Assessing the equity impact of the EU emission trading scheme on an African airline

© Chikage Miyoshi Cranfield University

Dr Chikage Miyoshi

Centre for Air Transport Management

Cranfield University

22nd April 2015

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Assessing the equity impact of the European Union Emission Trading Scheme on an African airline

Institute for Transport Studies, University of Leeds

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Agenda

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Ø  A Single Market o Global Aviation and its Dilemma in International Climate Negotiations

Ø Assessing the equity impact of the European Union

Emission Trading Scheme on an African airline

* Benefit of ‘ Air Transport’ ?

* Negative effect?

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5

Approaching environmental issues

Economic

Socio cultural

Political consideration

Externalities

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Emissions from Airport

Sustainable development

•  Social Cost = Private Cost + External Cost Air Pollution Accident Wild life, Nature Noise Waste Green House Gas

Fuel /energy Labour Facilities Administration

•  Social Benefit = Private Benefit + External Benefit

Profit Value of time Less accident Peace Working opportunity Happiness

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Further development:

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Environment is the key

Increase capacity and demand

Minimise nega1ve externali1es and cost &

Maximise benefits

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Strong Policy Driver

1992 1997

"   United Nations Framework Convention on Climate Change

"   Entered into force in 1994 signed by 166 countries, 196 parties in 2014.

"   Combat: GHG emissions Global warming Climate change

"   Ratified by 176 countries, has been ratified 192 of the UNFCCC parties in 2014

"   Entered into force in 2005 "   Achieve a reduction of 5% of 1990’s GHG

emissions in 2012

To stabilise GHG concentration in the atmosphere To promote sustainable technologies to grant an environmentally less harmful economic growth

•  Annex I countries – recognised as industrialised countries and economies in transition (EIT)

Annex I countries- developed countries to pay cost of developing countries

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Without Canada (in 2011)

40 countries and the EU accounted for 61% of GHG in 2009

Japan, Canada, Russia would not take the post 2012.

•  An international agreement linked to the United Nations Framework Convention on Climate Change

•  It sets the binding targets for reducing greenhouse gas (GHG) emissions.

•  An average of 5% against 1990 levels over the five year period 2008-2012

•  The end of the first commitment period of the Kyoto protocol in 2012

Adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16th February 2005

The Kyoto mechanisms Monitoring emission targets

Excluding international aviation

Kyoto Protocol

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•  Emission trading Assigned Amount Units (AAUs) •  Clean development mechanism (CDM) Certified Emission Reduction (CER) •  Joint implementation (JI) Emission Reduction Units (ERUs)

The Kyoto mechanisms

Kyoto Protocol

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•  Emission trading Assigned Amount Units (AAUs) •  Clean development mechanism (CDM) Certified Emission Reduction (CER) •  Joint implementation (JI) Emission Reduction Units (ERUs)

Every country has been assigned an amount of Assigned Amount Units (AAUs). These units are calculated in tons of CO2 equivalent (CO2-e). To ease the accounting of the sixe different GHG, offending gases are weighted by their global warming potential.

c.f. EUA : European Union Allowance

2003 ‘The Future of Air Transport White paper’ 2006 ‘The Stern review’ 2006 ‘The Future of Air Transport Progress Report’ 2007 ’Towards a Sustainable Transport System’-Supporting Economic Growth in a Low Carbon World’

Aims to maximise the overall competitiveness and productivity of the national economy and to reduce transport’s emissions of GHS, with desired outcome of avoiding climate change

Focus on the aviation emissions

UK Government Policy for transport

In Europe

"   Cap & trade system "   30 countries involved "   Started in 2005 "   Objective: 21% reduction by

2020 compared to 2005 "   Encourage investments in clean

and green system "   11,500 installations of heavy

emitters, representing 42% of Europe GHG (only CO2).

European Emission Trading Scheme

Individual and independent of any binding protocol under the UNFCCC

The EU ETS does not cover the Global GHG emissions.

