Aviation & Transport Services September 2007 A long haul. Aviation and sustainability: Striving towards a “Clean and Green” image Aviation industry: Current state and Numbers don’t always tell you the entire future outlook story and statistics need to be looked at in The impact of aviation and its contribution the entirety. to the global greenhouse gas (GHG) emissions is projected very differently in the Currently airlines carry 1.6 billion passengers press around the globe. However, all parties and up to 30 million tons of freight agree that aviation’s contribution to climate annually2. As per projected forecasts, the change is growing due to the projected aviation industry will more than double from traffic growth. Globally, more business 2002 levels until 20223, the number of communities favour action on climate aircraft will double and the RPKs (revenue change, both for environmental and passenger kilometres) will increase by more commercial reasons. than 2.5 times. With a sustained growth of 5-6% for freight, the FTK (freight ton Although the actual projections as shown in kilometres) is forecast to increase by nearly the WRI 2005 figures are only 1.6 % of the 3-5% annually4. The result of the above global share, the total global warming figures gives an estimate for fuel impact caused by aviation is attributed to a consumption to increase by nearly 1.5 to figure which is said to be 2-4 times higher 2 times. It is the growth rate of emissions due to additional externalities from aviation from the aviation industry that is a cause of emissions such as: concern. This fast growth rate will have a direct effect on the absolute volumes of 1. Formation of cirrus clouds. GHG emissions from the aviation industry. 2. Condensation trails (contrails). It is encouraging to see that many aviation companies have taken this issue seriously 3. Aircraft exhaust emissions also result in and have already started doing something substantial NOx (nitrogen oxide) emissions. about it. With the possibility of an emissions trading system looming around, aircraft 4. SO2 (sulphur dioxide) emissions and soot. operators would need to be prepared for a more defined sustainable strategy to ensure 5. Aircraft emissions are emitted at a higher that businesses are not affected. The altitude. European Commission (EC) has proposed aviation to be included in the current 6. Ozone depletion. European Union Greenhouse Gas Emission Trading Scheme (EU ETS). The proposal The aviation industry is at the brink of some indicates inclusion of all intra-EU flights by serious changes which will affect the 2011 and all flights arriving/departing from industry in the years to come. When it the EU by 2012. comes to CO2 (carbon dioxide) emissions and global warming, one of the underlying Sustainable development tasks that lie ahead is to free itself from the Today, it is a long haul for the aviation negative publicity generated in the press. industry to achieve a green image in the context of global warming. It has indeed Aviation contributes approximately 1.6% become a “hotbed of activity” for the of the global greenhouse gas (GHG) carbon offsetting companies to target emissions1. So why is aviation being aviation emissions and offer carbon-neutral targeted on such a large scale? services to the consumers. . . . Audit Tax Consulting Financial Advisory . A long haul Aviation and sustainability Being part of the voluntary market where be a priority task in achieving the long term This would mean going back to the drawing the statutory bindings and bureaucracy are goal of sustainable development. boards and identifying the sustainable far less compared to the compliance market solutions that cover the total institutional impact. is often seen by many as a preferred route There have been concerns by many on how to internalise their operational impact. “In today’s booming sustainability can impact the bottom line Voluntary markets are also progressing into carbon market a lot of performance. Corporate responsibility in the next phase very rapidly and stricter today’s businesses creates confidence in independent standards of quality and ‘hit and run’ offsetting investors and retains customers, not to verification of credits generated are companies have exploited mention the social impact it has on the emerging. The United Nations (UN) is also communities and governments alike. progressing to implement quality standards the consumer’s individual for the voluntary markets. A voluntary impact guilt.” Energy efficiency and innovation is the key. carbon standard has recently been Sound sustainable strategy can add valuable developed by the International Emissions inputs into stimulating innovation (e.g. Pilot Sustainable development is the key to Trading Association (IETA), World Economic techniques, fuel policy, auxiliary power unit maintaining a corporate reputation and to Forum (WEF), The Climate Group (CG) and use, taxi on one engine, weight reductions), ensure favourable bottom line results in the World Business Council for Sustainable generating ideas and identifying cost saving years to come. Corporate Responsibility (CR) Development (WBCSD). opportunities. Waste reductions, recycling has become an integral part of businesses and energy efficiency all contribute towards today and the aviation