The report, which was compiled by Ernst and Young and consultants York Aviation, found that up to 5.1bn could be wiped off low-fares carriers' profits between 2011, when aviation is due to enter the scheme, and 2012, due to the cost of purchasing carbon credits and the potential loss of passengers.

Industry sources have also indicated that Ryanair could be doubly-hit because of its rapid growth in recent years as, under the current proposals, 2005 will be used as the 'base' year for emissions.

This means that come 2011, Ryanair will have to purchase carbon credits for six years of growth, during which time its passengers numbers will have grown by over 50 million passengers.

The report indicates that, although all sectors of aviation will be hit by ETS, low-fares airlines will be the worst affected because they would be the least able to pass the costs of ETS onto their customers because their clientele is very price-sensitive.

It estimates that low-fare airlines will lose 15% of their passengers for each 10% by which they increase their fares.

Ryanair declined to comment on the report, stating that it was an industry wide study that did not refer to any specific airline but the secretary-general of the European Low Fares Airline Association (ELFAA), John Hanlon, admitted that ETS would cause difficulties for the sector.

"The reasons people travel with low-fare airlines would be different to traditional airlines and, for them, price is a major factor, " he said.

He said that ELFAA was concerned that base year would be set at 2005 because low-fare airlines had invested heavily in more fuel efficient and environmentally-friendly fleets in recent years.

For instance, according to a study by transport consultants Trucost, Ryanair aircraft now emit an average of 89 grammes of carbon per passenger kilometre compared with 146 grammes of carbon per passenger kilometre for the average British Airways flight.

"We hope, however, that the payback in operating more efficient aircraft will become apparent if the benchmark years are moved forwards to 2009 or 2010, as we have proposed, " said Hanlon.

He said that ELFAA's members hoped to maintain low-fare levels and absorb the cost of carbon credits by making economies elsewhere although he admitted this would be "very hard work for us".

Meanwhile, Aer Lingus's environmental manager Mark Dunphy said that the airline, which operates a lowfare model on European routes, was "keeping a watching brief on the situation" and that it was too early to say what effect it would have on the airline's finances.

"It looks like the low fares sector will be most affected but it looks like amendments to the proposal are possible, " he said.

Dunphy said that the airline, like ELFAA, was pushing for the base year to be forwards to 2009 or 2010 so that it could gain some advantage from new aircraft which are due to be introduced then, which will be more environmentally friendly than its current fleet.