Ask the expert: Sebastian Gallehr

Question: How will the European ETS affect your business?

Expert: Gallehr+Partner director & owner Sebastian Gallehr

From 2012 on every international airline, flights from and to the EU area will have to participate in the mandatory EU CO₂ Emissions Trading Scheme (ETS). According to Merrill Lynch the total cost of the ETS will be significant for the aviation sector and amount to about US$4 billion annually. We estimate that airline operators could see an increase in costs of more than 3% - if an operator fails to prepare carefully already in 2009, this could be even higher.

Let’s start with some of the basic questions: Do airlines even know if they are affected? Do airlines know if they are exempt? Do airlines know which authority they are allocated to? I can only say, make no assumptions – find out the answers before it’s too late. Did you know, for example that Annex I of the directive states that in general all aircraft operators with “flights which depart from or arrive in an aerodrome situated in the territory of an EU Member State to which the Treaty applies” are affected by the new legislation. My immediate call to action is to find out the answers to these questions. Once you know where you stand you can then begin to assign the necessary resources to deal with your submissions.

One thing is certain, the large airlines are dedicating resources and bringing in new skills to deal with this, but if your company doesn’t have this bandwidth, then bringing in experts in an advisory and consulting role is the best approach for you.

Skilled specialists can help airlines to not only understand and meet the requirements of the EU Directive, but also ensure that they are well positioned to profit in the future. The consequences of a “do just enough” attitude will carry a high price tag. We estimate that mid-sized companies with a yearly fuel consumption of some 500,000 tonnes of Kerosene could see cost risks of up to $40 million per year.

The upside is that there is also money to be made; you could increase your emission rights by 40%, translating to a value of almost $5.5 million over nine years.

The ETS is a market based cap and trade approach to reduce carbon emissions and has been operating in the EU since 2005. More than 12,000 energy utilities and industrial companies are currently obliged to participate. Active market participants supported by deep market know-how can gain significant profits or minimise unavoidable losses. There are different emission “currencies” to be considered like AA, EUA, CER and ERU as well as several instruments like spot and future products, options and swaps. As I say, it’s a whole new playing field.

The national competent authorities (CA) of each EU Member State will supervise and enforce the requirements imposed by the directive and the monitoring and reporting guidelines, i.e., ensure that aircraft operators submit monitoring plans at latest by August 31, 2009. The monitoring plan has to be compiled by the operator and should, among others, include mandatory standards or descriptions regarding processes, responsibilities, data-handling, controlling and so on. And of course, the reporting has to be true, transparent and complete.

And the complexity goes on, it is crucial to understand that two separate allocation applications have to be submitted until March 31, 2011: one for the period 2012 and one for the period 2013 to 2020. The allocation of free AA for the years 2012 until 2020 depends significantly on the amount of verified real tonne-kilometre of the year 2010 and it is clear that any airline operator which shows high tonne-kilometre in the year 2010 will have a competitive advantage due to a high free allocation.

Penalties are to be expected. If an operator fails to submit satisfying monitoring and allocation applications in time, no free emissions rights may be allocated. Then all the necessary allowances have to be bought at high cost on the markets or, and this could happen, the European aviation activity has to be terminated altogether.

The mandatory participation of the aviation sector in the ETS will have a huge impact on the aviation business in terms of competitiveness and future viability. Don’t be caught out by doing ‘just enough’.

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