Emissions trading u-turn won't cut air freight rates, say airlines

© Khunaspix Dreamstime.

Anyone hoping to see a further decline in air freight rates following the EU’s decision to ‘stop the clock’ on the Emissions Trading Scheme will be disappointed, say industry sources.

Yesterday, EU Commissioner for Climate Action, Connie Hedegaard, announced that she would temporarily exempt non-EU flights from paying into the controversial scheme for one year, until year end 2013, after ICAO’s General Assembly. The first allowances were due in April 2013. The u-turn came about after an ICAO meeting which progressed plans for an international scheme. “There are no guarantees, but there are indications from ICAO that it can work,” she said.

But, she warned: “If the exercise ends in nothing, we are back [to ETS] automatically.”

The move came as a surprise to most in the airline industry, including IATA. And there are still many questions to be answered. Ms Hedegaard made the point that yesterday’s announcement was ‘political’.

“It has not yet been approved by the 27 member states, although they are informed,” she said. “The decision needs endorsing. Politically, I recommend this and I think we will get the backing. But on the technical side we need to get the paragraphs amended and the technical side will take longer. But the intention is to have it very soon.”

The move also raises questions about the European Commission’s plans for the shipping industry, so far excluded from the scheme. In January, the Commission published a consultation document, which looked at options including a similar market-based mechanism, a straight tax on bunker fuel or emissions, the levelling of carbon caps on vessels, and a “compensation fund”.

The latest decision will ease non-EU airline finances, but it is unlikely that any cost savings will be passed on as many airlines are already struggling to survive – and few carriers had added the cost into freight rates.

Nikolas Dombrowski, product director airfreight for Geodis Wilson, said: “I believe that the current supply and demand situation was, and still is, not allowing  carriers to increase freight rates.

“For the airlines there will be the benefit of getting rid of these additional costs, but I don’t expect any stimulation of the market. And as the vast majority of the airlines have not passed on the additional costs I also don’t expect them to pass on the savings now, in particular against the background of their current financial situation.”

A spokesperson for Luxembourg-based freighter operator Cargolux agreed. “One cannot pass on the cost to one’s customers in such a fiercely competitive market environment.”

Some carriers, including Etihad Crystal Cargo, had decided to impose a surcharge to cover the costs of ETS, which in its case amounted to $0.03 per kilo from March 1. Many, however, did not introduce a surcharge. In February, law firm Holman Fenwick Willan issued a warning to airlines about imposing a surcharge.

“The Commission expects the cost of complying with the ETS to become one of the parameters of competition between airlines, harnessing competitive forces to drive further reductions in CO2 emissions by aircraft flying to and from the EU…The introduction of surcharges at the same time and at similar levels could be viewed as being consistent with an agreement between airlines which might amount to an infringement of the competition rules, along similar lines to previous surcharges cases.”

Flights within the EU are still subject to the ETS, a disappointment for Europe’s short haul airlines, as well as carriers such as Cargolux, which has several intra-EU flights via its rotations.

“There are no savings at this point for Cargolux,” said the spokesperson. “On the contrary, unlike our non-EU based competitors, we still have to comply with EU ETS at regional level and meet our monitoring and reporting obligations while we are faced with further uncertainty, pending the much awaited global ICAO solution.”

Under the new deal for aviation, which was included in the ETS from January 2012, ICAO must decide on one global market-based mechanism. A new scheme will doubtless raise the spectre of further costs for the airline industry, which has already paid to be compliant with the now potentially defunct ETS. The Cargolux spokesperson said: “Cargolux incurred costs for setting up procedures and systems, as well as the mandatory monitoring, reporting and verification activities. We also had to implement proper financial trading facilities for EU ETS allowances.”

The turnaround came following a series of threats from various countries including China, which ordered its airlines to cancel Airbus orders, as well as lobbying from government and airline groups around the world, and is likely to mean that any similar action imposed on the shipping industry is better thought out. At the beginning of October, following the consultation process, Ms Hedegaard and vice president Siim Kallas issued a joint statement on greenhouse gas emissions from shipping.

“Shipping is a global industry and needs global solutions to address its environmental footprint… The International Maritime Organization made a significant and highly welcome step forward in July 2011 with the Energy Efficiency Design Index. But this measure alone – which is applied only to new ships from 2015 – will not be enough to ensure shipping emissions are reduced fast enough.

“At EU level, we consider several options, including market-based mechanisms. A simple, robust and globally feasible approach towards setting a system for monitoring, reporting and verification of emissions based on fuel consumption is the necessary starting point… It’s therefore our joint intention to pursue such a … system in early 2013.

“The shipping industry itself is best placed to take the lead in delivering fast and effective greenhouse gas emission reductions – thereby cutting cost and making the sector fit for the future.”