Airlines stand to make billions of pounds in “windfall profits” from an emissions trading scheme that was supposed to make them pay for the environmental damage they cause, according to a government-commissioned report.

They will take advantage of the scheme to raise fares substantially, even though their costs will hardly change. The windfall will be highly embarrassing for the Government because it has heavily promoted the trading of aviation emissions to justify its plans to allow air travel to double by 2030.

Ruth Kelly, the Transport Secretary, claimed last week that emissions trading would ensure that the proposed third runway at Heathrow would not add to overall climate-change gases. She said that the scheme would force the industry “to take its environmental responsibilities seriously”.

It will be the second time that an industry has made huge profits from emissions trading. There was widespread public outrage last year when it emerged that British power generators had made more than £1 billion from the scheme, under which industries have to obtain a permit for each tonne of carbon they emit. The theory is that they will become more efficient so that they need fewer permits.

The problem with the power generators arose because they were given billions of pounds of free permits at the start to cover their existing emissions. The same problem could occur with airlines, which are due to join the scheme in 2011, because the European Commission is proposing that they be given enough free permits to cover 96-97 per cent of their present emissions.

The report, commissioned by the Department for Transport and the Department for Environment, Food and Rural Affairs, says that the airlines will raise fares by the full value of the permits even though they will pay nothing for them. It concludes: “The consequence of the results set out here is that a high level of free allocation will generate windfall profits.”

It recommends that airlines be forced to buy a substantial proportion of the permits needed to cover their present emissions.

Robin Smale, the economist who wrote the report, said: “The airlines are going to be in the same position as the electricity generators in making windfall profits from a scheme designed to benefit the environment. It could run to billions of pounds and it will be embarrassing for the Government and the industry.”

A DfT spokesman said that ministers were aware of the issue and were trying to persuade the EU to adjust the scheme. Britain is arguing that airlines should be given fewer free permits and be forced to buy a proportion of those they need at auction.

British Airways is demanding the same proportion of free permits as were given to the power generators. A spokesman said: “Industries in the current scheme were allocated permits based on their previous emissions levels and at no cost to them. Aviation should be treated consistently with existing sectors in the scheme.”

WWF, the environmental campaign group, calculated that airlines would make a profit of up to £4 billion a year under the present proposals.

Soaring emissions

13% of British greenhouse gas emissions are from aviation

50% more emissions from aviation expected by 2020, assuming fuel efficiency improves by 50%

235m passengers used British airports last year, estimated to rise to 470m by 2030

1.2 tonnes of CO2 emitted for each economy passenger return London-New York

Sources: Department for Transport; WWF; Atmosfair

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