The European Regions Airline Association (ERA) attacked the October 2 vote of the European Parliament Environment Committee (ENVI) which, it says, will increase the cost of emissions trading to the airline industry by more than 400 percent compared with the European Commission’s (EC) original proposal. The organization called for an impact assessment of the proposed rule.
“The EC’s original proposal had significant weaknesses but was at least supported by an impact assessment of sorts,” said ERA Director General Mike Ambrose, director general, speaking at the ASD Annual Convention in Barcelona. “The amendments proposed by the ENVI, however, have been made without even a simple impact assessment. The majority of the [Members of the European Parliament], who voted, have no idea of the severe economic, social or even environmental consequences of the actions they were taking. ENVI has treated the objectives of the Lisbon Agenda as a joke. To propose such changes without any consideration of the impact on the industry, jobs and Europe’s international competitiveness is unacceptable.”
Whereas the original proposal permitted CO2 allowances based on 100 percent of airlines’ average annual emissions during 2004-2006, the ENVI has reduced this to 75 percent. In addition, ENVI has proposed that 50 percent of this allowance should be auctioned and that the cost of all CO2 permits should be multiplied by a factor of two if the EC does not develop legislation before 2010 to address NOx emissions.
The ENVI also proposed that the scheme should be brought forward from 2011 to 2010. In order for the scheme to begin in 2010, airlines would need to be collecting and recording data from January 2007 despite the absence of an actual law.
“These vindictive amendments illustrate ENVI’s embarrassing lack of understanding of the massive impacts their actions might entail,” said Ambrose. “The extremism displayed by ENVI both reduces its credibility and harms the cause of sincere and well-meaning environmentalists.”
ERA recognizes that Emissions Trading is the most constructive of economic instruments, and the industry has supported it. ERA and a number of other European operator trade associations suggested amendments to improve the EC proposal, many of which were taken up by the Transport Committee (TRAN) and were based on a proper impact assessment, independently commissioned by industry.

ICAO Division Keeps Residuals on Even Keel
The growing division at the International Civil Aviation Organization (ICAO) as to how to reduce aircraft emissions will delay the development of more advanced engines, allowing residual value projections to remain largely unchanged, said Paul Leighton, editor of RAN’s sister publication Aircraft Value News.
Despite approval from U.S. and other delegations favoring solutions development by individual member states, ICAOs general assembly, meeting in Montreal last month, simply means that Europe will continue with plans to impose its Emissions Trading Scheme on aviation, now proposed for 2011, as well as the inclusion of non-European flights in 2012. Related Story The failure to reach a consensus, however, hampers efforts to combat the focus on aviation as a major polluter at a time when it only contributes two percent to the world’s carbon output compared to contributors such as cars, truck, power plants and homes.
ICAO, in opposing the EU ETS scheme, prefers to set up other emissions reducing initiatives that will not be ready to report back to ICAO for at least two years. The European ETS, effective January 2005, is the largest multi-national greenhouse gas emissions trading scheme currently in effect. The ETS currently encompasses 25 European countries and industries such as electricity, iron and steel, pulp and paper, chemicals as well as other sectors. The scheme, which sees various industries allocated an allowance for every ton of CO2 emitted based on emissions recorded in a specific year, allows companies to either sell surplus allowances should they emit less emissions than those allocated or force the purchase of allowances should they exceed their allowance. Aviation interests, having cut emissions with each generation of more fuel efficient engines, worry they will not get credit for 40-years of environmental work compared to other industries that have done little. However, because of the way the allowances for each company were allocated in 2005, only four countries in the EU out of 25, exceeded their basic targets such that most industries and countries had a surplus which could be sold or saved against future emissions. The allowances to be used will be defined as at 2004-2006 levels suggesting that by 2011-2012, the industry will have outgrown this allowance, forcing airlines to buy in allowances or seek to remain within their thresholds. This would stifle growth considerably or force up-gauging of aircraft.
Much depends on how much the allowances will cost but the consequent increase in ticket prices is seen as having a dampening impact on demand, which would reduce emissions. One estimate, by Ernst Young & York Aviation, prepared on behalf of those aviation interests impacted by the ETS, suggests that airlines profits could be cut by some 40 billion Euros by 2022. With the need to buy allowances and/or invest in cleaner aircraft, the price of the average ticket could increase by more than five percent. With the low cost carriers dependent on low fares for traffic generation, a five percent increase in fares could see a 10 percent drop in demand.
Offsetting that, however, is their efforts to generate revenues. Indeed, Ryanair thinks the impact on prices to the bottom line will be negligible as ancillary services provide the majority of revenue. Because the ETS scheme in based on historical emissions, there will be considerable opportunity for operators to benefit from such “grandfathered” rights in limiting the impact on cost structures. Owing to the way allowances are provided and the means by which they are bought and sold, airlines could seek to pass onto passengers the full cost of acquiring additional allowances while their net cost is much lower. Other industries, notably the power sector, that have been part of the ETS have already seemingly enjoyed a windfall in profits by charging consumers market rates while acquiring allowances at a discounted price.
