US Airlines May Profit from Carbon Tax

Following an academic study by scientists at the Massachusetts Institute of Technology and the Muenster University in Germany, it’s been found that airlines in the US could post windfall gains of up to $2.6 billion after being included in the European Union’s Emissions Trading Scheme (ETS). On January 1, flights departing and landing in the 27-member states of the EU were included in the bloc’s carbon emissions programme.

The move has been heavy attacked by countries around the world, and the US aviation industry has predicted it will cost them $3.1 billion from now through 2020. After Airlines of America failed in court to halt the extension, carriers in China refused to pay the carbon taxes, while Indian airlines have threatened to withhold carbon emissions data.

In the first year that airlines are included in the ETS, international carriers will get emissions permits that make up 85% of the industry cap – 214.8 million metric tonnes for the 30 nations of the European Economic Area, which includes the EU, Liechtenstein, Iceland and Norway. They will be required to purchase the other 15% at auction. This plan favours the airlines that are most fuel efficient, and they are due to get proportionally more cost-free allowances based on the commission’s benchmarks, which were published last year. Aviation information provider OAG says the ETS is expected to cost the global industry €3.5 billion and could cause an average 3% rise in fares. This is assuming allowances cost €30 each.

However, the study has found that the ETS will only have a small impact on carriers in the US and emissions. It also found that aviation operations will continue growing. If airlines pass on all the costs to passengers, including the opportunity expenses related to free allowances, profits will increase for US airlines. The report says the windfall gains could be substantial, as airlines will only have to buy about one-third of the required allowances under the current allocation regulations. A rise in the proportion of allowances auctioned, however, will reduce windfalls, and profits would decline.

This comes as Delta Air Lines became the first carrier in the US last week to add a $3 one-way fee on flights between the US and Europe. The move was later matched by United Continental Holdings, US Airways and American Airlines.

The EU has been imposing pollution quotas on over 11,000 manufacturers and utilities in its members states for years already. Companies that produce less than their quota can sell the surplus allowances, and businesses that exceed their limits are required to buy extra permits or face fines of up to €100 per tonne of carbon dioxide.