European Union: Taking Off? The Inclusion Of Aviation In The EU ETS

Last Updated: 21 April 2009
Article by Michael Woods and Becky Clissman

Introduction

The EU decided recently that the aviation industry should be covered under the EU Emissions Trading Scheme (EU ETS) to help meet emission reduction obligations under the Kyoto Protocol. Inclusion within the scheme will result in a further set of regulation for aircraft operators with potentially serious penalties for those who do not comply. This article explores the main provision of the new directive that sets out how the EU ETS will apply to aircraft operators and suggests some steps that aircraft operators should take in the run up to 2012 when the scheme will apply to them.

Overview of the Kyoto Protocol, the EU ETS and how the impact of emissions from aviation has been treated so far

The major feature of the Kyoto Protocol is that it sets binding targets for 38 industrialized countries and the EU for reducing greenhouse (GHG) emissions in the commitment period that runs between 2008–2012. Such countries (listed in Annex B to the Protocol) are obliged to reduce their collective emissions by at least 5 per cent during 2008–2012 from a 1990 baseline (5.2 per cent is the average). The EU approved the Protocol in 2002 through Decision 2002/358/EC. The EU has a burden sharing agreement that distributes between Member States the EU's commitment under the Protocol to reduce its emissions by 8 per cent on 1990 levels by 2008–12.

The Kyoto Protocol provides that countries must meet their targets primarily through national measures but it also allows three market–based mechanisms as additional ways to meet the targets: international emissions trading between government of Annex B countries of emissions allowances, the Clean Development Mechanism (CDM) and Joint Implementation (JI). The latter two are project–based mechanisms where projects that reduce emissions (eg energy efficiency or renewable energy projects) are set up in a developing country in the case of CDM, or another developed country in the case of JI, with investment from a country with emissions reduction targets under the Kyoto Protocol. Carbon credits (certified emission reductions (CERs) and emission reduction units (ERUs)) that are generated from such projects can be used by the country investing in the project to meet its reduction targets or can be traded in the carbon market.

Emissions from aviation are not covered by the targets in the Kyoto Protocol. The International Civil Aviation Organisation (ICAO) was tasked with developing a programme of action regarding international aviation's impact on climate change in 1997. It has produced a number of reports and held a number of meetings but a plan of action is still outstanding. Owing to the lack of progress, the EU has decided to take unilateral action in respect of emissions from aviation.

In 2003, the EU set up an emissions trading scheme as a way to put Member States on a path to compliance with the Kyoto Protocol. The principal piece of legislation to set up the EU ETS is Directive 2003/87 (the 'Emissions Trading Directive'). There is also a second directive (2004/101/EC) known as the Linking Directive which amends the Emissions Trading Directive and establishes that some Kyoto mechanism credits (CERs and ERUs) can be used to meet the obligations of entities covered by the scheme. Member States have introduced legislation to implement these Directives.

The EU ETS is currently in its second phase (2008–2012) having started with an introductory phase which ran between 2005–2007. The EU ETS covers large entities involved in electricity generation and heavy industry in a variety of sectors including production and processing of certain metals and the mineral industry.

The scheme currently works as follows: each Member State sets an overall domestic cap on CO2 emissions from relevant industry operators. Each industry operator (known as an installation) is required to limit its CO2 emissions based on a mostly free allocation of this domestic cap (represented by carbon credits called EU Allowances (EUAs) equating to a tonne of or an equivalent amount of CO2). An operator must surrender a sufficient number of EUAs following the end of each scheme year to cover its actual emissions during the scheme year (which it has monitored and had verified by an independent auditor). If an operator has a shortfall of EUAs it will have to pay an excess emissions penalty (which was €40 in the introductory phase and which is now €100) but it must still surrender sufficient EUAs. Allowances can be purchased from other operators which have met their reduction targets (perhaps by introducing energy efficiency or renewable energy measures) and therefore hold a surplus of EUAs.

Following a review of the operation of the scheme during the introductory phase, it was recognised that an excessive number of allowances were allocated by most Member States which resulted in a price collapse at the end of the first scheme year. The Commission has therefore proposed amendments to the scheme which were approved by the EU Parliament in December 2008 and which will take effect in 2013 (ie at the start of the 3rd scheme phase). The main amendments relate to the expansion of the scheme to cover other greenhouse gases and additional sectors, a transition to the auctioning of allowances from free allocation and the setting of a central EU–wide cap rather than national caps set by each Member State.

Details of how aviation will be incorporated in the EU ETS

In October last year, after a couple of years of intense negotiations, the EU Council approved Directive 2008/101/ EC (the 'Aviation Directive') which will amend the Emissions Trading Directive to include aviation within the scheme. Member States have to implement the Aviation Directive by 2 February 2010.

The key points in the Aviation Directive are explained briefly below.

Who and what is covered by the Aviation Directive?

All emissions from flights arriving at or departing from EU airports from 1 January 2012 will be covered. Detailed guidance from the Commission on how this will be covered is due out in August this year.

