The air transport industry, so governments are convinced, is slowly destroying the environment. Unfortunately, aeroplanes are also big, leave easy-to-spot contrails in the sky, and have become a fundamental factor in global trade and travel. This puts the industry smack in the middle of the ETS bullseye of Connie Hedegaard, European Commissioner for Climate Action, and the global air transport industry’s number one archenemy.

The problem is airlines are limited in their ability to reduce fuel consumption or CO2 without significant capital investment to operate fuel-efficient aircraft or restricting demand. The ETS also provides little incentive for operators to reduce their usage. As Dr Elena Ares noted in a briefing paper to British Parliament, this price “is a significant amount for power plants, steel mills and the like, but translates into an insignificant 3.8 cents per liter of aviation kerosene”.

A European Commission Impact Assessment has already acknowledged that the EU ETS will only reduce aviation emissions by about 3%, in reality offsetting one year of industry emissions growth. Still the EU perseveres.

In a political and PR coup for their ETS programmes, the European Union and the Australian Government will hitch their schemes together under an interim link that will synchronise carbon pricing from 1 July 2015.

Australia’s current Government has done little to support the industry selectively applying the ETS to the regional aviation sector but not international operations, on top of an increase the Federal Government’s decision to increase fuel excises, new security charges, and end the Enroute Charges Payment Scheme.

So what does this ETS link mean for Australia’s aviation industry operators? Relatively good news actually, the scheme integration likely to deliver a short-term cost reprieve.

“No later than 1 July 2018” both ETS schemes will be fully linked permitting full trading of carbon permits and allowing Australia’s airlines to purchase EU emissions permits and use them in Australia. In addition, Australia will abandon its own pricing scheme, adopting the EU price of less than $10 per tonne.

The ETS link induced reduction in carbon price to $10 mt should reduce the impact on REX’s operating costs by close to $1.5 million. REX’s current CO2 output is approx. 115,000 mt p.a.

This cheaper price, will translate into a lower excise added to the cost of aviation fuel. It could also see Australia’s regional airlines heading to Europe to purchase cheaper credits in the EU market to use back home. Eventually system prices will rise to €15 per tonne, but this will still be cheaper than the initial carbon price of $23 per tonne at current exchange rates.

Gillard is also treading a fine geopolitical line. Her move has also reversed Australia’s opposition to the EU ETS on aviation, effectively endorsing its obscure legality. Many countries still see charging for extraterritorial emissions on foreign aircraft as an invasion of sovereignty. Not the right line to be treading when our biggest trading partner is China, is already demonstrating to the European Union how far it is willing to go to protect its interests.