industry is not far The concept of voluntary reductions or cost saving measures. behind. Growing consumer awareness and offsetting the externalities caused by entities weather related natural disasters around the existed before the present mandatory Technological breakthrough is an important globe have only added to customer compliance market opened its trading ingredient in the greening of long term motivations for reducing individual/corporate floors. In today’s booming carbon market a aviation. Technological advances can be carbon footprints. lot of “hit and run” offsetting companies seen in the use of alternative fuels like have exploited the consumer’s individual bio-fuels for aircrafts and building zero- CR itself has moved beyond just enhancing impact guilt. This has led to the questioning emission aircrafts. Policy makers should the brand image and compensating of these offsetting market practices and the provide clarity and flexibility for the industry emissions by offsets. To demonstrate credibility of the voluntary carbon credits. to achieve its long term goal. environmental stewardship in its true sense, Aviation emission offsets are still very much sustainable strategy has to be harmonised on the priority list for voluntary reductions. Aviation in the EU ETS with corporate decision making. Mitigations The aviation operators themselves are aware The EC published a proposal in early 2007 should be coupled with quantifiable of this development and are engaging in for the inclusion of aviation in the present reduction targets. activities at a much faster pace. EU ETS. The entry of the aviation industry in this scheme would mean that aircraft The involvement of the aviation industry in “Energy efficiency and operators need a sound strategy in place to a carbon pricing mechanism is inevitable. manage their emissions and fleet efficiency. Emissions trading schemes should work as innovation is the key.” A financial impact analysis would be a catalyst in identifying the price of the imperative in determining the cost structure carbon and marginal cost of abatement The paraphernalia of sustainable strategy and benchmarking its position with respect across the industry. The inclusion of aviation should encompass deliverance to total to competitors. Below is a comprehensive in the EU ETS will change the dynamics of shareholder and stakeholder satisfaction. analysis of the proposal and it is subject to carbon price and the financial impact of changes once the final directive is in force. participating in a scheme of this size should (See Figure 1 below for timeline). Figure 1 Aviation becoming part of EU ETS A proposal for amending the directive 2003/87/EC to include aviation in the EU ETS in 2011 has been submitted to the council of ministers and the European Parliament. Timeline start date 2006 2007 2008 2009 2010 2011 2012 2013 Proposal 20 Dec 2006 submited Adoption of directive National implementation Verification of 2008 Ten-kilometre data Benchmarking/ Application up to Apr 2009 Calculation/Allocation Data 2010 reporting 01 Jan 2011/01 Jan 2012 Trading for aircraft operators Future trading 01 Jan 2013 periods Co-Decision Approval Intra-EU All Flights Integration process Flights in/out of EU 2 A long haul Aviation and sustainability Proposal Figure 2 The proposed scheme is a semi-open Aviation compliance portfolio trading scheme in which the aviation sector will be given separate certificates (AVC’s 100% aviation certificates). (See Figure 2 for The compliance portfolio The aviation portfolio can 90% Other is the total number of consist of: Aviation aviation compliance portfolio). They will be certificates needed to certificates (AvC’s), EUA’s, allowed to buy the European allowances 80% comply with the CER’s (and ERU’s) and project based credits but the other guidelines for the 70% aviation business within industries within the EU ETS would not be the EU ETS scheme; it is able to use aviation certificates for 60% the representation of the compliance. The proposed start for the total amount of CO2 50% inclusion of aviation in the EU ETS is 2011 Allocated emissions (verified). certificates for all Intra-EU flights and 2012 for all 40% international flights to/from the EU. Allocated certificates are The portfolio of other 30% being called aviation industries can consist of: The proposal will undergo discussion and 20% certificates, other EUA’s, CER’s (and ERU’s) adoption by the EU parliament and the industries are not council of ministers under the co-decision 10% allowed to comply with process. The adoption of this proposal is aviation certificates. 