At the end of 2006, the European Commission put forward a proposal for inclusion of aviation emissions in the EU ETS. WWF UK asked CE Delft to study one particular aspect of this proposal, namely the initial allocation of allowances to aircraft operators. We have looked specifically at:
- The interaction between allocation method and the likelihood that costs of allowances are passed through.
- How the allocation method may affect emission reductions within the aviation sector.
- The impact of high levels of auctioning on the profitability of the aviation sector.
One of the findings is, that in its current form, the Commission's proposal may give rise to 'opportunity benefits', apart from the opportunity costs generally involved with emissions trading. The reason is that the proposal is based on updated benchmarking, during the years that are used for updating the benchmark, airlines may have an incentive to produce below their marginal costs, so to obtain more emission allowances for future periods. Based on the analysis of the likelihood that costs will be passed through to airline customers, the report concludes that if 100% of the allowances were to be auctioned, the impact on the profit margin of airlines would be minimal.