Aviation is the fastest growing source of carbon dioxide emissions

The Institute for Public Policy Research (IPPR) and World Wildlife Fund (WWF) respectively estimate airlines could make up to �2.7bn and �3.5bn.

The reports say airlines could benefit by passing emission costs to consumers.

The European Union is tipped to decide if aviation will be included in the trading scheme on Wednesday.

Carbon trading

Europe's carbon market is the 25-nation body's main way of tackling climate change, and works by setting industry a quota of permits to emit greenhouse gases, and allows companies to trade those emissions rights.

To date, the European Trading Scheme - the largest of its kind and the only mandatory one world-wide, applies to large polluters such as energy and utility firms, covering 40% of all emissions.

But aviation - the fastest growing source of carbon emissions - has been excluded.

However observers say that the aviation sector may now be given permits to emit greenhouse gases, rather than having to bid for them in auction.

There are fears the airlines may then still try to transfer its theoretical "green" costs on to consumers, by pushing ticket prices up, say the two reports.

'Robust limit'

"Including aviation in the EU ETS is a step in the right direction," said think tank IPPR.

"But the EU should not repeat the mistake it made with the energy sector and give up the aviation industry free emissions credits, handing the airlines a windfall of up to �2.7bn," it added.

The WWF echoed this by saying: "A robust limit on emissions should be set and airlines must be required to pay for their allowances at auction or the system will not be credible."

Flights within Europe are now expected to be covered by ETS, but long-haul flights are not.

Wednesday's decision is to be made after the EU set tougher carbon limits for the second phase of the scheme from 2008-2012.