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A global scheme for aviation emissions provides a better deal than US and EU cap-and-trade systems

A global scheme for aviation emissions provides a better deal than US and EU cap-and-trade systems | ICF, SH&E, Waxman-Markey
Wed 19 Aug 2009 – This summer, airlines around the globe are scrambling to put together monitoring plans in preparation for their participation in the European Union Emissions Trading Scheme (EU ETS) starting in 2012.
 
The good news is that under the US cap-and-trade Waxman-Markey bill, which would set up a national market for pollution permits in 2012, carriers flying to, from and within the United States will not need to bother with monitoring plans. Indeed, under the draft American Clean Energy and Security Act, which was narrowly passed by the House of Representatives on 26 June and is due to get a Senate vote in the autumn, aviation is not directly included in the cap-and-trade scheme.
 
The bad news is the cost of the scheme to the aviation industry is not likely to be any cheaper than the EU ETS.
 
Under the Waxman-Markey bill, greenhouse gas emissions from the combustion of petroleum-based fuels are covered upstream at the producer or importer level. Fuel suppliers will likely pass on the CO2 price in the cost of refined products – gasoline, diesel and, for that matter, jet fuel. 
 
While the bill as it stands allows for the distribution of a number of allowances for free, the transport sector is currently not in line to benefit from these. The refinery industry would receive a small amount of free allocation, but its primary goal would be to compensate the refiners for their direct emissions associated with refinery operations. This is in order to allow them to stay competitive with foreign uncapped refiners from which the US typically imports refined products, such as South America and some of the Caribbean countries. 
 
Since petroleum imports (both crude and refined products) are ‘captured’ at the point of import under Waxman-Markey, imported oil products would face the same carbon cost as domestic producers and refiners – and all would presumably pass that through to consumers.
 
This suggests that under US rules airlines will have to pay for the entire carbon cost of the emissions resulting from the combustion of fuel purchased in the US. In the EU ETS, however, ICF/SH&E forecast carriers will receive on average 73% of their allowance needs for free in 2012, declining to about 54% in 2020.
 
ICF/SH&E also project that the overall cost of the EU ETS for all covered flights (within, to, and from the EU) would range between €1.3 billion and €2.0 billion ($1.8-2.8bn) in 2012 and €6.5 billion to €13 billion ($9.1-18.3bn) in 2020, based on EUA prices ranging €17 to €31 per MtCO2 in 2012 and €37 to €73 in 2020.
 
Based on ICF’s projections of the price of carbon in a future US ETS (which are significantly higher than the US Environmental Protection Agency’s projections), the cost of Waxman-Markey to the aviation industry could amount to $5.0 billion in 2012, rising to $11 billion in 2020.
 
The Aviation EU ETS directive allows for the possibility of excluding flights departing from a third country to an EU airport if that country adopts measures for reducing the climate change impact of flights. Waxman-Markey could well qualify as such a measure, suggesting that flights departing from the US would be excluded from the EU ETS. However, the articulation between the US and EU scheme will likely not be straightforward because the coverage applies to fuel purchased in the US rather than flights departing from a US airport. Airlines will be burdened with understanding the costs associated with different schemes, and defining appropriate carbon risk management and airline planning strategies.
 
This stresses the need to avoid a patchwork of conflicting and potentially overlapping national and regional policies. This could be achieved by including global aviation emissions in a post-Kyoto international climate regime. The cost of such a scheme for aviation would depend on the emission reduction targets adopted; possible restrictions on use of emission reductions from other sectors and/or geographies; the interpretation of common but differentiated responsibilities; and the share of allowances that airlines will have to buy via auctions versus those received for free.
 
If there are no restrictions imposed on the use of international credits, it is likely that the cost of such a scheme to the aviation industry would be considerably lower. Indeed, the price of international offsets in 2020 as available to airlines under a post-Kyoto global scheme could be as low as half that of allowances under the EU ETS. Under such circumstances, compliance costs for global aviation (domestic and international) in a global scheme in 2020 could be equal to the sole cost of the EU ETS for flights touching an EU airport.
 
This suggests that at a global level, the industry has little to lose from a globally-aligned CO2 cap-and-trade scheme. In particular European and US airlines have a strong incentive for such a global scheme, as advocated by, amongst others, IATA and the Aviation Global Deal group. The challenge ahead will consist in reconciling the views of different players, in particular airlines from developing countries.
 
 
Etienne Gabel is a senior consultant at consultancy ICF International/SH&E. SH&E, an international aviation consultancy, joined with ICF International in December 2007.
 
 
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