The scheme will cover aircraft 'operators' which are defined as those entities operating an aircraft at the time it performs flights arriving at or departing from an EU airport. If the operating entity is not known or identified, the owner of the aircraft will be deemed to be the aircraft operator. The scheme will cover aircraft operators operating in the EU regardless of whether they are based in the EU.

Under the Aviation Directive, each Member State will take responsibility for administering their native airlines' involvement in the EU ETS, as well as the international airlines that fly to their country more than other Member States.

As required by the Aviation Directive, the Commission recently published an initial assessment by the air traffic association, Eurocontrol, on which Member States would be the relevant Member State to administer the EU ETS arrangements in respect of each aircraft operator which is likely to be included within the EU ETS. This indicates that the UK will oversee about 780 aircraft operators, France will oversee about 515 aircraft operators and Germany 290. The Commission will update the list each year by 1 February to include other aircraft operators that have subsequently come within the EU ETS.

Exceptions

There are some limited exceptions for the following types of flights:

  • official missions of states that are not Member States
  • public service flights eg police military or customs flights
  • emergency flights - eg those for search and rescue, firefighting, and humanitarian flights
  • training flights performed to obtain a licence or rating
  • flights for scientific research or to check, test or certify aircraft or equipment, and
  • 'de minimis' flights eg where the take–off mass does not exceed 5,700 kg, where there are less than 243 flights per period for 3 consecutive 4 month periods or where emissions are lower than 10,000 tonnes per year.

The cap

For the first year, 2012, the Aviation Directive sets a cap of 97 per cent of historical emissions (ie the mean average of annual emissions from aircraft arriving at/ departing from EU airports in 2004–2006). For the next EU ETS phase (2013–2018) and subsequent phases, the cap will reduce to 95 per cent multiplied by the number of years in the phase. By August this year the Commission will have decided what the historical aviation emissions are, based on the best available data. The setting of a cap determines the amount of CO2 that can be emitted by aircraft operators across the EU. This figure then translates into the number of allowances (each equivalent to a tonne of CO2) that need to be surrendered by the aircraft operators each year.

Auctioning of allowances, the obligation and the use of auction revenues

The Aviation Directive provides that from 1 January 2013 15 per cent of aviation allowances (AAs) will be auctioned with the remaining 85 per cent allocated free to aircraft operators based on a benchmark. An aircraft operator will have to apply to their administering Member State for the free allocation of AAs ahead of 2012 and then at the beginning of each phase by submitting verified tonne–kilometre data for the flights it performs that arrive at/ depart from EU airports in the monitoring year  (ie an application will need to be made ahead of 2012 for free allocation of AAs for that year and then in the year ending 24 months before the start of the 2013-2018 phase and subsequent phases). The UK Government has specified that Aircraft Operators allocated to the UK who wish to apply for free allocation of AAs, will need to submit a benchmarking plan detailing how they will monitor tonne–kilometre data in 2010 by 31 August 2009 and they will then need to monitor their emissions in 2010 in accordance with their submitted plan and submit a verified report of these emissions to the UK regulator by 31 March 2011.

Member States will submit details of the applications that they receive from Operators to the Commission. The Commission will then decide the total quantity of AAs to be allocated for free and to be auctioned for a scheme phase as well as the benchmark to be used by Member States to allocate AAs for free, 15 months before the phase starts. 12 months before each phase is due to start, each Member State will use the Commission's benchmark to calculate and publish what AAs will be allocated to the aircraft operators whose applications it sent to the Commission during the phase and each year of the phase. The competent authority of each Member State (the Environmental Agency in the case of the UK) will then issue the AAs to each aircraft operator by 28 February 2012 and by 28 February each year thereafter.

A special reserve of 3 per cent of AAs will be set aside for allocation to operators who are new entrants (ie those aircraft operators who start performing flights that arrive at/ depart from EU airports after the monitoring year) or aircraft operators whose tonne-kilometre data increases by an average of more than 18 per cent annually between the monitoring year and the second calendar year for the phase. Again, aircraft operators who wish to obtain an allocation of AAs from the special reserve must apply to the competent authority of its administering Member State and the application will be referred to the Commission which will decide a benchmark for allocation of the special reserve for Member States to use in calculating the AAs due to the aircraft operators who submitted applications for AAs.

A Regulation providing details regarding the auctioning process will be adopted by the Commission (no date is given for this in the Aviation Directive). Although the Aviation Directive acknowledges that Member States can determine the use to be made of auction revenues, it states that such revenues should be used to tackle climate change in the EU and elsewhere including (i) by adaptation to the impacts of climate change especially in developing countries, (ii) by funding research and development of mitigation and adaptation particularly in respect of air transport for low emission transport, (iii) the cost of administration of the  scheme, (iv) by funding contributions to the Global Energy Efficiency and Renewable Energy Fund and (v) by funding measures to avoid deforestation. Member States will be required to report to the Commission on how they use auction revenues.  Like some other Member States, the UK Government is opposed to hypothecation of auction revenues as a matter of policy.

