The report by CE Delft, Costs and Benefits of Stopping the Clock: How Airlines Profit from Changes in the EU ETS, explains that ‘windfall profits’ normally occur in emissions trading when allowances are handed out for free. Company assets are automatically enhanced when receiving free allowances because they could be sold immediately on carbon markets and thus have a real asset value. Experience from other sectors involved in emissions trading shows that in many cases companies pass on up to the full value of these allowances to their customers, even when they have received them for free. As regards aviation, following the decision to include carbon emissions from aviation in the EU’s Emissions Trading Scheme (ETS) from 2012, airlines were allocated free emissions permits (effectively ‘permits to pollute’) representing 85% of their historical (2004-6) emissions. If airlines had charged customers for the full value of the 85% of permits issued for free – they would have pocketed up to €870 million.
The EU ETS also required airlines to surrender permits for all emissions in 2012 exceeding the 2004 historical level. For most carriers that meant the 15% not allocated for free plus any growth in emissions since 2004. Purchasing these permits on carbon markets represented a real cost for airlines, so it was expected that these real costs would be passed on to passengers. Many airlines said explicitly that this was the case. However, last November the European Commission decided to drop the requirement to surrender emissions permits on flights between EU and non-EU airports for one year – a measure known as ‘stopping the clock’. Assuming that air carriers had passed on to consumers the real cost of purchasing the additional permits on flights to and from non-EU countries – permits which now no longer need to be surrendered – airlines would have pocketed additional windfall profits of up to €486m. Hence in total, airlines stood to gain up to €1.36 billion in ‘windfall profits’ in 2012 alone.
There is little doubt that airlines raised their fares at the start of 2012, citing aviation’s entry into the ETS. Delta, for example, publicly announced a US$ 3 surcharge on each leg of transatlantic flights just one day after the inclusion of aviation in the EU Scheme. Ryanair showed a surcharge on its website. Because air fare pricing is not fully transparent, it is impossible to say whether all airlines did indeed charge customers for all their free emissions permits - so the CE Delft study made estimates based on likely scenarios.
T&E aviation manager Bill Hemmings said: ‘Passengers have paid towards fighting climate change, so it is unjust for airlines to retain these revenues as windfall profits. The entire air transport industry has an interest in ensuring aviation becomes sustainable, so the airlines should act responsibly and contribute any additional profits to the UN’s Green Climate Fund which was created to help developing countries tackle the impacts of climate change.’
‘Stopping the clock’ was a measure implemented by Europe to provide the International Civil Aviation Organisation (ICAO) with the ‘necessary’ breathing space to agree a global emissions trading system that would supersede the EU ETS. A high-level group set up by ICAO met in December and January and has so far disappointingly made little progress. The upcoming ICAO council meeting in March is the chance for political headway to be made. Airlines, meanwhile, have not yet said what they will do with their ‘windfall profits’.