UK: EU "Stops The Clock" On The ETS

Last Updated: 18 December 2012
Article by Mark Bisset

On 12 November 2012, the EU Climate Commissioner Connie Hedergaard announced that the Commission planned to "stop the clock" and suspend application of the EU Emissions Trading Aviation Directive 2008/1001 as regards flights to and from third countries on both EU and non-EU airlines. This means that the Directive will not be enforced and payment will not be required by EU regulatory authorities in respect of extra-EU flights by airlines which exceed their emissions limit and are unable to buy additional allowances.

Application of the Directive has been suspended until an ICAO Council meeting next autumn to allow a global market based initiative, which appears to have been gathering momentum, and which creates a chance to develop a global solution. The Directive has been widely criticised by non-EU airlines and governments and was subject to a challenge by the Air Transport Association of America (now Airlines for America) before the English High Court which was referred to the Court of Justice of the European Union (CJEU). In December 2011 the CJEU Grand Chamber held that the Directive was not contrary to the Chicago Convention and general principles of international law.

The Commission states that it is taking this step to allow ICAO a chance to put a global ETS solution in place but if this comes to nothing by next autumn the Directive will be reactivated.

Further details are expected from the Commission on how this "Stop the Clock" procedure will be implemented, but we set out in this brief note the answers to some of the main questions that have been raised since the announcement was made, so far as information is currently available.

Which flights are impacted?

The suspension applies to all "international" flights whether operated by EU carriers or non-EU carriers. An "international" flight is any flight to and from the EU, which includes for this purpose the EEA states (Norway, Iceland and Liechtenstein) and (from 2014) Switzerland. The Directive continues to apply to all intra-EU flights whether operated by EU carriers or non-EU carriers.

How will this be implemented?

In the press announcement on 12 November, Ms Hedergaard explained that whilst she has had regular consultations with the Member States prior to making the announcement, there would need to be a formal proposal which the European Council, the European Parliament and Member States would all have to endorse. However, she also stated that she would not have made the press announcement if she was not confident of their support.

The principle is that the Aviation Directive will remain fully in force but will be supplemented by a derogation that covers international flights. This will be done by way of adding a paragraph to Article 16 of the Directive so that action will not be taken against aircraft operators which do not meet the Directive's reporting and compliance obligations arising before the ICAO Assembly in respect of international flights. The only condition for this is that they have not received, or have returned, free allowances received in 2012 for such flights. Compliance sanctions will not be taken in case of the non-reporting of such emissions.

This derogation will need to follow the EU's co-decision procedure, and the Directorate-General for Climate Action (DG CLIMA) is hopeful that it will be ready by April 2013. There remains, however, the possibility that the European Council or, more likely, the European Parliament, may raise objections. Further, as the scheme is implemented through national legislation in each Member State, the derogation will have to be implemented nationally as well, so potentially there could be delay at the local level.

There is also, of course, the possibility of legal challenge to the validity of the derogation, in many respects relying on the mirror image of some of the arguments deployed by non-EU airlines first time round.

How does this impact the auctioning of allowances?

The percentage of auctioning remains at 15%. Consequently, a proportionately lower quantity of aviation allowances will be auctioned for 2012.

What about allowances that have been issued for compliance in April 2013?

According to their first calculations, the Commission expects to withdraw about two-thirds of the allowances that they had initially allocated to the 2012 period. The details will be published in the coming weeks by the Member States, and operators will be notified individually by their supervising authority.

What about small emitters?

A small emitter is a non-commercial air transport operator whose flights in aggregate emit less than 10 000 tonnes of CO2 per annum, or which operates fewer than 243 flights per period for 3 consecutive 4-month periods. A small emitter can take advantage of a simplified procedure to monitor its emissions of CO2 from its flight activity. We understand that small emitters will still be bound to comply with the EU ETS despite the derogation, but will only need to pay for emissions in Europe. More detail is awaited.

What does the Commission expect from the 2013 ICAO Assembly?

No alternative scheme has yet been agreed by ICAO and no alternative scheme is going to be in place for a few years yet, so what does the Commission expect from the 2013 ICAO Assembly? The Commission expects that the Assembly should agree on a global market-based measure (MBM) with a realistic timetable and road map for it to apply, alongside endorsing an ICAO framework for facilitating states' application of MBMs pending application of the global measure. There should also be "progress" on the development, submission and review of State action plans.

What if the 2013 ICAO Assembly fails to reach a satisfactory agreement?

The compliance obligations are being deferred and not waived. Should the meeting not produce the desired outcome, the deferred obligations are said to apply "automatically". This begs a number of questions, the answers to which are not yet clear. If the Assembly fails to reach an agreement, how is an operator to meet its 2012 obligations? How is an operator to retrospectively monitor its emissions unless it has already captured the relevant data in compliance with the scheme? (We would note here that airlines would be well advised to continue their monitoring and reporting). Does the deferral mean that the 2012 obligations must be met by surrendering the necessary quantity of allowances by the next compliance deadline, i.e. by 30th April 2014 (for 2013)? If so, what types of allowances may be used? May Phase 2 (2012) allowances be used to meet a Phase 3 (2013 – 2020) obligation, notwithstanding that the EU Directive states that units issued for Phase 2 may only be used in that period? Phase 2 EUAs are expected to be cancelled and replaced by Phase 3 allowances by July 2013, will this proceed? As always, the devil is in the detail and further legislation (following the co-decision procedure) may well be required if ETS obligations are re-activated; in the meantime, operators are left to face a lengthy period of uncertainty.

What about the US ETS Prohibition Act? (the "Thune" legislation)

On 3 December President Obama signed into law the bill banning US airlines from compliance with the ETS. This Act empowers the US Department of Transport to enact the necessary secondary legislation, but DG CLIMA believes that the DoT will not do it, at least not until October 2013, which is the date of the ICAO General Assembly. It should be noted that the Act does not preclude US carriers from respecting their ETS obligations for intra- European flights. In a rehearsal of the arguments made in the ATA case, DG CLIMA believes that the Act is in breach of the EU – US Open Skies Agreement of March 2010.

Is the "Stop the Clock" decision discriminatory?

The "Stop the Clock" measure seems to defeat one of the key principles underpinning the validity of the original inclusion of aviation in the EU ETS, that of non-discrimination in the treatment of operators. We may recall with a touch of irony the words of Advocate General Kokott in rejecting the ATA's legal challenge to the extra-territorial features of the ETS: "If the EU legislature had excluded airlines holding the nationality of a third country from the EU emissions trading scheme those airlines would have obtained an unjustified competitive advantage over their European competitors...Such favourable treatment would have been unjustified in view of the objective of Directive 2008/101 and such a course of action would not have been compatible with the principle of fair and equal opportunity laid down in Article 2 of the Open Skies Agreement".

Arguably hub and spoke international airlines based in the EU will be the biggest losers as a result of this interim measure. For example, a passenger flying from Brussels to New York via Heathrow will face an EU ETS charge on his or her flight to London. However, a passenger flying to New York direct from Brussels will face no emissions charges at all.

Conclusion

This is a dramatic U-turn by the Commission and may well have arisen due to political pressure which has been brought to bear by many third country carriers and their governments, for example from the US, China, Russia and India. The decision will in many ways be welcome to airlines but its economically discriminatory effect will be troubling to EU airlines and it raises some very difficult questions of detail to which the answers are not presently clear. It is to be hoped that the further details to be given in forthcoming EU technical briefings will provide sufficient clarification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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