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Aviation carbon permits auctioned as first deadline approaches

05 Apr 2013 19:03:50 | edcm

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Several batches of the usually illiquid EU aviation allowance (EUAA) are being put on the carbon market as European airlines face their first compliance deadline under the EU's emissions trading system (ETS) in three weeks' time.

A volume of 95,000 was sold on Thursday and more than double that number is due to be auctioned next week.

In Thursday's sale, trading firm Amsterdam Capital Trading auctioned phase II EUAAs, which can be used by aircraft operators for 2012 compliance, and the firm is considering holding further sales of the allowances ahead of the 30 April compliance deadline.

Amsterdam Capital Trading said the highest bid received for the auction was €4.80/tonne of CO2 equivalent (tCO2e) and that it received bids from a range of operations including airlines, banks and trading houses.

On 9 April, brokerage Vertis Environmental Finance will auction 230,208 phase II EUAAs. It said that, if the auction is cancelled or if not all the offered units are sold, a second round might be held on 18 April.

Airlines have previously complained that the European Commission's proposal to suspend non-EU flights from the ETS for 2012 has hurt EUAA liquidity to the point of putting some airlines' ability to comply with ETS at risk (see EDCM 21 February 2012).

Stop the clock

Missing the 30 April deadline would swell airlines' compliance costs, as they would face a €100/tCO2e fine.

That is significantly above the EUA 2012 benchmark price, which has averaged only €7.55/tCO2e in the past year.

Forthcoming cancellations of EUAAs could turn the sector short. Even though the Commission has given out EUAAs worth three times the volume of reported emissions, airlines might have to hand back around two thirds of their free allocations because international flights are excluded from the ETS under its "stop the clock" proposal. Under that proposal, airlines lose the right to any EUAAs related to international emissions (see EDCM 19 March 2013).

EU data show that, in 2012, 162m EUAAs were allocated to the 440 airlines that managed to open an emissions account. With 742 airlines affected by the ETS requirements, that leaves 302 still without an account.

The allocation is worth three times the current number of reported emissions of 54.8m tCO2e for 2012 but that figure could rise to 74.3m tCO2e as only 506 of the 742 airlines had reported their emissions by 1 April (see EDCM 3 April 2013).

Possible buyers and sellers

Vertis told ICIS it expects a "reasonable" interest in its coming auction. The auction held on Thursday by Amsterdam Capital Trading was four times oversubscribed.

"This can be understood as the liquidity of this kind of units is very low on the market and, based on the 2012 verified emissions data, a significant number of airlines are short and have to purchase allowances," the brokerage told ICIS.

Airlines and trading houses have shown interest in the broker's auction.

EU data show that, of the airlines that both received free allowances and reported emissions, 199 are short and 101 are long.

The shortest operators include Ryanair, Swiss International Airlines, Vueling Airlines and Jet2.com. The longest are United Air Lines, Delta Air Lines, KLM, Deutsche Lufthansa and British Airways.

Airlines can use EU allowances (EUAs) as well as offsets like certified emission reductions (CERs) and emission reduction units (ERUs) in parallel with EUAAs to comply with emissions requirements.

One source said auctions are a "brilliant" EUAs-EUAAs swap opportunity for airlines that have already purchased the more expensive EUAs.

"Because of the low liquidity of EUAAs on the market, a couple of airlines decided to buy EUAs for compliance purposes," the market source said.

"However, as EUAAs, are cheaper than EUAs, these market participants can sell the EUAs they purchased earlier."

Such a swap could enable them to post a profit if they bought EUAs when they were below €4.00/tCO2e. Silvia Molteni

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