Airlines could make up to #2.7 billion profits if aviation emissions become part of the EU Emissions Trading Scheme (ETS), according to the Institute for Public Policy Research (IPPR).
The EU is to announce whether aviation is due to be included in the ETS this week.
IPPR said the EU should require member states to auction the credits to emit greenhouse gases to airlines.
The institute added that if the airlines are given the credits they will pass on emissions credit costs to passengers, leaving the industry to pocket up to #2.7 billion in profits.
The report said the UK energy industry made about #1 billion windfall profits in the first year of the EU ETS when it was given free emissions credits.
The report recommends: The trading scheme should cover all flights to and from EU airports which would cover three times as many flights than if the scheme covered just internal EU flights; The trading scheme covers all greenhouse gases emitted by aeroplanes, not just carbon dioxide, which would increase its effectiveness five-fold; Individual countries develop a broad package of measures to address the climatic impacts of flying and the growing demand for air travel, which accounts for five to 12 per cent of Europe's greenhouse gas emissions.
Simon Retallack, head of IPPR's climate team, said: "When it comes to preventing climate change, there is no such thing as a cheap flight. Including aviation in the EU ETS is a step in the right direction. But the EU should not repeat the mistake it made with the energy sector and give the aviation industry free emissions credits, handing the airlines a windfall of #2.7 billion.
"The EU should take a strong lead on curbing emissions from airline flights and clip the aviation industry's wings."
