London, January 10, 2012 (EAEM) - Contrary to complaints that the European carbon tax on flights will harm them, analysis shows that many air carriers could well end up with large profits.

Two studies bear out this claim. The first, from the Journal of Air Transport Management, part-funded by the US government itself, has calculated that if airlines were to pass all costs of the emission certificates on to passengers, then they will make up to $2.6 billion profit over the next eight years because most of the permits will be given away for free.

The authors conclude: "Windfall gains from free allowances may be substantial because, under current allocation rules, airlines would only have to purchase about a third of the required allowances."

American companies have not hesitated to impose costs on passengers due to the EU's Emissions Trading Scheme (ETS), which came into force on 1 January, ahead of all other carriers in the world, while at the same time calling for trade sanctions against Europe.

The US Congress is considering measures that would prohibit US airlines from taking part in the EU-ETS. Secretary of state Hillary Clinton has written to the Commission warning the US will "be compelled to take appropriate action" if the charges are not postponed.

Delta Air Lines, American Airlines, United Continental and US Airways Group and US Airways say they have already added a $3 surcharge each way on tickets for flights between the United States and Europe.

But actually, in practice, it is impossible to tell what proportion of a ticket price is a result of the EU-ETS, says Rick Searney of the website farecompare.com, which monitors pricing of air travel, since many factors affect ticket pricing and operators won't reveal commercially-sensitive information.

"Fares are dynamic. They are going up and down all the time according to market conditions. Carbon is just another cost," adds Bill Hemmings, manager of environmental lobby group Transport & Environment.

The academic paper's conclusions are backed up by number-crunching from an aviation analyst at UK-based  RDC Aviation, Peter Hind.

He has calculated that if Delta were forced to buy every permit in the open market it would cost them around 3 euros ($3.80) per passenger, based on current EU carbon permit prices equivalent to a tonne of CO2 of around $8.55.

"That would, of course, cover all of their CO2 emissions and therefore you could work on the basis that their free permit allocations were a windfall - assuming that it doesn't damage demand, of course," comments Hind.

This contrasts wildly with airline industry claims that the scheme will cost it about €1 billion this year, rising to €2.8 billion by 2020.

Many airlines, such as Thai Airways, have already been buying carbon permits in the EU ETS, taking advantage of the current record low prices of around €7.9 per ton of carbon.

The notion that airlines could make windfall profits was  predicted by WWF in 2006.

Free credits

The actual figures airlines pay will depend on the fuel efficiency of each aircraft and how many passengers are on board each flight.

Airlines will receive 85% of the permits they need in the first year for free. The EU intends them to use such profits to invest in more efficient aircraft.

The percentage of free credits will then fall to 82% from 2013 to 2020.

The free allocation is based on figures submitted to the EU detailing airlines' share of passengers and cargo transported in 2010 that is expressed using a revenue-tonne-kilometre metric.

"If you look at the impact on the ETS, that only starts kicking in at the end of the year. It's very clear that they're (airlines) looking for excuses in more or less the same way as the power companies did when the ETS started," said Dutch Green member of the European Parliament Bas Eickhout.

The situation looks like becoming reminiscent of that for the European energy intensive industries.

Analysis by Sandbag and others has shown that the top ten "Carbon Fat Cats" in these industries share between them 240 million surplus allowances with a value of around €4.1bn.

Their report concludes that "the fact that the ETS has provided substantial windfalls to some participants and a money making opportunity for many others has not prevented industry from attacking it whenever it can and from successfully lobbying to keep it in its current state".

Many airline operators are now following the example given by these existing participants.However, the weak global economy and high fuel prices are more likely to be behind this drop.

The International Air Transport Association (IATA), has asserted that the ETS will cost airlines $1.15 billion in 2012, forecasting a 49% fall in 2012 industry-wide profit to $3.5 billion.

EU position

The EU position says that it is only right that airlines, like other industries, should pay for the carbon they emit.

They have had since 1997 to come up with their own solution, when the Kyoto Protocol on tackling climate change asked developed countries and the UN's International Civil Aviation Organisation (ICAO) to find a way to reduce aviation greenhouse gas emissions, and have not done so on their own.

The EU will impose financial penalties of up to €100 per tonne of CO2 on non-compliant carriers, or even ground them.

"From our point of view it is quite simple," a spokeswoman for EU climate commissioner Connie Hedegaard has said, "there is a law and we expect people to follow it."

The measure is hoped to save around 183 million tonnes of CO2 each year by 2020. But this may be counteracted by growth in air travel: the Commission expects traffic to rise more than double from 2005 levels.

The Commission's own figures state that complying would add between €2 and €12 per passenger, depending on how much airlines decide to pass on to their customers.

Thomson Reuters Point Carbon data calculates that the impact will only begin to happen from 2013 to 2020, when airlines are expected to buy about 700 million permits.

This could help to drive up the carbon price, which is necessary to finance low carbon infrastructure.

Jean Leston, head of transport policy at WWF-UK, said more credits needed to be auctioned, with the receipts funnelled towards efforts to combat climate change, such as the UN's $100bn Green Climate Fund.

Other airlines' responses

Lufthansa is amongst European airlines that has said it will raise ticket prices as a result of the EU-ETS, but it will not do so yet. It says it will need to buy 35% of the permits it needs for 2012 on the open carbon market.

The world's second largest long-haul carrier after Dubai's Emirates claims that the cost of the credits will be €130 million this year, but will not disclose how this is calculated.

Singapore Airlines Ltd. (SIA), the world's second-most valuable airline, is adopting a more progressive stance, saying it would try to offset the impact of the ETS by improving fuel efficiency and reducing its carbon emissions, which would lower the carbon charges.

This is exactly the response hoped for by the European Commission. In practice it is likely that most airlines will follow suit, though they will not shout about it.

Cathay Pacific has said the ETS would add about $6.44 to a ticket between Hong Kong and Europe.

China's position

The China Air Transport Association (CATA) is also mulling whether to take legal action against the EU on the tax and has declared a policy of non-compliance.

The EC says that a 17,000-kilometre flight from Frankfurt to Shanghai would generate about 678 kilograms of carbon, using the UN's ICAO carbon calculator.

Assuming a price of €17 per tonne (around double the current level) and the full value of emissions being passed to fares, that would increase a ticket price by €11.50.

China, the world's biggest emitter, has a target to reduce greenhouse gas emissions per unit of output by 40-45 percent from 2005 levels by 2020.

Its policies to achieve this include implementing energy efficiency and energy intensity measures, but poor inter-ministerial coordination is hindering development of a carbon trading scheme.

The National Development and Reform Commission (NDRC), which has overall responsibility for carbon emissions, hopes to launch pilot schemes in seven cities and provinces next year.