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Affected airlines must factor in many uncertain issues as they plan for inclusion into the EU ETS

Affected airlines must factor in many uncertain issues as they plan for inclusion into the EU ETS | Miles Austin, EcoSecurities

Miles Austin, EcoSecurities
Thu 18 Sept 2008 – Taking in approximately 12,000 installations, the European Union Emissions Trading Scheme (EU ETS) covers about 40% of the EU’s total greenhouse gas emissions, writes Miles Austin. The sector with the largest emissions outside of the scheme is transport and it is within this context that aviation is being brought within its scope from 2012.
 
There is a further desire within the EU to include shipping by 2015 and Member States such as Sweden are also pushing for surface transport to be incorporated. In the absence of significant alternative measures, both seem likely.
 
The proposal before the European Parliament and Council of Ministers to include aviation in the EU ETS finally seems to have reached, broadly speaking, a mutually satisfactory conclusion. It will cover every flight that touches down or takes off within the European Union’s 27 Member States.
 
The cap for the aviation sector in 2012 has been set at 97% of the average emissions for the period 2004-2006. The use of Certified Emissions Reductions (CERs) from the Clean Development Mechanism (CDM) is capped at 15% of an airline’s emissions. Not all of the 97% EUA cap will be allocated for free – 15% of the 2012 cap will be auctioned.
 
The current text stipulates that the auctioning revenue must be ring-fenced, or ‘hypothecated’, by the Member States for climate change purposes such as investing in low carbon technology. This move will probably not reach final approval as many Member States, particularly the UK, are against the imposition of hypothecation of revenues by the European Commission on principle. There are justifiable concerns that allowing Brussels to dictate how national revenues are spent would set a bad precedent, no matter how sympathetic each individual case.
 
For the period 2013-2020, use of CERs is again limited to 15%. The overall emissions cap will be reduced to 95%, and auctioning will again initially be set at 15%. However, the level of auctioning is subject to review. Given the ambition to increase auctioning to 100% for all non-aviation sectors during the 2013-2020 period, it is likely that any changes will result in increased levels of auctioning and, hence, decreased levels of free allocation. If an international climate change agreement is brokered, the EU will pursue a more aggressive emissions reductions target. It is highly probable that in common with all other EU ETS sectors, the aviation sector will have its cap tightened further to contribute to this.
 
A start date of 2012 places the onset of aviation’s inclusion in the EU ETS on the cusp of the scheme’s transition from its second trading Phase (Phase II), to its third trading Phase (Phase III). Phase II of the EU ETS runs from 2008-2012 to coincide with the Kyoto Protocol and Phase III from 2013-2020. The trading environment between the two is radically different. In Phase II the auctioning of European Allowances (EUAs) for all non-aviation sectors has been limited to a maximum of 10%. As mentioned for Phase III, the aim is to achieve 100% auctioning for all sectors by 2020. A few sectors that are deemed vulnerable to international competition through ‘carbon leakage’ will be excluded.
 
The EU ETS-wide shortage of allowances between Phases II and III will be far greater – Phase II is achieving an average 7% cut in comparison to 2005 emissions and Phase III will cut emissions by 20% or 30%, subject to an international climate change agreement. The use of Certified Emissions Reductions (CERs) has been cut from its Phase II level of circa 270Mt/yr to zero under the 20% scenario and 70Mt/yr under the 30% path.
 
All these factors point towards far higher EUA prices in Phase III of the EU ETS than are currently being experienced in Phase II. By way of example, Phase II EUAs are currently trading at around 25 euros. New Carbon Finance, a carbon market research company, has estimated the Phase III EUA equilibrium price at 62 euros.
 
There are a number of significant unknowns in all of this. The aviation industry’s contribution to the pursuit of a 30% emissions reduction target is uncertain. This to some degree makes sense. Although the EU has been consistently discussing a 30% target, in the event of an international treaty on climate change, the final result may see the EU pursuing a higher or lower target. The treaty itself may also contain a cap-and-trade scheme or other equivalent measures of similar stringency to the EU ETS designed to reduce aviation emissions. If so, it is not beyond all possibility that aviation could be removed from the EU ETS post 2012. The only argument currently accepted for a flight to or from the EU not being subject to the EU ETS is that it is covered by another scheme of similar stringency.
 
With relatively simple measures such as towing, engine washing, fitting winglets and accelerated replacement of older planes with efficient new ones, the 5% emissions cut to 2020 should be achievable. The main effect of the legislation is to prevent continued expansion of emissions from the EU’s aviation sector. This does not mean, however, that aviation activity itself need not continue expanding. For instance, it has been estimated that the implementation of a European Single Sky policy would reduce emissions by 15%. Put another way, with no loss of activity but simply with more efficient air traffic control practices, the aviation sector could not only achieve its emissions reduction target, but expand its activities by a further 10%.
 
Under the rules of the Chicago Convention and the WTO, it has been questioned whether or not Europe can impose a cap-and-trade scheme on either EU or, particularly, non-EU airlines. To tackle the Chicago Convention first, any signatory to it may apply non-discriminatory rules to the aircraft of other states operating within its airspace. The fact that the rules apply to all airlines, EU-based or not, not only complies with this requirement but were it otherwise, i.e. only applied to EU-based airlines, it would actually breach the rules of the Convention.
 
WTO rules specifically allow non-discriminatory measures for environmental protection. Again, the non-discriminatory aspect implies that aviation’s inclusion in the EU ETS must include all airlines operating within the EU regardless of their country of origin. The environmental protection aspect would seemingly endorse the EU’s approach in including the aviation sector in the EU ETS as a means to achieving this.
 
Which leads to a final consideration. There is a feeling amongst many airlines that some actor outside of Europe will legally intervene and hence scupper the plans for the inclusion of aviation into the EU ETS. Ignoring the ongoing debate on the likely success of such a move, many airlines seem to be taking a wait-and-see attitude based on the assumption that this will succeed. Whilst the administrative requirements for participation in the EU ETS are not onerous they also deserve serious consideration sooner rather than later.
 
A colleague of mine who has guided many new entrants into the EU ETS has described their reactions as going through the phases of fear, anger, denial and acceptance. The former three have been evident from the actions of the airline industry, the latter worryingly less so.
 
 
 
Miles Austin is Head of European Regulatory Affairs at EcoSecurities, a leader in the international carbon market. With over 10 years of experience, EcoSecurities has grown into one of the world's largest developers and suppliers of emission reductions, for both the compliance and voluntary markets. For more information, please visit http://www.ecosecurities.com/.


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