Directive 2008/101/EC to include aviation

The EU ETS (Emissions Trading Scheme)

Proposal for a directive of the European parliament and of the council, amending Directive 2003/87/EC so as include aviation activities in the scheme for greenhouse gas emissions allowance trading within the Community’

http://ec.europa.eu/environment/climat/aviation/index_en.htm

More information:

European Commissions

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•  Phase I ran from 1 January 2005 to 31 December 2007 and was a 'learning

by doing phase'; •  Phase II ran from 1 January 2008 to 31 December 2012 and includes

revised monitoring and reporting rules, more stringent emissions caps and additional combustion sources;

•  Phase III, which runs from 1 January 2013 to 31 December 2020, brings

major changes including, harmonised allocation methodologies and additional greenhouse gases and emission sources.

How does the EU ETS work?

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•  Companies exchanges units of EUA(European Union Allowance)

•  The EU ETS allows firms to bank and borrow allowances between years within a trading phase.

•  Firms can cover a short position by using previous unused units(banking) or by using permits allocated to following years (borrowing)

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EU-ETS time line

"   Learning phase

"   Carbon price "   NAP "   Free allocation

"   10% less allocations

"   1st Kyoto commitment period

"   Free allocation "   More sources

"   20% less emissions in 2020 compared to 2005

"   Each year: 1,7% less allowances

"   More GHGs and sources

The EU ETS

0

20

40

60

80

100

120

140

160

180

200

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Phase II Phase I

Auctioning

Reserve Historical base Monitoring

Car

bon

emis

sion

s

Free allowance

Phase III

97%

95%

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How does the EU ETS work?

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Carbon tax or ETS

Source: World Bank (2014)

US30 billion in 2013

•  Significant share of vehicles

•  But significant growth of aviation

•  And the further growth is forecasted by the Government

Source: Defra(2007)

Balance between the air travel growth,

economy and environment

Why aviation?

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Global sectoral approach for aviation industry required IATA, 22 September 2009

The Copenhagen Climate Negotiations (COP 15) , December 2009

ICAO ‘High-level Meeting on International Aviation and Climate Change’ 7-9 October 2009

• Aviation should be treated as a separate sector rather than by country • The global solution trough ICAO is the best way to reduce remissions • US support at ICAO meeting is critical

Towards Post-Kyoto

•  A global agreement on climate change by 2015 •  The Durban (COP 17)platform: the international agreement by 2015 and

implementation in 2020 •  Further mechanism include. Carbon market and finance

Doha COP 18, November December 2012

The 39th Session of the ICAO Assembly , 2016

The 38 th Session of the ICAO Assembly’, September to October 2013

Post-Kyoto

The amendment of the Kyoto Protocol from 2013 to 2020

•  A global MBM scheme by 2015 for decision in 2016

•  Annex I countries – recognised as industrialised countries and economies in transition

Annex I countries- developed countries to pay cost of developing countries

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Canada withdrew in 2011

Japan and Russia are out from the second commitment.

STOP the clock on the EU ETS

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EU suspends aviation inclusion in ETS for international flights

The 38th ICAO assembly (24th September-4th October 2013)

1 kg Jet Fuel = 3.156 kg carbon

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Source: ICAO (2013)

Traffic Growth and fluctuation

1 kg Jet Fuel = 3.156 kg carbon

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Fuel and Carbon emissions

Volatile Carbon price

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EU ETS Phase II and the first Kyoto Commitment

Oversupply in CERs and EUAs

0

50

100

150

200

250

300

350

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Inde

x (1

986

= 10

0)

RPK (all regions)Average stage distance flown(kms)Fuel (g)/pkmTotal fuel consumption per year (tonnes)Total fuel consumption per ATK

Source: Miyoshi and Mason (2009)

Fuel consumption increased by 4% p.a

Fuel efficiency improved by 2% p.a

Fuel efficiency trend-AEA airlines

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Abatement measures

Marginal abatement cost curve

£ tonne CO2

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CO2 tonne saved

-£100

£300

Carbon price

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Assessing the equity impact of the European Union Emission Trading Scheme on an African airline


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The first multi national emission trading scheme

Motivation: The EU ETS including aviation

Many regulatory issues and objections under the Chicago Convention and the Kyoto Protocol, ratified countries have different responsibilities and roles based on

whether they are Annex I country or Non-Annex I country.

‘ Stop the Clock action’ in November 2012 and ‘ Decision’ in 2013

A global MBM ( market based mechanism) led by ICAO in 2016 and will be implemented in 2020.

