United States: Update On Aviation And The Emissions Trading Scheme

The European Commission's proposal to extend the European emissions trading scheme (ETS) to include aviation activities has been controversial and subject to amendments by the European Parliament and, most recently, the European Council (Council).  The Council's position generally is consistent with the Commission's proposal, while the European Parliament has adopted a position which would lead to a much more stringent scheme for the aviation sector than any other sector.

Reason For Change


Under the existing ETS Directive 2003/87/EC (Directive), all operators subject to the scheme are allocated a number of allowances for their greenhouse gas emissions. Each allowance entitles an operator to emit one tonne of carbon dioxide per year.  If an operator produces less emissions, it may sell its extra allowances for the benefit of any other operator whose emissions exceed its emissions cap and which therefore requires additional allowances for the purposes of compliance.  Each year, an operator must surrender allowances to cover the total amount of its own emissions for that year.  Operators that do not surrender the relevant number of allowances are required to pay a penalty.

The Commission intends to include aviation activities in the ETS in order to ensure that the fast-growing aviation sector contributes to emissions reductions.  In particular, the Commission is concerned that if emissions from aviation activities in the European Union (EU) continue to increase at their current rate, by 2010 they may offset more than a quarter of the environmental benefits of the reductions required by the EU's Kyoto Protocol target.

Commission: Original Proposal


On 20 December 2006, the Commission released its original proposal to include aviation activities in the ETS by amending the Directive.  Key to the Commission's proposal were the following:

  • Beginning 1 January 2011, the ETS would cover all flights within the EU only, and the following year it would cover all flights arriving at or departing from an airport within the EU as well.
  • The number of allowances to be issued to aircraft operators would be capped at 100 per cent of an aircraft operator's average annual emissions from 2004 to 2006.
  • A certain number of free allowances would be allocated.
  • In 2011 to 2012, a percentage of allowances would be auctioned corresponding to the average percentage proposed by Member States in their national allocation plans(NAPs. Thereafter, the percentage would be reviewed as part of a more general review of the ETS.
  • Aircraft operators would be allowed to buy allowances from operators in other sectors (non-aviation allowances) covered by the ETS to cover their emissions.
  • Aircraft operators would be allowed to use certified emission reductions (CERs) and emission reduction units (ERUs) from the Joint Implementation or Clean Development Mechanisms, up to a harmonised limit specified by Member States.
European Parliament:  A More Radical Approach?


On 13 November 2007, the European Parliament proposed a number of significant amendments to the Commission's proposal.  In particular, it proposed that

  • All flights within the EU and arriving at or departing from an EU airport (EC flights) would be covered by the ETS from the earlier date of 2011.
  • The number of allowances issued to aircraft operators would be 90 per cent of the average annual emissions during 2004-2006.
  • 25 per cent of allowances would be auctioned.
  • If there are no EU measures that incentivise the reduction of nitrogen oxide from aircraft, then the amount of carbon dioxide that a non-aviation allowance, CER or ERU permits an aircraft operator to emit would be divided by two.  Therefore, two non-aviation allowances, CERs or ERUs would need to be surrendered by an aircraft operator to cover the emission of one tonne of carbon dioxide.
  • Non-aviation allowances would be included in the same harmonised limit on the number of CERs and ERUs that could be surrendered by an aircraft operator to cover its emissions.  This proposal contrasts with the way the existing ETS works, whereby an allowance obtained from one sector may be used to meet the obligations of an operator in another sector without limit.

The European Parliament's proposals would create a tougher scheme for aviation activities than the scheme existing for other sectors, particularly because of the reduced proposed cap on allowances to be issued, the amount of allowances auctioned and the limitations on using non-aviation allowances to meet emission reduction targets. 

Council:  Reversion To Commission's Proposals, With A Twist


On 20 December 2007, the Council reached political agreement (called a common position) on the amendments to the Directive to extend the ETS to include aviation activities.  The Council made a number of technical improvements and changes of a more political nature, the most significant of which was that it removed the one-year introductory phase proposed by the Commission for flights within the EU.  Consequently, the ETS would apply to all EU flights from 1 January 2012.  The Council proposed that 10 per cent of allowances be auctioned and that revenue from auctioned allowances be used to combat climate change.

In addition, the Council proposed that

  • Operators with very low traffic levels on routes to, from or within the EU be exempt from the requirements of the ETS
  • A special reserve of free allowances, taken from the overall cap, be available for new entrants or fast-growing airlines
  • A new mechanism to ensure consistent and robust enforcement throughout the EU be introduced whereby, for example, Member States may ask for an aircraft operator to be banned from operating in the EU for persistent failures to comply with ETS requirements
  • Although the Council's proposed amendments are significant, it has adopted a position generally consistent with the Commission's position.  Notably, it has not adopted the more controversial amendments proposed by the European Parliament, including the proposal to limit the sector from which allowances may be surrendered by aircraft operators to cover their emissions
Timing Of Amendments To ETS


The Council's position will now be considered by the European Parliament.  If the Council's position is adopted by the European Parliament, the proposed amendments to the Directive may be adopted in about four months' time.  If the European Parliament proposes further amendments to the Council's position, the proposed amendments to the Directive may be adopted in about eight months, or more.

Conclusion

The Council's decision regarding extending the ETS to include aviation activities was published shortly after the United Nations climate change conference, held in Bali, from 3 to 14 December 2007.  European Environment Commissioner Stavros Dimas said, "Having just returned from Bali, environment ministers were acutely aware of the challenge ahead and the necessity to act".  Interestingly, in this context, the Council adopted a less radical position on the extension of the ETS to aviation activities than that proposed by the European Parliament.  In departing from the European Parliament's position, the Council has demonstrated a more cautious approach to the demands it is willing to make, particularly on the aviation sector, to achieve its broader goals with respect to climate change.

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