(ED:  This message contains 3 items:  i.e. one article and two subsequent
letters to the editor:  Do you have any comment on this issue or any suggestions for
possible actions by airport, road traffic & other urban environment groups
in Australia?  This is the year to really punch our message home -- we
will not passively allow our cities to be used (abused) as concentrated
noise and pollution sinks for global transport increases).

Australian Financial Review
December 16, 1999
by Duncan Seddon (an oil industry consultant in South-East Asia).


Australia's adherence to the Kyoto Protcols for the reduction of
greenhouse gases will stymie Virgin Airways' ambition to enter the
Australian airline market.  Under the Kyoto Protocol, Australia will
commit to reducing the greenhouse emissions from fossil fuels to an amount
no more than an 8 per cent increase of the 1990 levels by the period 2008
to 2012.  Greenhouse gases arise from burning fossil fuels, and jet fuel
is no exception.

Current estimates indicate that Australia already exceeds the target level
of emission.  One of the largest growth areas of emission is in the
transport fuel sector and jet fuel is the fastest frowing.  According to
oil industry estimates, use of jet fuel, and hence greenhouse emissions,
in 2008 will be more than double that of 1990.  If Virgin manages to
capture only 6 per cent of the jet fuel market by 2008, Virgin will be
responsible for emitting about a million tonnes of carbon dioxide each

The convential wisdom in Australia is that the target will be achieved by
emissions trading of carbon credits.  In theory, the existing airlines,
because they operated in 1990, could generate carbon credits by reducing
emissions in the operations, for instance by moving to larger, more fuel
efficient aircraft.  The competitors could then use the credits to expand
their operations or sell the credits on a proposed carbon credit trading

Virgin Airways did not operate in Australian in 1990.  In theory, Virgin
will have to obtain carbon credits for its Australian operation in 2008.
But it is not clear how new entrants to a fossil fuel consuming industry
are to obtain these credits.

If a fully verifiable and international emissions trading system exists,
Virgin could generate credits from its Atlantic operations and, say,
transfer these to the Australian operation.

Unfortunately, given European Union oppositon, such international credit
transfer seems a long way off (beyond 2008).  Why? Because it might allow
polluters (the US) to avoid their Kyoto obligations by buying credits
(from Russia).

An alternative is that Virgin Australia will have to buy credits in an
Australian or regional market.  There is a wide range of estimates for the
value of a greenhouse credit.  In Australia, a common stated estimate is
$30/tonne of carbon dioxide, which would add considerably to Virgin's
operating costs which would not be experienced by its competitors.

But this estimate is very low by some international estimates, where the
value of a carbon credit has been placed at well over $200/tonne.  Such a
price would effectively shut out Virgin, or any other new player, from the
Australian airline market.  Another possibility is that carbon credits
which result from one sector may be used elsewhere in the economy.

It is not clear how a credit trading system will affect new entrants to a
fossil fuel consuming industry.  The proposed system could act as a major
disincentive to new players in the airline and resource development
sectors.  If not properly addressed,a consequence of carbon trading is
that new players are effectively frozen out, with the downside being to
compromise competition policy.


It is pleasing to see the Kyoto Protocol and carbon credits becoming
increasingly exposed in media reports and commentary.  Less than pleasing,
however, was the article by Duncan Seddon ("Kyoto may stall Virgin", AFR
Opinion, Dec 16) which laboured as much under logical inconsistencies as
it did from a lack of detailed thought as to how a carbon credit market
would work.

Mr Seddon's thesis was that the Kyoto Protocol would impose an
insurmountable financial burden which would not apply to existing players
in the airline industry.

Mr Seddon stated that the consumption of jet fuel in 2008 would be double
the level it was in 1990.  He then proceeded to argue that existing
airlines would be able to earn carbon credits by "reducing emissions in
their opertions by moving to larger, more fuel-efficient aircraft". 

Of course, to generate credits the consumption of fuel would have to be
reduced from 200 per cent to less than 108 per cent of 1990 levels.  This
would be an astounding achievement, given the actual and projected
increases in passenger numbers. 

If reductions in fuel consumption were this easy, one wonders why the
airlines have not done so already;  in fact, why fuel consumption need
double at all.

Perhaps the answer is that the cost of moving such aircraft may exceed the
possible savings in fuel consumption.  Or perhaps it is simply

More fundamentally flawed is the assumption that the Government would seek
to regulate each and every consumer of fossil fuels by taxing them, surely
it would be more efficient to apply the tax at the terminal rather than in
a discriminatory fashion when it reaches the consumers.

Mr Seddon is also mistaken in believing that the European Union opposes
the international trading in credits.  In a recent statement, the
Commission of the European Union in fact flagged the possibility of
introducing a European emissions trading scheme as early as 2005.  This is
because they believe interenational trading will reduce the cost of carbon
credits, and hence the impact on the economics.

What the Europeans actually oppose is international trading when it is not
supplemental to domestic emissions reduction efforts.  Be this as it may,
sacrificing this position may be the price of obtaining the US
ratification needed to make the Kyoto Protocol enter into force.

What is clear is that the Kyoto Protocol will have wide-ranging
implications for all Australian industries.  It is also clear that market
design characteristics will require careful consideration to minimise
their impact on the economy generally, as well as on specific industries.

Bill O'Chee
Director, Sand Corporation Ltd, Sydney, NSW.

LETTER 2  (Duncan's Seddon's response to O'Chee)

I thank Mr O'Chee for his comments re my article ("Airlines and carbon
credits, AFR Letters January 4).  In a roundabout way Mr O'Chee makes my
central point, namely the failure to find an answer to the question:  Are
new entrants to the airline industry going to have to provide carbon

Where inconsistencey exists, it is in an energy policy which encourages
the development of increased air travel (e.g. new airlines, airport
expansions, etc) while simultaneously pledging to reduce greenhouse
emissions to 108 per cent of 1990 levels (Kyoto).

For the record, the use of jet fuel is now over 50 per cent higher than
the 1990 level.  How is this increase going to be managed?  By a brake on
activity such as a carbon tax?

The airline industry is not the only player affected.  The big question is
how is any new fossil fuel-consuming project going to be approached?  My
fear is that major projects in the regions (WA LNG expansions, fertiliser
plants in Victoria, alumina refining in Queenland, etc) may become
sacrificed to hypothetical earning from carbon credits trading in Sydney.

The fundamental flaw is in the piecemeal way in which energy policy is
developing -- trying to be all things to all men.  The coming decade is
going to be an interest time for setting energy policy as the irresistible
force of development meets the immovable object of Kyoto.
Duncan Seddon
Mount Eliza, Victoria (Australia)

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