De minis consideration ( a developing country contributing less than one per cent of global aviation emissions.

The EC proposed to amend the 2003 ETS Directive in February 2014


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•  Airlines’ network and reconfiguration ( Albers et al., 2009: Derigs and Illing, 2013)

Previous studies

•  The additional costs and effects on fares ( Scheelhaase and Grimme, 2007; Scheelhaase et al, 2010; Morrell, 2007; Yuen and Zhang, 2011)

•  The impact on airlines industry and macroeconomic activity ( Anger, 2010)

Only minor impacts on costs, networks, and emission reductions for European airlines ( Derigs and Illings, 2013) and US carriers (Malina et al, 2012)

For Non- Annex airlines, it is crucial to discover how to engage and make use of the EU ETS(Zhang and Wei, 2010)

It is effective only if aggressive measures are implemented (Degres and Illing, 2013;Sgouridis et al, 2011; Verspermann and Wald, 2010)


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To measure the equity effects of the aviation EU ETS on a non-Annex I country’s airline by comparing it

with airlines in Annex I country.

Research Objective

All itineraries via London (LHR)- and Johannesburg(JNB) in 2011 British Airways (BA), Virgin Atlantic Airlines(VS), South African Airlines (SA) and others

Assumption: the original ETS system design

Case 1 : the actual fleet strategy by airline in 2011

Case 1 : BA and SA change aircraft to efficient fleet

Limitations: only one route is analysed. Network and revenue managements are more complex and dynamic.


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Methodology and data used

Step 1: Model 1: estimate emissions by airline

Step 4 Model 3: estimate consumer welfare change by group due to the impact of the EU ETS

Step 2: estimate the additional cost on fare by airline

Step 3 Model 2: estimate the market share change by airline, which is caused by fare increase due to the EU ETS

Data used: OAG (2012) PaxIS (2012)

UK CAA (2012) BADA 3.6(2006)


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Methodologies and data used

The more refined tier 2 methods

LTO cycle CO2 emissions calculation Aircraft type

Stage length

Altitude Aircraft type Cruise cycle

Fuel Consumption calculation

BADA aircraft performance data

table

Cruise cycle CO2 emissions calculation

EEA Emissions

data Inventories Guide book

The Total CO2 emission On each route

Source: Miyoshi and Mason (2009)

Fuel consumption and emission Calculation methodology


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Methodologies and data used


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NECTAR 2014 Cluster 1 meeting on Networks

𝑃𝑛𝑖 = exp(𝑉𝑛𝑖 )

∑ exp(𝑉𝑛𝑗 )𝑗∈𝐶𝑛

𝑉𝑛𝑗 = 𝛽1𝑇𝑖𝑚𝑒𝑛𝑗 + 𝛽2𝐹𝑎𝑟𝑒𝑛𝑗 + 𝑆𝑡𝑜𝑝𝐷𝑢𝑚𝑚𝑦𝑛𝑗 + 𝜀𝑛𝑗

𝜂𝐹𝑎𝑟𝑒 𝑖𝑃𝑗 = δ𝑃𝑗

𝛿𝐹𝑎𝑟𝑒 𝑖∗ 𝐹𝑎𝑟𝑒 𝑖

𝑃𝑗= (1 − 𝑃𝑖) ∗ 𝐹𝑎𝑟𝑒𝑖 ∗ 𝛽𝐹𝑎𝑟𝑒

𝜂𝐹𝑎𝑟𝑒 𝑖𝑃𝑗 =

δ𝐹𝑎𝑟𝑒𝑖𝐹𝑎𝑟𝑒𝑖

∗ 𝐴𝑀𝐸

∆𝑊𝑖𝑗 = −' 𝑃𝑖𝑗1𝐶𝑖𝑗𝑗

−12'(𝑃𝑖𝑗0 − 𝑃𝑖𝑗1 )𝐶𝑖𝑗 𝑗

+12'(𝑃𝑖𝑗0 − 𝑃𝑖𝑗1 )𝐶𝑎𝑟𝑏𝑜𝑛𝑖𝑗𝑗

Model 2

Model 3

where =1,2,3 ; j∈C_n are alternatives in the choice set C for individual n ; Pni is the probability of the individual n choosing airline i on the route; and Vni is a deterministic utility for the j alternative of individual n.

