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Friday, August 3, 2007

Regionals Environmental Story Good

Despite its good environmental record, the advent of new environmental regulatory activity has forced many to rapidly become schooled on the issues at a time when most are still wondering, since aviation efficiency is a necessity, what the controversy is all about. Thus, Part II will cover why you should care and what it all means. The simple answer is the bottom line, but it so much more complex than that.
While some may think what is going on in Europe will not affect them, it is the leading edge of a movement with European regionals in the thick of battle. It is from their experience U.S. regionals can take important lessons. They are already getting the message out that regional airlines, as with their major-carrier counterparts, have a very good story to tell, especially since their major competition is the car. Flybe has used what is called eco-labeling to its advantage and Bombardier (BBD) has taken Flybe’s efforts further by applying the same logic to its regional jets. The message? Regional airlines are far more environmentally friendly than regulators would have us believe as they call for passengers to curb holiday flying and visits to second homes because aviation is bad for the environment.
The largest issue is emissions trading, which is expected to cost the U.S. industry an estimated $16 billion annually. For regionals the major question is how that will impact capacity purchase contracts, or will it become just another pass-along cost as fuel is today. Whether or not an emissions trading scheme (ETS) will be imposed on U.S. carriers, is up for grabs but the potential impact is huge. What exactly that means to regional costs is one of the many unknowns that have yet to be resolved. Even so, it behooves anyone to get up to speed not only in the finer points of green aviation but the coming regulations that could impact the bottom line.

From the Top
The 1997 Kyoto Protocol requires participating parties to reduce their overall emissions of greenhouse gases by at least five percent below 1990 levels between 2008 and 2012. Europeans have set 2011 to include domestic aviation in emissions trading schemes and 2012 for the inclusion of international flights into Europe. This alone will no doubt result in heated debates at September’s ICAO generally assembly in Montreal. U.S. airlines prefer to focus on reducing emissions via fuel efficiency and other technological advancements while Europe wants emissions trading schemes, already in place around the world, to include aviation.
There is one thing on which the entire industry agrees, however. “We must all rally around the ICAO work,” said Bombardier Vice President Marketing and Communications Trung Ngo. “It has the responsibility under the Kyoto Protocol and it makes sense to have a UN organization develop how the industry should address the environment, which will be a lot better than trying to meet the different standards set around the world. The whole industry is wrestling with this subject. It is a monumental issue. As an industry we are working very hard to drive the best fuel economy out of known technology.”
Embraer (ERJ) Executive Vice-President, Technology Development and Advanced Design, Satoshi Yokota echoed Ngo, but said his company, as with many others, is still struggling with the initiatives now in research and development and where its programs fit in. Airlines, too, are struggling, looking to partner with environmental organizations to offset their carbon footprint or that of their passengers.
For aviation, considerations go far beyond what comes out of an engine nacelle and includes everything from the drawing board to first flight and dispatch to maintenance and overhaul. Manufacturers are reducing the environmental impact of their manufacturing process. Traffic management systems are developing fuel/emissions savings programs for aircraft routing. Recently, FAA Administrator Blakey noted that airlines are now spending millions to retrofit aircraft to take advantage of the advances made with the success of required navigation performance (RNP) systems that afford very precise approach paths for increased fuel savings. Horizon is already on board. In addition, government and private partnerships are working on the development of alternative fuels but such advances are years, if not decades off.
As reported in Part I, despite all that remains to be done, the aviation industry is way ahead of the power curve on environmental issues having seen to noise and fuel efficiency long ago. It is continuing those efforts and investing in massive research and development that hold great promise in the long-term.

Globally, all transportation modes account for 20 percent of Green House Gases (GHGs), according to European Regions Airline Association (ERA). Of transportation’s contribution to GHGs, road transports – trucks and cars – constitute a full 80 percent to the airlines’ 12 percent while emissions from energy generation for lighting is three times that from aviation at 36 percent. Despite all the political rhetoric against it, aviation constitutes only two percent of all global emissions, according to the International Air Transport Association (IATA). Still, the industry is not resting on its laurels but is doing more from re-equipping fleets and finding more efficient routings to reducing the environmental impact of manufacturing of its equipment.

