The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents


Memorandum submitted by Virgin Atlantic Airways Limited

INTRODUCTION

  1.  Virgin Atlantic Airways was set up in 1984 to provide a competitive alternative for business and leisure passengers on long-haul routes between the UK and major destinations. It has grown steadily over the past 25 years and now serves 30 destinations in the US, the Caribbean, Africa, India, Asia and Australia from Heathrow, Gatwick, Manchester and Glasgow. Virgin Atlantic currently has 38 modern long-haul aircraft in its fleet and around 9,000 employees. It is the second largest UK scheduled carrier by revenue and revenue tonne kilometres.

SUMMARY

  2.  Virgin Atlantic has always supported the inclusion of aviation in an emissions trading scheme. We believe that a cap and trade system to deal with emissions from aviation is not only beneficial to the environment but it also establishes a market-driven solution to carbon mitigation.

3.  The EU Emissions Trading Scheme will have a limited ability to reduce international greenhouse gas emissions. It is our view that rather than a proliferation of domestic or regional trading schemes (or blunt taxation) leading to environmentally irrational behaviour and competitive distortions, a mandatory global approach to tackling the aviation sector's CO2 emissions would be the most effective and economically efficient way of reducing the industry's environmental impact.

  4.  We remain concerned that the EU Emissions Trading Scheme will have an anti-competitive impact on EU airlines that fly outside of Europe. As a purely long-haul airline, Virgin Atlantic competes with third country carriers not subject to the same levels of environmental regulation (and therefore costs) which will be subject to substantial carbon leakage.

  5.  Virgin Atlantic is investing in new more fuel efficient aircraft to meet our ambitious fuel efficiency target (a 30% improvement by 2020, on a 2007 baseline) and despite the fact that we will be carrying more passengers on a larger fleet of aircraft, our focus on fuel efficiency means that our absolute emissions will peak within the next decade.

ENVIRONMENT AND THE RECESSION

  6.  In 2009, Virgin Atlantic celebrates its 25th birthday. During that time we have endured the first Gulf War, the bursting of the dotcom bubble, the aftermath of 9/11, the SARS outbreak, the second Gulf War and oil prices spiralling up off the chart. But the economic crisis we are currently facing is potentially even more damaging to our industry than anything we have faced before.

7.  Environmental lobbyists have argued that Governments should not loose sight of dealing with climate change during the global economic downturn. We agree. In fact this is a great opportunity to develop policy that incentivises a shift towards a lower-carbon economy rather than imposing direct taxation or regulation that stifles the industry's ability to recover and does little to reduce emissions from aviation.

  8.  By taking a pro-active and pragmatic approach to reducing emissions using new technology, better designed aircraft, alternative sustainable fuels and targeted market based measures, airlines have a greater flexibility to reduce emissions in real terms. There is equally a role for Governments to adopt policies, which support, bolster and stimulate the aviation industry. These policies should not only be for the short-term but also need to ensure the aviation industry's post-recession viability.

THE EU EMISSIONS TRADING SCHEME

  9.  Virgin Atlantic is investing in new, more fuel efficient aircraft to meet our ambitious fuel efficiency target (a 30% improvement by 2020, on a 2007 baseline) and despite the fact that we will be carrying more passengers on a larger fleet of aircraft, our focus on fuel efficiency means that our absolute emissions will peak within the next decade.

10.  We have always supported the inclusion of aviation in an emissions trading scheme and have taken a leadership role within the industry to reduce its emissions wherever possible. By imposing stringent emissions caps and, most importantly, giving the industry the flexibility to choose how to meet them, emissions trading is not only beneficial to the environment but it also establishes a market-driven solution to carbon mitigation.

  11.  However, we still have reservations regarding the following key areas:

    — significant cost burden upon airlines;

    — the likelihood of non-European carriers complying with regulation;

    — the competitive disadvantages that will be imposed on EU carriers as a result of the scheme, known as Carbon Leakage; and

    — the impact of auctioning off EU credits and the use of auctioning revenues.

SIGNIFICANT COST BURDEN ON AIRLINES

  12.  Given that the airline industry is facing one of the toughest economic situations it has ever known, the cost burden of ETS on our business remains a significant concern. Our modelling suggests that even without auctioning, the cost to Virgin Atlantic is estimated to be in the tens of millions of pounds in 2012 alone[56] and would certainly exceed the £46.8 million profit that was made in the 2007-08 financial year, considered a very good year for airlines.

COMPLIANCE BY NON-EU CARRIERS

  13.  We understand that the UK Government is due to publish its draft enforcement regulations shortly. However, we remain concerned that some non-EU carriers' nation states currently dispute the legality of the EU unilaterally imposing EU ETS on them. Given that the UK will have the lion share of non-EU carriers under their regulatory jurisdiction, the UK must take a leadership role in ensuring that EU carriers do not suffer negative competitive impacts as a result of the scheme being unequally enforced.

VIRGIN ATLANTIC'S EXPOSURE TO CARBON LEAKAGE

  14.  Virgin Atlantic's intercontinental-only business model will be particularly prone to carbon leakage due to our exposure to competition from so-called "sixth freedom carriers" such as Etihad and Emirates and our limited ability to pass on the cost of the ETS to our passengers.

15.  Passenger and cargo traffic on long-haul carriers is not only "point-to-point", eg a direct flight between London and New York, but also includes a high proportion of connecting passengers. Many key traffic flows, eg between the US and Asia, or the US and sub-Saharan Africa, currently connect through the European Union. These passengers could easily switch to routes connecting outside the EU (and therefore wholly outside the scope of the EU ETS) in order to avoid the additional costs associated with European airlines' compliance with the scheme. This results in the leakage not only of traffic and economic benefits to EU companies, but also of carbon dioxide emissions, resulting in net environmental disbenefits. (Virgin Atlantic would be happy to share this evidence with the Select Committee on a confidential basis due to the commercial sensitive nature of the data).

