On July 8, the European Parliament voted to expand the European Union Emissions Trading Scheme (EU ETS) to cover aviation emissions as of January 2012. Based on a 2006 European Commission proposal, the approved legislation will require all commercial airlines, regardless of country of origin, to purchase and surrender carbon emissions allowances for all flights within the EU or departing from or arriving at EU airports. Total emissions for the civil aviation industry in 2012 will be capped at 97% of historical emissions, defined as average emissions from 2004-2006. The cap will decrease in 2013 to 95% of historical emissions, with the option of further tightening after 2013. Initially, the EU will provide 85% of permits for free and auction the other 15%; the percentage of auctioned permits may rise in subsequent years.

The United States, individual air carriers, and industry groups such as the International Air Carrier Association have sharply criticized the legislation, arguing that forced emissions caps are not the best way to mitigate the adverse environmental effects of aviation and that the legislation imposes undue costs on airlines at a time of crippling fuel costs. The United States and some industry groups also maintain that the inclusion of civil aviation in the EU ETS violates European obligations under the 1944 Convention on International Civil Aviation (also known as the Chicago Convention).

Some non-EU air carriers, however, will be hurt more by the legislation than others. According to data compiled by the MIT Global Airline Industry Program’s Airline Data Project, of the six major U.S.-based international airlines, Continental and Delta are the top two airlines by far in terms of percentage of both available seat miles and total revenue from the Atlantic/European Region. Delta and Continental’s Atlantic/European operations for each of the past two years have accounted for more than 24% of the airlines’ total seat miles and more than 22% of total revenue. By contrast, over the past two years, the other four major U.S. international air carriers - American, Northwest, United, and US Airways - had Atlantic/European operations accounting for only 11-16% of total seat miles and 10-16% of total revenue.

Certain companies may see the EU regulations as an investment opportunity. For example, Aviation Partners, a company formed by former Boeing and Lockheed engineers, developed “winglet” technology that reduces drag on an airplane’s wings, thereby increasing fuel efficiency. Aviation Partners worked with Boeing to add winglets to certain existing Boeing aircraft, including the Boeing Business Jet and several 737 models. Technology that increases fuel efficiency, already in high demand, will become increasingly valuable as airlines start to factor emissions permit costs into their budgets. Other companies making advances in fuel efficiency include Virgin Atlantic, whose founder, Richard Branson, is investing in the development of aviation biofuels. In February 2008, a Virgin Atlantic 747-400 flew from London to Amsterdam with a biofuel mix in one of its four engines, marking the first time that a commercial aircraft flew using a form of renewable energy. Although aviation technology often takes years from development to commercial implementation, companies that invest now in aviation R&D might see big payoffs when the EU emissions caps go into effect in 2012.

Jonathan Ross contributed to the development of this post.

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