European airline chiefs reaffirm support for EU ETS but say obstacles could hinder effective implementation
Steve Ridgway, Virgin Atlantic CEO and new AEA Chairman
Mon 21 Feb 2011 – At a board meeting of the Association of European Airlines (AEA) held last week, airline chiefs representing 36 established scheduled network carriers voiced their continuing support for the EU Emissions Trading Scheme (EU ETS). However, they said obstacles to the effective inclusion of aviation into the scheme are likely to become increasingly apparent in the lead up to its start on 1 January 2012. They have outlined around a dozen technical, legal and MRV (monitoring, reporting and verification) issues that will need resolving over the next 10 months. The airline CEOs have again repeated demands for auction revenues be used by States to fund clean technology investment towards achieving a Single European Sky and particularly in developing alternative sustainable fuels.
Assembled for the first board meeting under new AEA Chairman Steve Ridgway, Chief Executive of Virgin Atlantic, the airline leaders reaffirmed their commitment to an environmentally responsible sector and “longstanding support of an environmentally effective and economically efficient ETS, as a precursor to a global scheme”.
Said Ridgway: “The 1 January 2012 start date for the EU ETS is fast approaching, but there are still many critical areas which need to be resolved. It’s imperative that the European Commission fixes these issues to ensure the scheme works as always envisaged, and avoids creating unfair market distortions or undermining its environmental effectiveness.”
An internal document produced by the AEA (a full transcript below) details 12 key issues that it believes need to be addressed, including what it sees as an unfair distortion in the share allocation of allowances – which are to be based on 2010 traffic data – as a result of last year’s Icelandic volcano eruption. The AEA estimates the damage could amount to €2 million ($2.7m) in total and lead to Middle East carriers receiving an excess of 144,748 tonnes of CO2, to the detriment of their European counterparts. Given the nature of the volcano’s effects, the AEA says operators from Southern and Eastern Europe also stand to gain at the expense of those in Northern and Western Europe.
The AEA also warns against the potential impact of the legal challenge to the EU ETS made by the Air Transport Association and leading US carriers and the possibility of non-compliance by the operators of non-EU countries that have voiced their opposition at ICAO level to the “unilateral” imposition of the scheme. The threats by the EU to non-compliant operators could also lead to retaliatory measures, argues the AEA. The de minimis exemptions applied by the EU ETS and the de minimis agreement at the recent ICAO Assembly are also potential areas of concern, it says.
The continued delay to the publication of the total carbon emissions baseline and the implications of the extension of the EU ETS to include the operators from EEA States are also noted by the AEA.
The airlines are looking for investment of EU ETS revenues by States in helping the sector reduce its carbon emissions. If aviation’s contribution to society is not to be diminished in the quest for lower environmental impact, instruments such as emissions trading need to be complemented by clean technology, said Ridgway.
“We call on the EU to stimulate the development of step change technologies – putting Europe at the forefront of this new industrial revolution – critical amongst which are sustainable alternative fuels with their obvious potential to reduce aviation’s carbon footprint,” he demanded.
“The Treasuries of EU Member States will be receiving massive incomes from the ETS. It is only common sense that these revenues should provide the investment needed to further the aims of an environmental policy. This includes funding for the SESAR project to provide the next generation of Air Traffic Management, and the research and development effort to break aviation’s current dependency on fossil fuels, stabilise the energy supply chain and deliver more quickly a lower carbon future for our sector.”
Analysis in full by AEA of key outstanding EU ETS technical/legal/MRV issues:
1. RTK 2010 volcanic ash crisis remains unsolved
The eruption of the Eyjafjallajökull volcano has significantly distorted the benchmark for the allocation of allowances to airlines under the EU ETS. Given that tonne-kilometres flown in 2010 will determine the number of allowances allocated to airlines for the period 2012 to 2020, this unequal impact will result in an artificial redistribution of allowances. Given the current low price of carbon, it is estimated that the damage could amount to €2m ($2.7m) in total.
The AEA analysis demonstrated that the issue will lead to distortions between carriers from different regions. Most notably, Middle East carriers will receive an excess of 144,748 tonnes of CO2, to the detriment of their European counterparts. Moreover, the distribution of allowances among European carriers will not reflect their normal aviation activities, since operators from Southern and Eastern Europe were less affected by air space closures than those in Northern and Western Europe. The allocation of allowances based on data flawed due to exceptional circumstances will therefore lead to an unfair and unrealistic allocation of allowances.