As airlines develop voluntary passenger carbon offset programs, with Delta (DAL) becoming the first U.S. airline to develop such a program, a new trend is emerging called eco-labeling to illustrate just how eco-friendly a given product is.
Flybe has compared its Q-400 to a car, as part of its defense against assertions that passengers will be environmentally negligent if they fly. Politicians point to holiday flights and second homes as culprits despite the fact that 80 percent of all aircraft emissions relate to flights over 1,500 kilometers.
Part of the problem, said the panelists during last week’s AviationToday.com’s webinarThe Green Challenge in Aviation: How ‘Clean’ Technology Will Affect You – is the fact people see airplanes flying over their houses not power plants.
It is only a matter of time until such arguments cross the Atlantic where there is no real alternative to the car except flight. Unlike Europe, the U.S. has spent the last half century dismantling passenger railways and worshiping at the altar of the private automobile.
“Eco-labeling is the best way regional airlines can be transparent,” said Ngo. “We endorse it fully. Today even appliances have labels. Why not aircraft? Let’s be transparent because our story is excellent. From the regional airline and aircraft standpoint the one thing they ought to highlight is the extent to which they provide a unique and essential service. There are many points where there is no other linkage to the outside world except by air, thus it holds a significant environmental value. If you limit travel to local driving you are trading off air transport, with its cleaner emissions, for private transport.”
Flybe applies a per-liter fuel measurement to its aircraft, comparing it to driving. “That’s the best measure of efficiency,” said Ngo. The average Q-400 efficiency is as good as the smallest European car. You’d have to drive a hybrid compact car to achieve the same efficiency. The consumer has to decide what mode of transport they want to take and, when it comes to the environmentally friendly aircraft, you can forget the SUV. The RJs of today are not only superior to the car but to RJs of the past and the narrow-bodies of the past and the future. They are 30 percent to 40 percent more efficient than the F-100 or the 737.”
The standard measurement is the vehicle occupancy rate per liter/gallons of fuel at a rate of 6.4 liters per 100 kilometers. The average car has 1.5 occupants (25 percent load factor), compared to load factors aboard aircraft. Bombardier’s NextGen equipment offers lower fuel burn per trip than a small car over similar distances. The CRJ700 has an equal fuel burn to a small car at a 42 percent load factor. This load factor is staggeringly conservative given the 70-plus percent load factor of most flights in the U.S. The CRJ1000 equals the car at a 52 percent load factor. The Q400 betters that, of course, according to the eco-labeling produced by Flybe. It equals a very small car at 35 seats or a 47 percent load factor.
And, aircraft for aircraft, the CSeries, said Bombardier, offers a real advantage over current narrow-bodies with its 70 percent advanced structural material including 40 percent composites. The CSeries 110 offers a 27 percent advantage over old narrow-body aircraft and a 13 percent emissions advantage over new narrow-body jets. With the CSeries 130, the disparity rises to 33 percent and 21 percent fewer emissions, respectively. The question then becomes will such arguments fly with passengers, especially given the price of tickets from regional points.

“Regional aircraft are intrinsically environmentally friendly,” said Ngo. “Green is built into our genes. Otherwise we have no reason to exist.”

Embraer cautioned that such statistics may not be entirely accurate given the variables that exist in aircraft operations. Yokota noted that Embraer conducts very aircraft specific route analysis for its customers, which include such variables as temperature, speed, wind, length of haul and the number of passengers supporting the route.
“Under 100 miles you can’t compete with the car,” he said. “When you reach 300 to 400 miles, the regional jet overtakes it. Customers are taking the ERJ 170 and ERJ 190 for routes that have between 200 and 300 passengers a day.”
Even so, Embraer did provide some comparisons. “Even with E-jets offering 16 percent more cabin volume per passenger, including wider seats and a wider aisle, the fuel burn per seat (and thus CO2 emissions per seat) of the E-Jets fall in the same ballpark as the CRJs', according to Embraer’s Andre Rizzi. “With regards to the E195, its fuel burn per seat is lower than the Q400's.”
But another variable takes even the most efficient aircraft and compromises it. While air traffic services are making inroads for aircraft efficiency, moves to a satellite-based system, which will afford even more efficiency, it is a long way off. “You have three elements that make a fuel efficient aircraft,” said Ngo. “First is how air traffic control manages the aircraft and the second is how do airlines make the decisions on how they schedule the service. That has an impact. Are they optimizing the operation and conducting business to maximize fuel conservation and minimize emissions? There is also the technology of the aircraft. Those are the three legs of the environmental stool.”

