October 31, 2013
On 16 October 2013, the European Commission (EC) brought out a proposal which would extend the European Union greenhouse gas (GHG) Emissions Trading System (ETS) to cover GHG emissions from the aviation sector occurring or associated with flights in European regional airspace. The proposal is a demonstration of the EC’s continued desire to push forward the ETS generally, with its ultimate aim potentially being to link the ETS with compatible carbon market systems existing and emerging around the world in the coming years.
The ETS is a market-based GHG cap-and-trade regime that covers certain industrial sectors in the European Economic Area (EEA) countries. The program sets an emissions “cap” on the total amount of GHG that can be emitted by covered entities during an applicable compliance period. Such covered entities are allocated or purchase through auction emission allowances up to their individual allowance budget cap. Every year each regulated company must surrender the amount of allowances or their equivalent (e.g. offsets) necessary to cover its emissions. Companies that have reduced their emissions below their allotted budget can trade or sell excess allowances that are not needed for retirement with other entities. In recent years, due to fundamental market design errors, the ETS market has suffered due to allowance over-supply.
If the new EC proposal for aviation is adopted in its current form, from 1 January 2014 until 2020 any flight to and from a country outside the EEA would be subject to the ETS, but solely for emissions attributable to that portion of the flight that is within EEA airspace. All emissions from flights solely within the EEA, which began to be regulated under the ETS in 2012, would continue to be covered.
Despite its scope, the EC proposal represents a retreat by the EC from its original position on emissions from international flights — i.e. regulating emissions attributable to the entire duration of domestic and international flights on routes to, from or between EEA airports. In April 2013, the EU established a moratorium on the enforcement of any ETS requirements for flights from or to non-EEA countries, starting with the first compliance year of 2012 for the aviation sector. The EC likely took this initiative as a “goodwill gesture” to allow time for the International Civil Aviation Organization (ICAO) to reach a broader agreement to tackle aviation-based greenhouse gas emissions worldwide rather than on a country-by-country or region-by-region basis.
There are therefore two aspects to the retreat; if the new proposal is passed into law it would limit the ETS so as to cover only the part of international flights within EEA airspace, and it would mean that international flights were fully exempted from the ETS for 2013 (in addition to the suspension of enforcement for 2012).
Nevertheless, even this seeming retreat is controversial because it follows hard on the heels of the 4 October 2013 framework agreement established by the ICAO to set upon developing a global aviation sector GHG reduction regime by 2020. Various actors have indicated that the EC proposal risks undermining the multilateral ICAO negotiations. Several legislators and industry groups are pressing the European Parliament (EP) and Council, the EU bodies which will now have their say on the proposal, to amend the new EC proposal.
The ICAO framework intends to design an aviation carbon market to address only post-2020 emissions — while the EC, as it has consistently indicated it would, considers it necessary to push forward with a regional aviation GHG mitigation scheme in the meantime. EC officials have stated that the proposal will spur momentum toward a global carbon market led by ICAO, and that it is fully consistent with ongoing international climate talks to develop market infrastructure from the ground up – which may become part of an agreement with binding legal force by the end of 2015. The EC has also pointed out that covering international flights arriving or departing from the EEA is entirely lawful under EU law, international law, the Chicago Convention on International Civil Aviation and relevant international Air Service Agreements.
Opponents of the EC proposal are therefore somewhat stuck; the current EP term ends early in 2014, so there is a short window to approve this aviation-focused legislation. If this is not done, then the existing law, with a 30 April 2014 deadline for surrendering allowances relating to 2013 emissions, will resume effect. This would include international flights for their entire duration.
An important player in this will be Peter Liese, a German Member of the EP (MEP) responsible for analysing aviation and ETS legislation. He is a strong supporter of the ETS covering all flights within European airspace. However, the aviation proposal may be impacted politically by the impending EU trilogue discussions over finalizing an overall ETS market “backloading” reform package (e.g. delaying the auctioning of some emission allowances (EUAs) to provide short-term EUA price support). How those market reforms proceed is unclear, and there is internal opposition within the German government.
Regardless, there will be, to say the least, vigorous discussion on the revised EC aviation proposal and extensive time for industry and stakeholder input before the proposal becomes law. In the meantime, operators of intercontinental flights (as well as companies with substantial air transport supply chains into and out of Europe) remain unsure about their ETS compliance obligations for 2013.