The EU and aviation emission

Aviation business was brought into the EU Emission trading scheme (EU ETS) from the New Year. This essentially puts a cap on the amount of fuel the airlines can burn in a given time and if they want to burn more fuel, then the airlines have to buy carbon credit from other companies that managed to save from their carbon emission limits. While there are certain questions still being asked about emissions allocation and carbon pricing volatility in the past years, the inclusion of aviation industry was largely debated in the courts of law and was finally given an approval.

Even though, aviation accounts for less than 2% of world carbon emission, the economics of this emission is little different to that of others. Carriers from other continents that are forced to pay for carbon emission within EU are not happy about this extra cost for their operation. But, for this writing I would like to argue for the case of EU carriers only.

Aviation business is unique in a few ways from other business as it is very high fixed cost intensive and fuel is the biggest cost for running the business. Also, the type of fuel required for running the business is one of the most expensive ones. Hence, whether EU laws are in place or not, airlines must control their fuel cost to stay competitive. A thermal power station can control the coal input to create electricity based on the forecasted demand. In other words they can convert all their fuel into money. However, in aviation, no matter whether the flight is full or almost empty, the fuel cost remains almost the same. Hence, the amount of fuel burnt is not tightly coupled with the revenue made from the flight. This may not be true in other participating industries in the EU emission trading scheme. Hence, this gives added incentives to airline industry to reduce their carbon emission naturally without any EU emission laws.

The cost of creating one ton of carbon from aviation fuel is far greater than cost of creating one ton of carbon from coal powered business. Also, the revenue earned by burning one kilo of aviation fuel is different to that of revenue earned by burning one kilo of other fossil fuels. In such a scenario, how can a single price for carbon across all industries using different fossil fuels work? Surely, the emission trading scheme would favour one industry over other.

Also, the basis of carbon allocation for industries is flawed. All emitters are given same amount of carbon emitting licenses that they emitted in the previous years. This favours large emitters and cripples small emitters from expanding. When the same is applied to the aviation industry, it would surely cripple small airlines from expanding due to high emission costs. The emission trading scheme should stop this 'Cap and Giveaway' scheme and should study the carbon reduction potential of each industry and also the carbon reduction potential of each fuel type. With a single code across the continent, the business landscape would be tilted with aviation industry in the wrong side of it.

Another flaw from the previous years was the over allocation of the carbon credits. However, EU claims that the carbon allocation problem is sorted from the 2012 period; there are two possible scenarios. If the carbon were priced lower in the market due to over allocation, then the industry would prefer paying lower for carbon emission instead of investing in carbon reduction. If the carbon were priced higher in the market due to under allocation, then the companies which wants to invest in carbon reduction would find it difficult to fund it. In either ways, the emission trading scheme is not encouraging companies to invest in carbon free technologies. Instead of paying for carbon emission, the airline industry could do better by investing in low emission aircrafts and technologies. It is inevitable for the airlines to move in that direction due to the cost of fuel and prevailing competition. EU ETS is a major distraction for the airline industry.

On top of all this, there is another severe danger. The danger of moving quickly towards bio fuel. Bio fuel emits very less carbon than the kerosene based aviation fuel. However, it has many other consequences. The population of the world has reached 7 billion last year. We do not have enough land and fresh water resources to feed all people three times a day. If Bio fuel picks up, then farmers might be forced to use their farming land to create bio fuels. This will cripple the health and safety of people, especially to those living in poor countries. The cost of malnutrition and other human costs should also be factored into, in the pricing of bio fuels. Again, EU ETS is a major distraction. It encourages the usage of bio fuels, instead of encouraging investing in genuine technologies that reduces carbon footprint.

Investment in renewable energy such as wind and solar is the way forward for most of the industries. It is a very long distant dream as far as aviation industry is concerned. Aviation industry should invest in technologies and aircrafts that reduces carbon emission. Any other laws or treaties such as EU ETS is a distraction towards that path.