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.