Post-event coverage from Ready for take-off: Impacts of aviation in the EU Emissions Trading Scheme

The EU Emissions Trading conference, which took place on 6 November in Frankfurt, was a great success, providing us with the unique opportunity to bring together such a diverse group of individuals and specialists from the industry. Each bringing their expertise and provided a perspective on the challenges and opportunities the ETS will have on the aviation sector.

We covered a broad range of topics from compliance and reporting, to the economic and business impacts, to trading allowances and the overall carbon market. Summary descriptions for each of the sessions along with the accompanying presentations can be found by viewing the tabs below. The final agenda and an update of the legislative process can be found below.

Planning for the EU-ETS should now be well under way, both strategically and at a more detailed level – changes will be required across the full range of activities in the organisation. Companies that do not rise quickly to this challenge may ultimately place shareholder value at risk.

At PwC, w e have a breadth of service offerings in place ranging from strategy advising & modeling, and carbon due diligence to verification of emission reports. The document below outlines some of our key services and solutions.

  Agenda & Legislative Process




Opening & Survey



Klaus-Dieter Ruske opened the conference with a welcome note. He spoke about the overall impact of the regulation, and specifically how carbon thinking will need to span across the full range of activities within an organsation from operations in order to be successful. These range from trading, to mergers and acquisition strategy & investment planning ,from environmental compliance to tax and accounting.



PwC has currently launched a thought leadership publication titled Ready for Take-off? , presented by Jeroen Kruijd, which analyses the inclusion of aircraft operators in the EU Emissions Trading Scheme. The report draws upon the results of a survey of twenty aircraft operators, carried out in 2007. Key findings suggest that few airlines are prepared for the EU’s upcoming emissions trading in 2011. Despite the fact that huge rises in costs are expected, two in three airlines have no strategic action plan. While nearly half of airlines think trading in emission rights will affect them "a reasonable amount", only one in four of them has made a qualified judgment of how their business will be affected.



Take-off! Getting prepared for emissions trading Moritz Nill from PwC argued that, with all the uncertainties still there, operators should start preparing themselves now. All companies involved will have to deal with a number of cross discipline issues that need to be resolved.




Compliance & Reporting


Understanding allowances allocation and reporting obligations under the EU ETS was presented by Jasper Faber, Senior Consultant, CE Delft. Monitoring will begin in 2008 with reporting of transport data in 2009. Reporting emissions will apply from 2011 onwords based on actual fuel consumption. Fuel includes all fuel for flight including APU and taxiing, etc. Emission value based on caloric value of fuel rather than mass or volume.


Key elements of the commissions proposal and next steps by Niels Ladefoged, Unit C3 Clean Air and Transport EU Commission DG environment began with highlighting the regulation in 2011 to include all flights intra EU followed by all flights to and from the EU in 2012. Initially CO2 emissions are being regulated, however this is subject to change to include additional harmful substances (NOx) in the future. The current time schedule (i.e. starting monitoring in 2008) will be hard to maintain.

The EC has hired a consultant to draft guidelines for monitoring and verification. The objective is to use any information available and to use a stakeholder dialogue approach.

Best practice monitoring and reporting: Efficient use of existing data and difficult elements presented by Karlheinz Haag, Head of Environmental Issues, Lufthansa introduced the complexity of monitoring aircraft emission between the commercial and operational approach. The commercial approach evaluates the amount of bought kerosene whilst the operational approach used takes kerosene on flights as the main factor for CO2 emissions. When we look at the number of flights and connections, we realise the massive amount of administrative work that lays ahead of us. The largest dilemma plaguing the airlines is the collection and validity of data. How accurate does it need to be, what is necessary to control and monitor the emissions, and who is able to control and verify the reports. There are additional unclear factors such as how are situations such as s holding patters and detours going to factor in to the overall equation.

Smart solutions for monitoring and reporting by Randolf Hager, Business Development Manager, Technidata referred to the three levels for corporate monitoring & reporting:
Lowest Level 1: Operations - every day issues
Middle Level 2: Non-Operations - periodical data collection
Top Level 3: Management - key performance indicators

Airlines should follow a road map to ensure they have early strategic consolidation to preparing for risk mitigation. Smart IT solutions for data collection, validation and reporting are out there and already in use at some more advanced aircraft operators.

What does a verifier do? Getting yourself prepared on time by Jeroen Kruijd from PwC, again addressed the issue of verification, specifically the lack of capable verifiers, and the confusion due to the lack of standards and clarity of the role and responsibilities of verifiers. Additional concerns include the level playing field, which is a must for operators to maintain their competitive advantage. Also, who will ensure verification in far away countries, and is the verifier allowed to verify allocation data and emission for the same operator? Operators need the guidelines now before the enforcement of the reporting requirements.

