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The facility was withdrawn last year, but should be introduced before July with the EUA value taking a haircut of 25%.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.
“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.