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.

Posted in News