Managing compliance: Organising the role of the competent authority presented by Aniel Bangoer, Climate Change and Industry Directorate from the Dutch Ministry VROM. The Dutch have assigned the existing competent authority for ETS to be the authority for the aviation as well, in stead of the aviation inspection authority. Operators will need to monitor a variety of factors for allocation purposes such as the # of passengers, flight distance and how to deal with code sharing, etc. The operators have this data but must determine how to best present these figures in a monitoring plan and what the guidelines for monitoring, reporting, and verification are. Once submitted, the monitoring plans must be approved by the competent authority-who then in turn will issue a number of allowances. Mr Bangoer also argued that a single authority per country would be beneficial to a level playing field.




Economic & Business Impact


Economic Considerations by Robin Smale, Director, Vivideconomics addressed the key question, how will emissions trading affect profits of airlines and welfare of passengers. Mix of passengers and the structure of airlines will be key factors. There will be a cost pass trough around 100% of the cost of allowances. Robin Smale stressed that profits will increase in some cases which will result in a beneficial position for these airlines after entering the emissions scheme due to an increase in prices and more customers won for the carriers.

Level playing field within and between sectors by Philipe Eydaleine, Permanent Representative Air France stressed that hidden costs of yesterday are the topic of today. As we know, the goal will be to reduce emissions - which is a burden that the government should bear together with the airlines - how to share this cost should be a topic on the agenda. A financial incentive by the commission needs to be put forward.

Business impact considerations: A cargo carrier perspective by Uwe Detering, Manager Public Affairs, United Parcel Service. Discussed how noise becomes a determining factor in fleet planning and highlighted the engineering process in place at UPS to find ways to ensure the reduction of emissions or the least damage as possible. The issue for cargo carriers is the discrimination against them which clearly reduces the incentive to reduce emissions. Europe is not ready for the regulation and the ETS.

How to navigate through the accounting jungle - CO2 allowances and IFRS , Raphael Heiner from PwC introduced the five accounting policies for EUA's

  • IFRIC 3 (withdrawn); still fully compliant with IFRS, but: accounting mismatches occur
  • Net approach (accounting EUAs at cost, i.e. zero)
  • Gross approach (accounting EUAs at fair value)
  • Modified net approach
  • Modified gross approach

Companies must analyse and carefully decide which of the five accounting policies they wish to apply. There is an additional challenge to the companies when swapping CER/ERU's with EAUs.

An airport perspective on daily operations and abatement options, Emanuel Fleuti, Environmental Services, Zurich Airport. We need to understand the difference between the airline and airport perspective as well as where the overlapping occurs. The airports are effected due to the emission reduction requirements on stationary sources. Zurich Airport was the first airport to implement a strategy to reduce emissions, managing to reduce emissions by 30% over the past 10 years.



Trading


Trading Strategies presented by Ian Milborrow from PwC focused on emissions trading as a policy instrument - how has it worked so far and how should it work now and in the future. There are two choices each company has. Either to reduce emissions or buy at a market price if reducing emissions is too expensive. Regulation visibility is crucial for businesses and how should they price their carbon risk going forward. There is a critical need for long-term planning to cope with this regulation, to factor carbon price into business strategies, and how to adjust the business model and to take advantage of this opportunity.

Market Structure and behavior: Looking backwards and forwards, Eva Karra Director of Commodity Trading from Lehman Brothers predicts that it will take a long time until the market is commodotised. To date, the market has been monopolised by utilities, but we will see three players emerging including compliance players, financial institutions, and carbon companies. The latter, carbon companies, will play a very important role as even in the beginning- as they are willing to take the risk to implement CO2 reduction projects to generate emission reghts.

Managing risk in tomorrow's carbon market by Andreas Arvanitakis, Senior Analyst, Point Carbon. There are different factors that determine the price. Airlines are part of the big picture, however, they will not be a key driver effecting the price and therefore, the market. There are three markets: ETS/CDM/joint implementation.




Panel


Panelists: Niels Ladefoged, EU Commission
Karlheinz Haag, Head of Environmental Issues, Lufthansa
Thomass Wyns, Policy Officer Emissions Trading, Climate Action Network
Sanjeev Kumar, EU ETS Coordinator WF European Police Officer
Meike Söker, German Ministry for the Environment

Moderator: Hans Schoolderman, PwC

Summary
Airlines will need a test phase to determine if the trading scheme works and is successful. The infrastructure that keeps the market moving is still under development. The good news is that the aviation sector will not suffer as others have in the past as the market, even though still developing, has already evolved.

Passengers will be effected by the increase in prices leading to a change in passenger demographics. Flying will become even more of a luxury than it already currently is. An opposing view from the panel stressed that the emissions trading scheme will have a limited environmental impact but no dramatic impact on passengers - prices will go up but not dramatically.

Competition is a large concern for the airlines- especially the potential competitive distortion. Players must be treated equally, nondiscrimination, systems and measures must apply equally to all carriers.






Contact


Moritz Nill, Climate Change Services, PwC DE
moritz.nill@de.pwc.com

Jeroen Kruijd, Climate Change Services and Aviation, PwC NL
jeroen.kruijd@nl.pwc.com