2.Baseline is not yet published
The Commission should have published the baseline – the average of the total carbon emissions in 2004/05/06 – in August 2009. This publication has been delayed a number of times. Currently, Eurocontrol and DG CLIMA (European Commission’s DG Climate Action) are still calculating the final figure, including use of APUs in the baseline. Possible timeframe is unavailable.
3. Transposition of Directive 2008/101 into national law by Member States at risk
The original deadline for transposition was 2nd February 2010 but several Member States (including Cyprus, Estonia, Greece, Hungary, Poland and Slovakia) have reportedly still not completed the transposition of the Directive into national legislation. On 24th November 2010, the Commission asked these States to speed up the adoption of the necessary legislative and administrative measures. It is also considering launching infringement procedures against these Member States.
4. List of operators covered by the EU ETS not yet finalised
A new list, taking into account the participation of EEA-EFTA countries, is expected shortly. Issues with regard to the attribution of operators to specific Member States should be brought to the attention of DG MOVE (European Commission’s DG Mobility and Transport).
5. Outcome of ATA legal action against the EU ETS uncertain
In December 2009, the Air Transport Association of America (ATA) and three of its members initiated legal action by claiming that the EU ETS Directive:
is contrary to the principle of complete and exclusive sovereignty;
is contrary to the Kyoto Protocol provision to pursue limitation or reduction of greenhouse gases emissions only through ICAO;
is incompatible with the provisions of the Chicago Convention which preclude the imposition of charges in respect solely of the right of transit over or entry into or exit from a State; and
imposes a tax on fuel consumption and hence violates the Open Skies agreement between the EU and the US.
However, the ATA does not convincingly demonstrate that the EU ETS regulates the flight and manoeuvre of aircraft in the airspace of third States and over the High Seas. In addition, Article 2(2) of the Kyoto Protocol only requires States to negotiate in good faith under the auspices of ICAO. Furthermore, the EU ETS cannot be seen as imposed solely for the right of entry or exit from the implementing States’ airspace.
Even if the chances of success of such legal action against the EU ETS are uncertain, the protests against the scheme highlight the vulnerability of Europe’s unilateral measure. Should legal action against the EU ETS succeed, it is uncertain what the consequences would be for aircraft operators.
It is possible that we will face a judgement restricting the scope of applicability to exclude inbound flights on non-EU carriers, or other variants which could impact the allocation of allowances, but otherwise not prevent implementation of the EU ETS itself on 1st January 2012.
6. Draft Regulation on operating ban creates further concerns
In 2010, DG CLIMA prepared a draft Regulation detailing the procedure to be applied in cases where a State decides to request such a ban. DG MOVE feels that such legislation is not necessary, as the EU ETS Directive already provides a sufficiently clear basis for penalties. The enforcement provisions include fines, impounding, imprisonment, withdrawal of traffic rights, etc.
Bans of non-European aircraft operators will undoubtedly trigger retaliatory measures from their State of registry, possibly including bans on European aircraft operators. Third countries could argue that these are legitimate and legal counter-measures in response to the violation by the EU of the ASAs concluded with the States concerned.
The enforcement of penalties against aircraft operators from non-EU countries is therefore likely to further weaken the legitimacy of the EU ETS, in addition to causing significant economic damage to operators and inconvenience for passengers.
7. Threat of distortive equivalent measures
Where a third country adopts measures to reduce the climate change impact of flights from that country to the European Union, the EU ETS allows the Commission to exclude these flights from the scope of the Directive. All flights from the European Union to that country would be covered by the EU ETS, while all flights into the EU would be covered by the equivalent measure. As of today, no country is reported to have expressed an interest in negotiating the recognition of equivalent measures.
The readiness of the Commission to consider measures other than a cap-and-trade mechanism raises serious concerns:
taxes and other forms of levies do not offer the same environmental benefits as emissions trading – they reduce the financial capacity to dedicate resources to environmental initiatives;
taxes and other forms of levies do not take into account the economic and social pillars of sustainable development; and
the potential recognition of measures that do not have an environmental effect at least equivalent to that of the EU ETS would be detrimental to the environmental objectives of the EU, hence the EU ETS would no longer constitute a blueprint which can be “exported” to non-EU countries.