The imposition of ETS on airlines can also be viewed as a less costly alternative for operators than the placement of other taxes on aviation such as fuel. Because of the past desire to ensure that indigenous operators were not disadvantaged compared to foreign carriers, fuel has largely not been taxed, contrasting sharply with the extensive taxes placed on fuel for surface transport, particularly in Europe.
Depending on the price of the allowances that the airlines will need to purchase, passengers are already all too familiar with the array of taxes that are placed onto ticket prices. Though most airlines now quote an all inclusive fare, there remains a clear opportunity for operators to market the cost of the ETS to passengers as a carbon tax, providing a measure of reassurance, albeit misguidedly, for the traveling public that they are playing a role in reducing greenhouse gasses. The industry has already introduced fuel surcharges at a level similar to some ETS scenarios for which there has been no discernible impact on traffic levels and therefore no reduction in emissions.
One of the primary purposes of the ETS is to reduce carbon emissions by reducing demand. If the cost of buying allowances is set at a high enough level, then fare prices will indeed need to rise and demand will be impacted, particularly for the low cost carriers who are dependent on volume. However, the EU ETS in its present form does not seem capable of impacting anticipated demand levels nor in accelerating the necessary technological change that would make a difference in cutting emissions.
The probable limited impact of the ETS on reducing demand is at the core of the disagreement between the EU and the rest of the world at the recent meeting of ICAO. The rest of the world, notably the U.S., sees the ETS as a little more than a tax even though compared to other proposals being suggested, ETS seems to represent a more lenient solution for the aviation industry in dealing with its public image.
The residual value projections being made for the current generation of narrow-bodies are therefore unlikely to be the subject of change as a result of the ICAO meeting or even possibly the EU ETS. The current generation of aircraft will continue to be favored because they offer lower fuel consumption and therefore reduced operating costs. With the expectation that fuel prices will remain at current levels or even increase, albeit with the benefit of a weaker dollar, operators will continue to place pressure on the airframe and engine makers to produce aircraft that are cheaper to operate rather than because of a moral stance on emissions.
*Acknowledgement to Craig Windram, Director, Carbonsim.

Dramatic Tech Changes will Take Decade or More
Innovation needed to dramatically impact greenhouse gases (GHGs) will take another 15 to 20 years, based on current working and regulatory practices, according to the consensus of the International Society of Transport Aircraft Traders (ISTAT), which met recently in Vienna. Notable for the inclusion of Jeff Gazzard, from GreenSkies Alliance, the conference underlined the growing concern that the growth of the aviation industry in the coming years, as indicated by the extending backlog, will represent a greater contributor to greenhouse gasses despite on-going improvements in engine emissions. A doubling of traffic in the next 20 years will overwhelm efficiency gains, according to AVN’s Leighton, reporting on the ISTAT meeting.
The 300 ISTAT attendees noted the impact of adverse publicity despite contributing a minor proportion of greenhouse gases such that future growth could be constrained. The prominence of the environment at such a major industry conference, highlights the importance of the environment to the industry and the relative attraction of aircraft and residual value expectations.
Developments in engine technology are taking place but the pace of change in terms of making a radical difference to emissions are unlikely to appear until perhaps 2020 or later. Replacement of the existing fleet is replaced by newer technology that will make a difference on emissions will take 25-30 years.
In seeking to launch new products, the airframe manufacturers are dependent on the engine makers. A new narrow-body family from either Airbus or Boeing is unlikely to appear without a major improvement in engine technology. While incremental improvements in existing engines will be made, an all new airframe/engine combination based on current regulatory conditions, may not be forthcoming for another decade or more, providing reassurance for residual values of current generation narrow-bodies.
The ISTAT conference, however, demonstrated the relatively advanced development of biofuels including the use of algae as a mix to kerosene. Demonstration flights are due in a matter of months rather than years. While the use of biofuels will not necessarily reduce engine emissions, their benefit lies in absorbing carbon from the atmosphere in the first place and in being able to be used in existing engines and fuel systems with minimal change. A potential 50 percent mix of algae and kerosene, combined with other measures such as a carbon tax could offset the negative press that aviation currently receives and therefore limit the imposition of regulatory restrictions as well as potentially reducing operating costs.
Nonetheless, should the projections and rate of climatic change for global warming be verified in the next five to 10 years, the aviation industry will come under ever more pressure to introduce changes that much sooner. There may be a need for the airframe and engine manufacturers to accelerate their development programs, perhaps by introducing more collaboration to make better use of scarce engineering and material science capability, prompting a major change to long-term residual forecasts.