where 〖Fare〗_i is the attribute of the i alternative; and β_Fare is the estimated coefficient of the fare. In addition, the elasticity of fares can be obtained by average marginal effects (AME) of fare change as below.

where ∆W_ij is the welfare change of individual passenger i on airline j,P_ij is the probability an individual passenger i taking a trip with airline j,C_ij is the cost of carbon charges on the trip by passenger i with airline j,; 〖Carbon〗_ij is the cost of carbon damage on the trip by passenger i on airline j , 0 denotes ‘before the ET ETS’ and 1 denotes ‘after the EU ETS’.


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All London (LHR)- Johannesburg(JNB) routes

Number of departures Per year

Number of seats

supplied Per year

Number of passengers carried Per year

Seat Configuration

Number of passenger on flight

Average load factor

Average fare JNB-‐LHR (USD)

Average fare LHR-‐JNB (USD)

British Airways (BA) 728 255,528 195,482 351 269 0.77 1,433 1,538

Virgin Atlantic (VS) 365 127,118 92,354 348 253 0.73 930 956

South African Airlines (SA) 677 192,841 132,256 285 195 0.69 918 1,043

Source: Traffic data (UK CAA, 2012) and average fare (IATA, 2012)

Main players ( BA :42% and SA :38%)


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Data and assumptions used

Aircraft type Seat Block fuel (kg)

Number of departures Per year

Capacity Share (%)

Case 1 (The current Fleet) in 2011

BA B747 337 104,728 728 41%

SA A330-‐200 222 55,714 259 15% A340-‐300 253 63,644 167 9% A340-‐600 317 81,679 252 14%

VS B747 451 104,728 116 7%

A340-‐600 308 74,706 249 14%

Case 2 ( Expected

fleet)

BA B787-‐900 250-‐290 48,366 728 41%

SA A330-‐200 222 55,714 259 15% A340-‐300 253 63,644 167 9% A340-‐600 317 74,706 252 14%

VS B787-‐900 250-‐290 48,366 116 7% A340-‐600 308 74,706 249 14%

Note: case 1 is based on the actual aircraft type used in 2011. Case 2 is based on the assumptions that BA and VS switch aircraft type from B747 to B787-900.


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Additional cost per passenger by airline

Additional cost per passenger

Low Medium High €7 per tonne €15 per tonne €30 per tonne

Case 1 BA 5.5 11.7 23.4 VA 3.9 8.4 16.8 SA 3.9 8.3 16.7

Case 2 BA -‐0.2 -‐0.4 -‐0.8 VS 2.0 4.3 8.7 SA 3.9 8.3 16.7

BA’s carbon cost is the highest in case 1, however, they can obtain the additional carbon when their fleet is renewed.


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The equity effect change by airline and route Carbon price

Case

Carriers

LHR-‐JNB (the South bound route) JNB-‐LHR (the North bound route)

Market share (%) Before ETS

Market share (%) After ETS

Carbon cost per

passenger (USD)

After ETS

Carbon saving per passenger (USD)

Consumer welfare

change per passenger (USD)

Market share (%) Before ETS

Market share (%) After ETS

Carbon cost per

passenger (USD)

After ETS

Carbon saving per passenger (USD)

Consumer welfare

change per passenger (USD)

Low

(€7 per tonne)

1 BA 46.5 47.9 5.3 0 -‐5.33 46.5 48.2 5.3 0 5.31 VS 22 19.7 4.38 0 -‐4.26 22 20.1 4.34 0 -‐4.39 SA 31.5 31.4 3.91 0 -‐3.91 31.5 31.7 3.9 0 -‐3.91

2 BA 46.5 46.5 -‐0.18 2.8 3.01 46.5 47.1 -‐0.18 0.66 3.01 VS 22 20.8 2.14 1.0 -‐1.16 22 21.2 2.13 0.22 -‐1.15 SA 31.5 31.4 3.91 0 -‐3.91 31.5 31.8 3.9 0 -‐3.91