Transparent and comprehensive criteria must be defined which include the need to stimulate investment, and to promote sustainable development, cost-efficiency, reinvestment of revenues and non-discrimination.
8. Extension of the EU ETS to new States
With the extension of the scope of the EU ETS to include the 3 EEA States, a number of new operators will enter the EU ETS. DG CLIMA expressed its intention to make arrangements for these new operators to apply for free allowances based on their aviation activities in 2011. As the free allowances that will be allocated to other operators will be based on their aviation activities in 2010, the different treatment may be discriminatory and distortive, in particular considering that the data for 2010 was flawed by the volcanic ash crisis.
Furthermore, the necessity to make “special arrangements” for aircraft operators when the EU ETS’ geographical scope is extended is another example of the lack of adaptability and unpredictability of the EU ETS.
9.De minimis exemptions – ICAO
In October 2010 the ICAO Assembly adopted Resolution A37-19 which notably provides for exemptions from market-based measures for operators from States whose international aviation activities are below a threshold of 1% of global RTK. However, as the Resolution is not legally binding, the application of the EU ETS will not be affected as the EU ETS will take precedence.
10.Threat of de minimis exemptions – EU ETS
The EU ETS contains a de minimis clause which exempts operators whose total annual CO2 emissions are below 10,000 tonnes per calendar year and, more importantly, operators who do not fly more than 2 flights a day to or from EU airports (fewer than 243 flights per period for three consecutive four month periods).
Even if such a de minimis clause does not constitute an overt discrimination, in certain cases the material differences between the carriers may not be sufficient to provide an objective justification for a difference in treatment. Furthermore, in addition to any possible discrimination against European carriers, the de minimis exemption provided for in the EU ETS may distort competition to the detriment of European operators.
The rule is inherently discriminatory where, because of the limited threshold, emissions could be exempted on a country-pair basis. For example, all AEA airlines will be covered whereas their competitors which fall below the threshold on a certain country-pair or city-pair route would not be covered. If all carriers subject to such cases of de minimis were encouraged to file for exemption, the total amount of emissions from non-EU carriers not covered by the EU ETS would no longer be de minimis but could well be de maximis.
11. Legal issue of distorted RTK 2010 data
Due to the volcanic ash crisis, revenue tonne-kilometre (RTK) data for 2010 will not reflect normal aviation activities but will be significantly distorted as a consequence of exceptional events. Adjustment through a light-handed legislative process is the highly preferred option.
However, no light-handed provision is foreseen in Directive 2008/101, and the adjustment of RTK data or the allocation of allowances in consideration of exceptional circumstances is not envisaged. Moreover, Directive 2008/101 is drafted in such a way as to prevent the substitution of data for performed aviation activities by planned aviation activities. Airlines have the obligation to submit RTK performed. Any decision which would provide otherwise, including an amendment of the MRV guidelines, would thus be contrary to the Directive.
In order to adjust the RTK data to take account of the volcanic ash crisis, a formal amendment of Directive 2008/101 would be needed. However, this would open the door to further, undesirable, modifications, such as the auctioning of 100% of allowances and re-introduction of the multiplier. Climate Commissioner Hedegaard has indicated she will pursue this avenue if and when challenged by the industry.
12.Issue of non-EU countries which refuse to comply with the EU ETS provisions
At the ICAO Assembly many non-EU countries clearly stated that they were not willing to comply with the provisions of Directive 2008/101 and would hence simply ignore the existence of the EU ETS. It is not clear what the consequences of such a situation would be.
If the European Court of Justice (ECJ) upholds the EU ETS in its current form, the EU would most probably try to ensure compliance by non-EU countries by enforcing the measures stipulated in the Draft Regulation on the operating ban, thus creating all sorts of problems for the industry.
However, if the ECJ judgement highlights flaws in Directive 2008/101, the EU would be vulnerable to counter measures from non-EU countries based on possible violation of ASAs, etc. In addition – if legally feasible – the EU could be inclined to ‘recalibrate’ the EU ETS in such a way that the legal requirements of the ECJ are met.