0% The aviation industry expected by end 2007/early 2008. Political Compliance however, is permitted to obstacles could cause some delays. Most of portfolio comply with certificates the issues have been agreed upon but the from other industries. issues which still need consensus are on the amount of auctioning and determining the baseline. International/domestic laws and Efficiency measures Reporting of the emissions would be based legal issues can further delay the process. In the proposed trading scheme it would on the actual fuel usage by the airlines (total Importantly, the US has voiced concerns over “pay” to be efficient for any aircraft distance between the origin and the the inclusion of international flights and has operator. Efficiency measures could be destination). Where actual fuel data is not threatened a law suit against the EC. described as: available a standardised tiered method could be used to estimate emissions. Allocation/auctioning • Accelerated fleet renewal. Emission factors to be used for the The aviation industry will have its baseline calculation of emissions are not a complex set for the year 2005. This would include • Retrofitting of aircrafts (e.g. winglets). issue due to the fact that the aviation sector the annual average emissions for the period uses a relatively homogeneous fuel. Data 2004-2006. Allocations will be based on the • Surface treatments (reducing air from any non-compliant operator and air benchmarking principle: based on these resistance). traffic data might be provided by design elements the expected shortage of Eurocontrol. CO2 certificates in the market will add up • Optimisation of: to 34 million tons in 2011. “Efficiency 1. Timetables. Conclusions measures” will play an important role in 2. Route Network. The aviation industry is in the spotlight and ensuring sufficient allocations to aircraft 3. Flight Frequencies. the expected regulations would have a operators. The verification of the ton- 4. Air Traffic Management. financial impact on the industry. The path to kilometre data for benchmarking will be 5. ASM (Available Seat Miles). going green is indeed a long one, but from the year 2008. This is assuming the 6. Load factor. encouraging indicators suggest that the scheme starts on 1 January 2011. industry has started moving in the right • Actual ton/kilometres vs. fuel usage. direction. Technological progress is an Auctioning of allocations as proposed important element in achieving the long stands at 3%; this is based on average • Short haul vs. Long haul. term goal. Unfortunately technology doesn’t auctioning levels in different member states keep pace with the demand growth. It is of in the current EU ETS. The council of Compliance imperatives utmost importance that energy efficiency ministers would have to agree specifically on Compliance to the scheme would cover parameters are identified to capture the rate the auctioning levels which can go up to the design of monitoring, reporting and of growth of aviation externalities. Market 10% in the adopted directive. There are verification of emissions from individual based policies would put a price on carbon, talks of 100% auctioning by some parties, operators. According to the design of the so it is vital for all participants to understand adding uncertainty to the allocation process scheme the aircraft operators would be the the risks and opportunities involved in a and increasing insecurity of aviation responsible entities. new market place. Efficiency measures certificates. Issues which might bring would assist aircraft operators in developing additional insecurity in allocations are new a track record that favours them in a trading entrant reserves, remote area’s special environment and gives the competitive edge treatment and early actions taken. in a low profit margin industry. 3 A long haul Aviation and sustainability Bureaucracy hurdles increase the uncertainty Emissions risk management structures of the anticipated regulations. It is should be incorporated into the corporate Contacts important to understand the indicators that risk management framework. These For more information, please contact: drive the carbon markets. Some aircraft structures should typically cover risk operators would be affected more than assessment, control frameworks, developing Pierino Ursone others when aviation becomes part of the carbon market expertise pertaining to clear email@example.com EU ETS. In this scenario it remains to be seen understanding of trading essentials and Tel: +31 20 5825485 how involvement in such a scheme affects competitive drivers. It would assist the aviation economics of: organisations to create a competitive Udeke Huiskamp advantage through anticipation and firstname.lastname@example.org • Market access controls ”freedoms of air”. innovative actions on climate change and Tel: +31 20 5825846 emissions trading. Compliance knowledge • Price fixing mechanisms (tariffs). assists in preparing for expected regulations Paul O’Neill and in making informed decisions. email@example.com • Slot allocations. Tel: +44 20 7303 7110 Notes It would be quite apparent that the 1. WRI: 2005 Deloitte Financial Advisory Services strategies in such an environment would be 2. ICAO 2003 Energy Capital Markets different for different players (low cost 3. Airbus 2003 Orlyplein 10 carriers, full service carriers, regional carriers, 4. IATA 2003 1043 DP Amsterdam charter flights etc.). P.O. Box 59237 1040 KE Amsterdam It is the need of the hour for the aviation The Netherlands industry to enhance its CR strategy and incorporate short, medium and long term Tel: +31 20 582 5420 goals in sustainable development. Fax: +3120 582 5460 Participation in a carbon pricing scenario needs complete understanding of risk firstname.lastname@example.org elements in a compliance market and www.deloitte.nl credibility standards for voluntary markets. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 140 countries. 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