Few things have generated as much controversy as the EU's decision to include aviation in its Emissions Trading Scheme (ETS). Since 1 January 2012, when airlines first had to comply with the ETS rules, the industry has complained bitterly about the high cost of what many call an environmental tax. The airlines have passed this cost on to their customers, anticipating what they will have to pay when the bill for their 2012 emissions comes in April of this year.
But a study published today by independent consultancy CE Delft found that in fact, inclusion in the ETS generated a windfall profit for the airlines in 2012. That's because the airlines passed on costs for purchasing emissions credits that they in fact received for free.
The windfall profits from passing on this 'imaginary' cost could be huge - up to €1.3 billion. That's quite a lot considering that profits for EU airlines in 2011 were just €400 million.
In April, industries included in the ETS must surrender enough credits (or 'allowances') to cover the greenhouse gases they emitted in 2012. But in this phase of the ETS, companies are given a certain amount of those credits for free. In 2012, airlines were given free credits corresponding to 85% of what they emitted in 2010. The remaining 15%, plus any increase in emissions since 2010, have to be purchased.
The CE Delft study found that airlines have not only passed on the cost of that '15% plus' to consumers via extra charges on flight tickets - they have also passed on an imaginary cost for much of the 85% of credits they received for free. The consultancy calculates this to amount to up to €870 million in pure profit.
Airlines with flights outside the EU fared even better. They have been passing on extra ETS costs to customers on long-haul flights since the beginning of 2012. But after a year of threats by foreign governments including the US and China, who said the charge amounted to an illegal extra jurisdictional tax, the Commission announced in November it would temporarily ‘freeze' application of the ETS rules for flights taking off or landing outside the EU. This, the Commission said, was to give their global partners time to agree to a global mechanism for curbing aviation emissions via the International Civil Aviation Organisation (ICAO) by the end of 2013.
This means that come April, airlines won't have to surrender any permits for these 'outside-EU' flights – even though they have already charged customers for the ETS costs they said they would incur. This will net these airlines an additional €486 million in windfall profits, according to the study. The Commission has confirmed that these airlines will never have to submit allowances for the outside-EU flights that took place in 2012.
Green transport campaign group T&E, which commissioned the study, is calling on the airlines to donate the windfall profits made through extra ticket charges to the UN's Green Climate Fund. “Simply pocketing over a billion euros of passengers' money would not only damage industry credibility but also rightly prompt questions as to their real motives,” said Tim Johnson of the Aviation Environment Federation.
The airlines have not commented on the study, but in the past they have emphasised that being brought into the ETS involved investing in new reporting software and personnel to keep track of emissions. They have also pointed out that in the next phase of the ETS, which begins next year, they will not be given such a generous amount of free allowances. Though windfall profits may be generated in this first year, it is an anomaly in the long-term and reflects the future cost of doing business.
Of course, the airlines had no way of knowing the foreign flights would end up not end up being charged in the end. But they would have known full well that they were getting 85% of their allowances for free.
Whether or not the ETS charges that were passed on in 2012 reflect a future reality, my suspicion is that passengers won't take too kindly to the idea that the extra cost they paid that was ostensibly going toward reducing emissions will actually just be pocketed by the airlines.
Dave Keating reports on the interrelated issues of environment, energy, climate change, transport, health, agriculture, fisheries and research for European Voice. In this blog, Dave brings you insights into the sometimes byzantine world of European Union policymaking as well as the equally confusing nature of life in Brussels. Originally from outside New York City, Dave has lived in Europe for six years. He can be reached at DaveKeating@economist.com.
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