Aircraft operators will be obliged to submit allowances equivalent to their verified annual emissions from flights arriving in/ departing from EU airports by the end of April each year. Aircraft operators whose emissions exceed the AAs that they have been allocated for free or have bought at auction will have to either purchase AAs from other aircraft operators or purchase EUAs from other EU ETS installations or (to a limited extent) purchase CERs/ ERUs in the secondary market. In 2012 up to 15% of the number of allowances required to be surrendered by an aircraft operator can be CERs/ ERUs (the amount will be determined at least 6 months prior to the start of subsequent phases as part of the general review procedures in the EU ETS Directive). It should be noted that installations of industries already covered by the EU ETS will not be able to use allowances issued to aircraft operators to meet their obligations under the EU ETS.

Sanctions for non–compliance

As with the installations of industries already covered by the EU ETS, aircraft operators that fail to submit the correct number of allowances that correspond to the total emissions from flights arriving in/ departing from EU airports by 30 April in relation to the preceding calendar year, will face an excess emission penalty of €100 for each tonne of emissions not covered by an allowance. Payment of this penalty does not remove the need to surrender the right number of allowances which must be purchased and then surrendered in addition to payment of the penalty. Member States are also required to publish the names of non–compliant aircraft operators.

There is also a more draconian penalty which aircraft operators may face if they persist in their non-compliance following enforcement action by Member States. In these circumstances Member States may request that the Commission imposes an operating ban on the relevant aircraft operator. If the Commission decides to impose such a ban, all other Member States are obliged to give effect to the ban. 

Implementation of the Aviation Directive in the UK

The Department of Transport and the Department of Energy and Climate Change (DECC) issued a consultation paper together with draft Regulations in March this year regarding the transposition of the Aviation Directive into UK law. The consultation and the draft regulations focus on setting up a system for aircraft operators to apply for free allocation of AAs and introducing requirements on aircraft operators to submit plans (an emissions plan) which will detail how they will monitor emissions and requirements obliging them to monitor their emissions from 1 January 2010 in accordance with their submitted emission plan. The consultation also proposes civil penalties for failure to comply with the monitoring and reporting requirements (eg failing to submit an emissions plan will attract a fine of £5,000 with an additional daily penalty of £500 after a notice of the penalty has been issued up to a 90–day maximum so that the maximum fine could amount to £50,000). It is anticipated that the Regulations will be in force at the beginning of August this year.

This consultation paper is the first of a two-stage process for the transposition of the Directive; a second consultation paper and further draft regulations will be consulted on later this year regarding the remaining elements of the Aviation Directive including the obligations on aircraft operators regarding surrender of allowances, auctioning of AAs, the special reserve for new aircraft operators and those with increased tonne-kilometre data, the use of CERs and ERUs and the EU–wide operating ban.

What the aircraft operators should be doing now

The following is a list of points setting out some of the activities that aircraft operators should be taking now to ensure that they will be in compliance with the EU ETS in 2012.

  • Check whether you are covered by the Aviation Directive and what needs to be done to comply with it and the implementing legislation in the Member State that you have been allocated to.
  • Gain an understanding of how the EU ETS carbon market operates.
  • Collect flight and emissions data in order to be able to submit an application for free allowances by 31 August 2009.
  • Consider what expertise and resources are required by your organisation to ensure ongoing compliance with the Aviation Directive and the relevant implementing legislation and consider whether outsourcing or training of the relevant personnel is the best course of action for your organisation.
  • Prepare a trading strategy and prepare for participation in the auction process.
  • Start to work out the costs associated with compliance and ensure that these costs are appropriately budgeted form, and
  • Follow the implementation of the Aviation Directive in your administering Member State and ensure you are up to speed with all the relevant details.

Conclusion

It is anticipated that the legal validity of the Aviation Directive will be challenged.  Several international airlines have indicated that they will take legal action to block the Directive on the grounds that it breaches international aviation laws and World Trade Organisation (WTO)/ General Agreement on Tariffs and Trade  (GATT) rules. It is also understood that a coalition of US airlines is currently preparing a legal case against their inclusion in the EU ETS. It is not clear what stance the new Obama administration will take and whether it would support any such action by US airlines. Previously the Bush administration had warned that the inclusion of non–EU aircraft operators in the EU ETS could breach the Chicago Convention which governs international civil aviation and that it would take action under the Convention in the event that the EU went ahead with its proposals. However now that the Obama administration is considering proposals for a federal emissions trading scheme for the US it is not so clear how the US will react to the Aviation Directive.

For most airline operators and their passengers, however, the key question is not whether the Aviation Directive will be challenged but what impact this directive will have on the cost of flights. The Commission has previously estimated that the inclusion of aviation within the EU ETS would add approximately €40 to the cost of a long-haul return flight and €9 to a short–haul return flight. Given the current economic conditions and concerns regarding what impact they will have on airline operators, any additional costs will be a key concern for the aviation industry and related industries. 

Given the relatively short timeframe for implementation and compliance, it is considered that aircraft operators covered by the scheme should start working now towards compliance in order to minimise the likely additional cost and to best take advantage of the commercial opportunities which emissions trading can represent. 

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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