Airlines Start Buying Carbon Permits

A number of major carriers are taking advantage of the Emissions Trading Scheme (ETS) by buying carbon allowances at a steal. This comes as many non-European Union airlines – particularly those in the US, China and India – continue to fight the legislation despite a ruling from the EU’s highest court in December that the scheme doesn’t breach international law.

As of January 1, all airlines that use airports in the EU were brought into the ETS. They have joined the over 10,000 manufacturers and power plants that have been essentially paying a tax under the regulation since 2005. All carriers that land or take off in the 27 member states and three neighbouring nations have to submit permits to cover the emissions of their flights. The emissions cap for this year has been set at 215 million tonnes, and 183 million allowances (85%) will be given to the airlines for free. The carriers will have to purchase the other 15% at auctions.

Carbon trading has been slow for airlines since they haven’t received their emissions permits yet. However, Lufthansa, Air France-KLM and others have been purchasing permits, or they plan to. Lufthansa says it will need to buy 35% of the permits it needs on the open market this year. It will be passing the expected €130 million cost onto consumers. Spokesman Peter Schneckenleitner said that they are continuously purchasing allowances.

The timing to buy allowances couldn’t be better for some carriers, as the benchmarks are having a hard rebounding from a €6.30 per tonne record low in mid-December. Allowances have only recovered to €7 per tonne since then, and this is still half of their 2010 value.

Virgin Atlantic chief executive Steve Ridgway predicts that carbon trading will become a routine for carriers, like hedging currencies and fuel. However, volumes will vary depending on the economic outlook. Allowances are being driven by the level of confidence and economic activity in Europe right now, he added, and this is struggling to grow. The airline will receive almost 3.6 million allowances this year. According to its 2010 emissions data, the airline emitted 4.5 million tonnes, which means it will likely have to buy more.

Meanwhile, a study on the effect of the ETS on US airlines has found that the carriers could benefit from the scheme with windfall gains of up to $2.6 billion. The US aviation industry forecast that the legislation would cost them $3.1 billion between now and 2020. However, if the airlines pass the costs onto passengers, their profits will increase. Some major carriers – Delta Air Lines, American Airlines, US Airways and United Continental – have already implemented a $3 one-way surcharge to help cover the costs.