European aviation firms brace for carbon trading

Aviation International News » March 2008
February 26, 2008, 6:05 AM

The outlines of aviation’s place in the EU Emission Trading Scheme– a CO2 emission permit market–are becoming clearer. Experience from other industries gives trading experts confidence that aviation’s absorption will be smooth but expensive.

“It is a commodity market,” Marc La Rosa, marketing director at trading specialist Orbeo, told AIN. He asserted that the ETS is working well, adding that the prices (as low as two or three euro cents per metric ton of CO2) during the first phase (2005-2007) should not be considered a serious failure. The authorities later attributed this low pricing to “overallocation,” a situation that La Rosa said will not be repeated in the second phase (2008-2012).

The overallocation (more CO2 permits than needed were allotted, hence the weak market prices for one ton of CO2) can be explained by the fact that the first phase was a test, he said. EU authorities did not want to put too many constraints on the entities that participated.

In addition, little was known about the extent of their emissions. But now detailed CO2 emission figures are available for 12,000 sites for which they were not available in the 2005-2006 period. Moreover, the EU has sharply reduced the number of CO2 permits (known as EU allowances, or EUAs) that will be offered for 2008-2012. The allowed total is 14 to 15 percent less than current unrestricted CO2 emissions, La Rosa estimated.

One ton of CO2 is already trading at about E22, a massive leap from the 2005-2007 price of just a few cents per ton. Some 50 percent of the market comprises a handful of large carbon exchanges. The rest of it is decided by over-the-counter trading. Companies on the EU ETS buy or sell EUAs and certified emission reductions. They can also import CERs under the clean development mechanism (CDM), which funds CO2 emission reductions in developing countries.

Some question marks hang over the inclusion of air transport into the ETS. One of them is whether one aviation EUA will be equivalent to one “ground-based” EUA (see box). If there is a differentiation, an airline that wants to emit one ton might be required to buy three tons on the market.

La Rosa estimated that the air transport industry would have to buy around 300 million tons of EUAs between 2013 and 2020. To get a feel for the cost, this should be multiplied by the price of one ton, which brings the annual average cost to more than $1 billion.

Some airlines have started buying CO2 permits on the market, buying permits as they would hedge against fuel prices, said La Rosa. They need to hedge several years
in advance and 2012, the likely year of inclusion, is imminent in hedging terms, he noted.  

Fuel Burn at Altitude

Aviation lobbies have argued that civil aviation produces a mere 3 percent of CO2 emissions derived from human activity. However, scientific studies are questioning this position. According to new studies, the secondary effects of the emission of one ton of CO2 at altitude end up multiplying the CO2’s impact so that it is probably equivalent to three tons of surface emissions.

The radiative forcing (that is, the bad impact on climate change) of one ton of CO2 is the same, whatever the altitude. However, as Daniel Cariolle, an expert at French weather forecast and study organization Meteo France, explained to AIN, other emissions–specifically nitrous oxides (NOx) and soots– have a radiative effect as well.
Nitrous oxides are ozone precursors, and ozone is a powerful greenhouse gas. It remains active for between six months and one year when emitted at the cruise altitude of a turbine-powered aircraft.

Soots serve as kernels for water condensation. Some condensation trails then morph into cirrus clouds, which, although they live for only a few days, have a greenhouse effect, too.

Current models show that the final multiplying factor is between two and three. The upper limit is the one most commonly mentioned by experts. Further studies are needed, however, to refine the understanding and quantifying of these effects.   

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