Emissions Trading
Some of the programs developed to date include government-funded incentives to pay for green technology. One airline already has five year’s experience under its belt and has come away with lessons for everyone having built in fuel conservation beyond what is currently being done in aircraft operations. British Airways became the first airline in the world to do emissions trading when it joined a pilot program – UK Emissions Trading Scheme – in 2002. It reported the most valuable aspect the program, which ended in December, has been adding energy consciousness into system planning. Data and energy management information was vastly improved and the airline gained a number of strategic benefits including accounting for carbon prices in network planning decisions and integrating emissions tracking into fuel hedging and financial management activities. In addition, it implemented a carbon offsetting program for domestic passengers in 2005 and, while it has gotten off to a slow start, it plans to rollout a worldwide program.
The biggest problem with emissions trading is making sure the aviation industry gets credit for all the work already accomplished. “Who is going to be the net buyer,” asked Washington Post National Aviation Editor Del Wilber, during AviationToday.com's webinar. “The airlines. They aren’t going to have anything to sell because they’ve already cut to the bone.”
There are already emissions exchanges around the world including Japan, Chicago (which also developed the European Climate Exchange and the Montreal Climate Exchange); and Asia.
ICAO endorsed the open emissions trading system for international aviation – the ability to trade across industries rather than a closed scheme which would restrict trading within aviation alone. It requested the immediate development of guidelines for open emissions trading, focusing on establishing the structural and legal basis for aviation's participation in an open trading system, and including key elements such as reporting, monitoring, and compliance. ICAO has already created a Template for Voluntary Measures for use by airlines and/or governments for voluntary agreements.
In its report on Voluntary Emissions Trading, ICAO noted two approaches to voluntary program funding – passengers, such as Delta’s program, or airline funding environmental programs on its own. Charging passengers is not too far off the European suggestion that costs associated with emissions trading could be passed on to passengers. But that has its own problems given the elasticity of airline pricing as illustrated in Part I. For a more detailed look at emissions trading see the sidebar below.

Regardless of how aviation responds to current political initiatives, it is clear that regionals will have their challenges as the environment movement sweeps around the globe. For now, they should take their lessons from Flybe.

Part III: How industry initiatives are working.

Emissions Trading 101 – ICAO Voluntary Emissions Trading Scheme Report*

Emissions trading is a market-based approach to achieving environmental objectives. It allows those who have reduced Green House Gas (GHG) emissions below a required target, to sell their excess to offset emissions from another source. Airlines will be assigned allowances based on the industry’s past record. However, since the industry has already accomplished so much in reducing their environmental impact, observers are worried they will not receive credit for past investment, reducing their allowances. Should emissions trading be imposed on aviation, the industry wants an open regime in which is can trade with other industries versus a closed regime which would force it to trade only with other aviation companies. Prices under a closed scheme could be perhaps 10 to 20 times higher than under an open scheme, according to ICAO.
The primary aircraft GHG emissions are carbon dioxide (CO2) and water vapor (H2O). Other emissions are oxides of nitrogen (NOx), particles containing sulfur oxides (SOx) and soot. The total amount of aviation fuel burned, as well as the total emissions of carbon dioxide, NOx, and water vapor, are well known relative to other parameters such as aerosols. These gases and particles alter the concentration of ozone (O3) and methane (CH4), may trigger formation of condensation trails (contrails), and may increase cirrus cloudiness – all of which may contribute to climate change. To date, no analysis has been done on what, if any, impact contrails may have.
Emissions of all non-CO2 greenhouse gases are converted to metric tons CO2 equivalent using the one hundred year Global Warming Potential (GWP) values established by the Intergovernmental Panel on Climate Change. The unit of emissions measurement, reporting, price quotation and trading is metric tons of carbon dioxide equivalent (tCO2e).

Emissions Exchanges

There are currently carbon exchanges in Japan, Asia, Chicago, Montreal and Europe.To date, British Airways is the only airline to participate. Rolls Royce is a member of the Chicago Climate Exchange but for its manufacturing processes, not its engine emissions.
As a member of the now-defunct UK Emissions Trading Scheme, which provided government incentives to reduce emissions, BA pledged to reduce its annual emissions against 1998-2000 levels by 3.96 million tons of CO2 by the end of the scheme in 2006. Participants reduced their emissions by 11.88 million tons of CO2 during the five years. Government incentives totaled £215 million over five years or approximately £43 million per year. The level of incentives and associated targets were set through a competitive bidding process. Participants included 6000 companies which already had emission or energy targets set through Climate Change Agreements with the government.
BA’s carbon offset program allows passengers to offset the CO2 emissions created during their flights by making a voluntary contribution to an organization called Climate Care. The money raised is used by Climate Care to invest in projects that avoid, reduce or absorb carbon dioxide emissions through renewable energy, energy efficiency and forest restoration. The voluntary contribution is calculated on an emissions cost of approximately £7.50 per tCO2,e using actual fuel consumption and load factors from the BA's aircraft fleet. This translates to a contribution of £5.00 per passenger on a return flight from London to Madrid and £13.30 for a return flight from London to Johannesburg. On longer routes, such as a return flight between London and Sydney, the contribution is £28.83. Climate Care’s work is confirmed by an Environmental Steering Committee, which includes environmentalists and NGOs including WWF and Forum for the Future.

