Publication / 23 Mar 2004

Sector Briefing: Emissions Trading and European Aviation

Trucost looked at the implications of including the European aviation industry under the EU ETS. Thirteen companies were studied, representing the majority of listed airlines within the EU.

There is an increasing awareness within the EU that the carbon dioxide emissions of the aviation sector will need to be limited, either by tax or a ‘cap and trade’ scheme. There is a contradiction between unconstrained growth in air transportation and the Government’s emission reduction targets.

Trucost wanted analyse the likely effect that a carbon dioxide emissions trading scheme (ETS) would have on the European Union aviation sector. Thirteen companies have been studied in this report, representing the majority of listed airlines within the EU. For illustrative purposes allocations have been calculated using the ‘grandfathering’ methodology employed in the existing draft UK National Allocation Plan and some comments on the possible winners and losers from this approach have been included.

The study shows that ‘grandfathering’, where emissions permits are allocated with reference to historic emissions levels, may not be the most appropriate method for the aviation industry. An ETS could have a large impact on the profitability of low cost flights in Europe, due to the greater elasticity of demand of leisure seats and small profit margins. As the scheme would by definition be restricted to flights within the EU, airlines with more globally diversified routes will be less affected than those whose flights are entirely within the EU.

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