  16.  In order to ensure that this exposure is minimised, we have argued that aviation should be classified as an industry that is "subject to substantial carbon leakage" under the current legislation of the General ETS Directive, and therefore subject to a lesser level of auctioning.

LINKING OF ETS SCHEMES

  17.  When linking with other trading systems, the Government and Commission must take account of the potential for competitive distortions. If, for example, the EU were to develop a reciprocal arrangement with Australia's proposed emissions trading scheme whereby all flights by EU or Australian carriers departing from or arriving in a European Union Member State were covered by EU ETS, and all flights departing from or arriving in Australia by an EU or Australian carrier were covered by the Australian scheme, there would be a significant risk of market distortions and carbon leakage. Non- EU carriers operating EU—Australia routes would only see a half of the route covered by an emissions trading scheme and be subject to the inherent costs. They would be able to offer much more competitive fares on what is effectively the same route, compared with the EU or Australian operators for which 100% of their network would be subject to the costs of emissions trading. Given the international markets in which we compete, it would only be possible to pass on a small fraction of these costs to our passengers without rendering our fares uncompetitive.

18.  There should also be a strict set of criteria for evaluating the equivalence of a third country or region's trading scheme. If, for example, the Commission agreed an arrangement with a third country with a less stringent trading scheme whereby EU carriers' emissions were dealt with by the EU and the third country's carriers' emissions were dealt with through their cheaper scheme, this would give the EU carriers higher operating costs relative to their competitors and adversely impact the EU carriers' ability to compete on these routes.

IMPACT OF AUCTIONING AND USE OF AUCTIONING REVENUES

  19.  Virgin Atlantic has welcomed the decision that the level of auctioning for aviation should remain at 15% until 2020.

20.  Revenues generated by the auctioning of emissions allowances should be hypothecated for (i) the administrative costs to Governments of overseeing EU ETS, and (ii) projects which will have a direct impact on reducing emissions.

DEVELOPMENT OF A GLOBAL CARBON MARKET

  21.  Aviation is a small but growing contributor to man-made greenhouse gas emissions, but must play its part in achieving global climate change targets. It is our view that rather than a proliferation of domestic or regional trading schemes (or blunt taxation) leading to environmentally irrational behaviour and competitive distortions, a mandatory global approach to tackling the aviation sector's CO2 emissions would be the most effective and economically efficient way of reducing the industry's environmental impact.

22.  Failure to reach agreement on a framework for international aviation's role in achieving climate change targets should be considered a failure of the UNFCCC process. Virgin Atlantic continues to work with industry colleagues to support the UK Government's efforts to avoid this.

  23.  In February 2009, Virgin Atlantic, British Airways, Air France/KLM, Cathay Pacific and BAA, launched the Aviation Global Deal (AGD) Group. The Group is calling for international aviation to play its part in global CO2 emissions targets, which are to be agreed by the United Nations Framework Convention on Climate Change in Copenhagen this year.

  24.  The AGD Group has published a communiqué, setting out the principles it believes should form the basis of a successful mechanism for including aviation in the global climate change framework. These include:

    Environmental integrity: Aviation must reduce net CO2 emissions in line with scientifically determined targets, through technology, sustainable biofuels, improvements in infrastructure, operational efficiency and cost-effective economic measures, especially carbon trading.

    A global approach: Policy measures to deal with aviation's contribution to climate change should be developed at a global sectoral level to avoid competitive distortion, carbon leakage and the creation of a patchwork of conflicting national and regional policies.

    Maintain competitiveness: Airlines must face equal treatment, in accordance with the Chicago Convention.

    Equity between countries: At the same time as it delivers equal treatment between airlines, any agreement must also respect the UNFCCC principle of common but differentiated responsibilities amongst countries.

    Economic efficiency: Aviation must be integrated within the overall climate framework with open access to cost-effective market-based instruments including carbon trading, CDM credits and potentially deforestation avoidance credits.

    Operational capability: The system must be simple, universally applicable and straightforward to implement. Compliance must be enforceable at state and carrier level.

  25.  In 2009, through the AGD Group, Virgin Atlantic will seek to engage with environment and transport policymakers around the world, and consult with other industry stakeholders and environment groups, to ensure aviation can make a positive contribution to discussions in the run up to the UN Convention in Copenhagen.

UK CARBON BUDGETS

  26.  Virgin Atlantic supports the Government's view that international aviation is best dealt with at an international level and views aviation's inclusion in the EU ETS as a step in the right direction to tackle aviation emissions. The Government should remain firm in its position that emissions from international aviation should be excluded from the UK's national emissions inventory as, from January 2012, they will be included in the EU Emissions Trading Scheme.

CONCLUSION

  27.  There can be no doubt that airlines are facing the most challenging set of economic effects it has ever known in modern times. Despite this, Virgin Atlantic remains determined that such challenges will not dissuade us from our ambitious environmental commitments. We have a clear vision of how to we intend to meet these goals and will continue to drive and challenge our own industry.

28.  The Government too must play its part. It is essential that the Government works with its international counterparts to find agreement on a framework for international aviation's role in achieving climate change targets. Only then will the impact of emissions from aviation be reduced by a significant level.

March 2009






56   Calculations based on the price of carbon at €30 per tonne and the cap based on 100% of 2004-06 emissions. Back


 
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