The E.U. proposal, which is expected to get the green light this autumn, would force airlines flying in and out of the bloc's 27 member states to pay for their CO2 emissions at an estimated cost of €3 billion a year from 2015, Merrill Lynch research shows.
'Despite high fuel prices and concerns from international airline organisations, the E.U. appears determined to press ahead with this plan, posing fresh challenges for airlines but also opportunities for the aerospace industry,' said Merrill Lynch Socially Responsible Investing analyst Zoe Knight.
The E.U. move is expected to drive demand for more fuel-efficient aircraft, increase the focus on the most profitable routes and encourage carriers to increase the number of seats. Airlines are also likely to hedge their carbon emissions.
With airlines expected to pass on the additional cost of the European emissions trading scheme to passengers, the average ticket price could rise by up to 3 percent from 2012.
'For most airlines, fuel is now their single biggest cost. The European Union's 2012 deadline could encourage airlines to revamp their fleets sooner rather than later in order to achieve greater fuel efficiency,' said Merrill Lynch European Aerospace industry analyst Celine Fornaro.
The E.U. has already imposed CO2 emissions restrictions on the power, cement, and oil and gas industries to counter global warming. For the first time, the E.U. is now also targeting aviation emissions in a bid to cut CO2 emissions by 20 percent from 1990 levels by 2020.
The European Council is widely expected to endorse a proposed directive this autumn to include aviation in the emissions trading scheme. The proposal gained the support of the European Commission and the European Parliament in July.
While aviation is responsible for only 2 percent of global emissions, airline emissions grew by around a third from 1990 to 2004, raising fears that they are offsetting emission cuts in other industries. Flights in and out of the E.U. account for over half of global aviation emissions.
'As well as expecting airlines to offset these costs through greater efficiency, we also expect them to pass on as much of the cost as possible to customers,' said Merrill Lynch European Travel & Leisure analyst Samantha Gleave.