Rising cost of pollution poses major problem for airlines

A rapid and steep rise in the cost of emissions in Europe is hitting airlines especially hard as they struggle to repair their balance sheets caused by the effects of the pandemic.

The cost of carbon allowances which can be purchased under the EU's emissions trading system has more than doubled when compared with pre-pandemic levels and is now at over €50 per tonne.

Like all carbon-intensive sectors, airlines operating in the region must buy the tradable carbon allowance credits to cover emissions under parallel systems in the EU and the UK.

Read more: Carbon price hits €50 high as EU sets climate goals

The UK system, which was launched in May, began trading at even higher prices of over £50 per tonne (€58 per tonne).

Low-cost airlines such as Ryanair, easyJet and Wizz are being hit particularly hard because both schemes only cover flight emissions in mainland Europe and the UK - where budget carriers do most of their flying.

Deutsche Bank analyst Jaime Rowbotham told the FT: "There’s no getting away from the fact that the carbon price is going through the roof and these guys are exposed to that."

He added that, while disclosures regarding emissions trading and strategies for hedging are patchy, it could be estimated that Ryanair, easyJet and Wizz will each pay over €600 million in carbon costs in their combined 2023 financial years, up from almost half that before the pandemic.

Airlines receive an annual amount of free credits, and any emissions beyond that level must be paid for. The decline in passenger numbers during the pandemic means that some free credits remain unused.

Also read: £15m sustainable aviation fuel contest launched in UK

They receive enough free credits to cover around 50% of emissions at pre-pandemic levels.

The problem does not look likely to go away with traders anticipating a continued rise in the price of carbon as governments and corporations become more ambitious in terms of their net-zero pledges.

It has led several airlines to start hedging credits in a similar way to they do with jet fuel to lock in lower prices.

Ryanair has locked in credits at €25 per tonne, which the airline says it will use through to its 2023 financial year.

The budget airline's director of sustainability Thomas Fowler has described the scheme as a "tax on EU traffic", arguing that it should also be applied to flights operating outside of Europe.

Our view on it is that aviation as a whole has to do its job to reduce its carbon footprint, not intra-EU traffic," Fowler told FT.

He added that the proceeds should be reinvested into the industry to fund further research into sustainable fuels and models of aviation in order to help the sector transition to a low-carbon economy.

There are plans in both the EU and the UK to reduce the number of allowances in the trading schemes over the next decade as well as the number given out for free. It is widely expected that this will push up the price of credits even further.

Also read: Rome airports first in Europe to achieve highest Carbon Accreditation

Emissions trading is rapidly becoming one of the top three costs to airlines, according to lobby group Airlines for Europe. It is likely the rising costs will be passed on to passengers and the sector will find itself having to perform a delicate balancing act as they also aim to stimulate demand through low prices as the continent emerges from the pandemic.

The cost of emissions trading credits has never previously been high enough to change airlines' behaviour, though some now will have to consider that €50 per tonne is likely to be the bottom price moving forward.

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