 176 million EU allowances for free, and from 2013 to 2020, they will receive around 170 million of these permits for free a year.
However, the free allocation will not cover the industry’s carbon dioxide emissions within the EU scope because the aviation sector has grown sharply since 2004 and 2006.
The sector will be short around 60 million tonne of carbon dioxide allowances in 2012, according to analysts.
If carbon prices were to remain around 9 euros a tonne this year, the industry would face a bill of 540 million euros. Governments will auction carbon allowances throughout the year and the money will go into the coffers of EU member state governments, with no guarantees of them re-investing into green technologies.
The EU has left the door open for foreign airlines to escape the clutches of the ETS, with the condition being that their national government impose similar carbon reduction policies or schemes.
And with the Europe teetering on the brink of recession, and with several countries unable to throw off a crippling debt burden, international political pressure may soon tether the green winged aspirations of the EU parliament, the body which passed the legislation that brought both foreign and domestic aviation into the ETS.
Many member states in the EU are not as environmentally conscious as Brussels.
In its coverage of what are assumed to be the first airline carbon surcharges, the international press has been quoting “industry watchers” and “analysts” who apparently believe that ticket prices may rise by up to $90 per seat on a typical long-haul flight under Europe’s new carbon scheme.
How credible are these claims? And if they are true, why is Delta Airlines apparently only hedging itself against a maximum of $3 per ticket of costs? Delta has not officially linked a $3 fee announced on Jan. 2 to Europe’s carbon scheme which started the day before.
At $3, Delta’s surcharge does not look unreasonable, given that the price at the exchange of carbon allowances isn’t the end of the story when an airline covers its exposure under the Emissions Trading System (ETS).
Airlines have had a host of costs associated with monitoring and measuring in the run-up to the scheme. On March 31, airlines will have to report their emissions for 2011, for example. Software has been purchased. In some cases, entire desks of compliance and carbon trading expertise have been hired.
Even an airline attempting to deal as deftly as it can with the regulations, faces fees for over-the-counter purchases of carbon allowances from banks, for example, or for carbon exchange fees. The ETS implies a higher holding of euros for many airlines, and that implies an added element of foreign exchange hedging, with its own associated broking and OTC fees. Added to that, carbon prices have dropped recently and the allowances may have been bought at the higher earlier price.
According to a spokesman for the Aviation Environment Federation, it has “nothing against airlines imposing a surcharge that includes a reflection of their administration costs for participating in the carbon trading system.”
Airlines for America has put the cost of complying with the ETS between 2012 and 2020 at $3.1 billion. This is a difficult number to unravel. But when Delta’s surcharge was reported by Reuters journalists yesterday — a story that instantly went global — it was accompanied by this, now massively disseminated, forecast.
“Some industry watchers predict airfares between the United States and Europe could rise $50 to $90 as airlines attempt to pass along the expense.”
In OPIS’s own analysis, Delta’s team is much closer to the money than the un- named observers above.
On Wednesday, Jan. 4, the December 2012 EU Allowance carbon futures contract settled at €6.57/mt ($8.49) and the December 2012 Certified Emissions Reduction future ended at €3.83/mt ($4.95/mt).
Using the above numbers, an aircraft carrying 300 passengers and using 50 metric tons of jet fuel on a long-haul flight would need to pay $1,337 to meet the cost of carbon locked in as December 2012 EU allowances. If the airline were to receive no free allowances, then the implied cost on the flight would be $4.46 per passenger.
However, most airlines will receive the majority of their allowances for free. With a 65% free allocation, the cost of carbon for the flight falls to $1.56 per passenger.
As for that $90/ticket estimate, until 2020 airlines will continue to receive a large part of the allowances needed to meet their 2005 historic emissions for free. If the free proportion of a growing airline’s emissions fell from, say, 65% today, to just 30% in 2020, then for that price-hike to be accurate, carbon prices would need to soar.
A $90/ticket carbon surcharge in 2020 would imply a carbon price of $245/mt, and that assumes airlines achieve no improvements in fuel economy and that biofuels flop.
So what do Reuters’ own carbon analysts say about the price of carbon in 2020? Its respected Point Carbon team says that in 2018-2020 it expects carbon prices, which have lost half their value in the last year, to reach a relatively meager 16 euros ($20)/mt.
Rather than a $90/mt surcharge, that suggests that one of perhaps $3.80/ ticket, excluding administration charges, rounded up to $5, might be more appropriate in 2020.
The price for clean jet fuel, as assessed by OPIS on Wednesday, stood at $1,039.51/mt for Rotterdam jet fuel in barges on Wednesday.
For now, it will cost an additional $6 per roundtrip ticket on Delta Airlines for travelers going between the US and Europe.
The carrier rolled out the surcharge on January 2 and it applies to tickets purchased in the US, a spokesman told OPIS via e-mail.
The surcharge was rolled out just as US carriers, as well as the entire commercial aviation industry, had to start complying with carbon reduction regulations in Europe. Those regulations took effect on January 1. The airline declined to comment specifically on the reason for the fee.
Airlines for America, an industry trade group, sued the European Union, asking to be exempt from the carbon reduction plan, saying the scheme was in violation of international law. The European Court of Justice ruled in late December that all airlines serving Europe are required to participate in carbon reduction efforts. Airlines for America, in a statement said it was reviewing its options following the court’s ruling. That indicates it could be considering another appeal or lawsuit.
In 2011, the US House of Representatives passed a bill that would make it illegal for US airlines to comply with the EU regulations. But, the Senate never passed a companion measure.
Under the EU carbon reduction plan, airlines must account for carbon emissions for flights taking off and landing in Europe. The measurement of carbon emissions begins at the point where the aircraft pushes away from the gate, regardless of whether that is in Europe or not. And the measurement ends when the plane arrives at its new gate, regardless of whether that is in Europe or not.
On Wednesday, December 2012 EUA carbon credits settled at $6.57 and December 2012 CER credits ended at $3.83.
The price for clean jet fuel, as assessed by OPIS, stood at $1,039.51/mt for Rotterdam barge fuel. Meanwhile, U.S. jet fuel was running over $3.05/gal.