Medium

(€15 per tonne) 1

BA 46.5 49.5 11.0 0 -‐11.07 46.5 50.2 11.07 0 -‐11.04 VS 22 16.7 11.1 0 -‐10.8 22 17.9 10.6 0 -‐10.68 SA 31.5 31.2 8.4 0 -‐8.4 31.5 32 8.39 0 -‐8.39

2 BA 46.5 46.4 -‐0.39 6.1 6.45 46.5 46.5 -‐0.39 6.05 6.44 VS 22 19.5 4.89 2.3 -‐2.65 22 22.0 4.34 2.04 -‐2.3 SA 31.5 31.2 8.4 0 -‐8.42 31.5 31.5 8.35 0 -‐8.35

High

(€30 per tonne)

1 BA 46.5 52.4 20.8 0 -‐20.9 46.5 52.3 20.8 0 -‐20.8 VS 22 12.2 30.3 0 -‐29.5 22 13 28.5 0 -‐28.9 SA 31.5 31 17.0 0 -‐16.9 31.5 31.1 16.9 0 -‐16.9

2 BA 46.5 46.3 -‐0.79 12.5 12.9 46.5 46.4 -‐0.79 12.14 12.9 VS 22 17.0 11.2 5.3 -‐6.1 22 17.4 10.96 5.16 -‐5.9 SA 31.5 31 16.9 0 -‐17.0 31.5 31.2 16.9 0 -‐16.9


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The results: LHR-JNB with low carbon price(€7 per tonne)

Small difference for both carbon cost and welfare

Case 1 ( the actual data in 2012) Case 2 ( BA and VS fleet change after the free allocation)


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The results: LHR-JNB with Mid carbon price (€15 per tonne)

Difference among airlines becomes larger.

Case 1 ( the actual data in 2012) Case 2 ( BA and VS fleet change after the free allocation)


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Findings

•  Fuel-efficient aircraft and passengers on both Annex-I and non-Annex I airlines could benefit from reductions in fuel consumption and CO2 emissions.

•  a fleet renewal strategy provides significant benefits in terms of carbon costs. However, this strategy requires a large amount of investment and time. The burden of fleet renewal could be much larger for some non-Annex I airlines compared to Annex I airlines due to capital and financial access, including higher discount rates charged to non-Annex I airlines.

•  The economic instrument is effective. However, it is very limited unless the carbon price is very high.

a more restrictive system design (Vespermann and Wald, 2011). Therefore, more aggressive regulation is required (Derigs and Illing, 2013).


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Policy proposals and the further study

•  There are some equity gaps between the Southbound and Northbound routes as well as between Annex I and non-Annex I carriers. This aspect also should be considered with regard to changing the system or implementing the global market mechanism in the future. The carbon price should be higher for an effective mechanism, but the equity difference will be greater among airlines and passengers.

•  One way of moderating the equity gap between Annex I and non-Annex I airlines could be a fairer distribution of revenue from the EU ETS. Under the general EU ETS legislation, the current distribution methods are unclear on where revenue goes and how it is spent within the EU. One option could be transparent and direct redistribution to each participant, which would compensate for equity issues among airlines and countries. This issue needs to be analysed in any further research.


Thank you so much indeed

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Chikage Miyoshi E-‐mail: [email protected]

References

Transportation Research Board (2008). Airport Cooperative research Program (ACRP), Report 4, Ground Access to Major Airports by Public Transportation. http://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_004.pdf

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Transportation Research Board (2003). Transport Cooperative research Program (TCRP), Report 83, Strategies for improving Public Transportation Access to Large Airports http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_83a.pdf Transportation Research Board (2010 ). Airport Cooperative research Program (ACRP), Report 28, Marketing Guidebook for Small Airports http://www.aci-na.org/static/entransit/acrp_marketing_airports_3-10-10.pdf Transportation Research Board (2009 ). Airport Cooperative research Program (ACRP), Report 11, Guidebook on preparing Airport’s Greenhouse gas Emission Inventories http://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_011.pdf Miyoshi C, Mason K. 2009. The carbon emissions of selected airlines and aircraft types in three geographic markets. Journal of Air transport Management 15(3):138-147. Miyoshi C, Givoni M. 2012. The environmental case for high speed train in the UK: examining the London-Manchester route . International Journal of Sustainable Transportation, available on line.

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