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
| 