Japan’s Voluntary Emissions Trading Scheme (JVETS)
In May 2005, the Ministry of the Environment established JVETS to subsidize the installation of emissions reduction equipment for selected participants who commit to specific reductions in their CO2 emissions. The scheme also allows these participants to trade CO2 emission quotas to meet their reduction targets. The total emissions reductions for fiscal year 2006 were forecast to be almost 0.28 million tCO2e, while the total reduction over the officially-recognized service life of the subsidized equipment is calculated at about 3.8 million tCO2e.
The problem is the difficulty in applying this to airline operations given the technology constraints with aircraft engines, according to ICAO’s preliminary Voluntary Emissions Trading for Aviation Report published this year. The report said that new aircraft engines and even new aircraft could be subsidized under the scheme. In addition, airline ground operations could qualify for replacement of either auxiliary power units or fixed airport power supplies.

Chicago Climate Exchange (CCX)
The 142-member CCX is a voluntary, legally binding, greenhouse gas emissions registry, reduction and trading system for emission sources and offset projects in the United States, Canada, Mexico, Brazil and worldwide. Eligible offsets include methane destruction, agricultural and forestry practices, GHG mitigation in Brazil, renewable energy and clean-development-mechanism-eligible projects. Also included is mitigation of carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.
By the end of Phase I (December 2006) members targeted reducing direct emissions by four percent below the average of their 1998-2001 baseline. Actual reduction was substantially more than that. The CCX market price in October 2006 for CO2 was about $4 per ton. The price has risen from around US$0.98 in December 2003 and reached a high of US$5 in April 2006.
ICAO said this type of exchange is likely the only type with a potential for including aviation, especially since new schemes covering ground sources are expected to be developed.

European Climate Exchange (ECX)
ECX was established in 2004 and is a wholly owned subsidiary of the Chicago Climate Exchange. It manages the sales and marketing for ECX Carbon Financial Instruments (ECX CFIs) listed on the Intercontinental Exchange (ICE) Futures electronic platform. Each ECX CFI is based on emission allowances issued under the EU’s Emissions Trading Scheme. ECX daily prices per ton of CO2 have ranged from €20 (April 2005) to €30 (April 2006). The ECX market price in September 2006 for CO2 was about €16 or US$20 per ton. In October 2006, the ECX traded its first emission option, giving buyers and sellers the ability to hedge price risks.

Montreal Climate Exchange (MCeX)
MCeX was established in July 2006 as a partnership between the Montreal Exchange (MX) and CCX. It is intended to accelerate the development of a structured environmental market in Canada. The mission of the MCeX is to offer price transparency, environmental integrity, low cost, wide access and reliability to those sectors of the Canadian economy involved in air quality and climate change concerns.

Asia Carbon Exchange (ACX-Change)
ACX-Change was launched in August 2006 and is a fully owned subsidiary of the Asia Carbon Group, headquartered in the Netherlands. The ACX-Change is a Clean Development Mechanism (CDM) focused exchange. It claims to be uniquely positioned as a global platform for sellers and buyers of Certified Emission Reductions (CERs). It gives sellers of CERs an exposure to a large number of potential buyers while giving buyers a broad range of CER sources with varied risk/benefit profiles to choose. There is no indication as to whether this trading platform could be used to support a voluntary emissions trading system involving aviation.

Voluntary Carbon Offset Schemes
For a number of years now, consumers have been able to offset the emissions via the facility provided by independent carbon offset providers. Delta (DAL), in partnership with The Conservation Fund, is the only U.S. airline to have such a program. These organizations sponsor projects, which reduce carbon emissions. Initially the focus was on reforestation, but emphasis has now shifted towards renewable energy supply and energy conservation in countries not covered by the Kyoto Protocol. There is increasing interest among private and corporate airline customers in the climate change impact of air travel.

Distribution of allowances
This is, perhaps, the most contentious issue for airlines. According to ICAO’s VETS report, distribution of allowances could occur through grandfathering, auctioning or benchmarking. Grandfathering and auctioning do not raise specific issues that are significantly different for aviation than for other sectors. If benchmarking is used for distributing emissions allowances within the scheme, ICAO calls on regulators to recognize previous investment in new technology. Incentives should also be provided to operate the most emissions efficient aircraft in the most efficient way in the future.

Cap and Trade
The Cap and Trade system involves trading of emission allowances, where the total amount of allowances is strictly limited or 'capped' by a regulatory authority. Allowances are created to account for the total allowed emissions. At the end of each compliance period each entity must surrender sufficient allowances to cover its emissions during that period. Trading occurs when an entity can reduce units of emission at a lower cost than another entity and then sells the allowance. A Cap and Trade system is generally based on those entities included in the cap.
*Excerpted directly from ICAO Voluntary Emissions Trading Scheme Report

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