The EU has decided to include aviation in the European Emissions Trading Scheme (ETS). The system covers passenger airlines and cargo carriers both from Europe and from Non-European countries. The first flights under the EU ETS will take place from 1 January 2012 but first obligations call for action on the part of operators as early as mid 2009. Changes will be required across the full range of activities in the organisation. Aircraft operators need to treat their inclusion in the EU ETS as a strategic business issue rather than a mere matter of environmental compliance. Our research indicates that aircraft operators are still far from being ready for the ETS. The EU Commission has not created a new emissions trading system for aviation, instead, it has adopted the basic structure of the existing system. Experiences from the running ETS can thus be used by aircraft operators to get prepared.
What is the European emissions trading scheme?
The European emissions trading scheme (EU ETS) is an existing cap-and-trade scheme that sets a cap on total allowed emissions for a number of industries. Industrial companies currently under the scheme can sell surplus allowances if the free allocation exceeds their emissions level, and need to reduce emissions or buy additional allowances if they lack enough allowances. By setting a tight cap, regulators create a shortage of allowances, which drives the price for allowances.
What does emissions trading scheme mean for aviation?
From 2012, aircraft operators will be covered by this scheme, with a cap at 97% of 2005 emissions levels. From 2012 onwards, operators will have to surrender one allowance for every tonne of CO2 emitted on a flight to and from (and within) Europe. A number of allowances will be issued for free. Allocation of these free allowances is based on a benchmark relating to transported persons and goods in the base period 2010. A further portion of allowances will be auctioned: initially at 15% of all allowances, auctioning may increase in later years. Operators emitting more than their allocated amount of CO2 will need to reduce emissions or - more likely - procure extra allowances. A special reserve of 3% of the total quantity of allowances will be allocated to new aircraft operators and operators with sharp growth.
Where can allowances be purchased?
EU emission allowances (EUA) can be purchased from other parties subject to emissions trading (i.e. other aircraft operators or utility and industrial companies). This can be either done directly or anonymously on exchanges. Airlines are also allowed to use emission credits from emissions reductions projects (CER, certified emission reductions from the clean development mechanism (CDM) or ERU, emission reduction units from the joint implementation (JI)). The use of CERs and ERUs is limited to 15 % of the number of allowances carriers are required to surrender.
Who is affected?
Affected are aircraft operators (as defined by ICAO designator) of all flights departing from and / or arriving at an airport in Europe, whatever their nationality. This covers passenger and cargo flights in aircraft with a maximum take-off weight of more than 5700kg. A set of special flights (e.g. to remote regions, training flights, etc.) will be altogether exempt from the scheme.
Which authority is responsible for affected carriers?
Every aircraft operator will be administered by one EU member state. This will be the Member State that granted the operating licence to the operator or the Member State that the greatest amount of emissions can be attributed to. The EU will publish the administering member state for each aircraft operator before February 2009.
How are CO2-emissions monitored and reported?
Emissions are to be calculated as product of fuel consumption and emission factor separately for each flight and each fuel type. Fuel consumption also includes fuel consumed by the auxiliary power unit. The emission factors are about 3.15 t CO2 per t of jet kerosene and 3.1 t per ton of aviation or jet gasoline following the 2006 IPCC Inventory Guidelines. Further details about emissions monitoring will be published in the "monitoring guidelines", which are currently being prepared at a European level. Only aggregated emissions for flights within a member state or from and to a member state need to be reported to the competent authorities.
How is free allocation determined?
Free allocation is determined by the total amount of tonne kilometres of an aircraft operator in the base year 2010 and a benchmark factor. Tonne kilometres for the purpose of free allocation are defined as the product of distance and payload, where "distance" means the great circle distance between origin and destination plus an additional fixed factor of 95 km and "payload" means the total mass of freight, mail and passengers carried. Operators can choose between the actual or standard mass for passengers and checked baggage contained in its mass and balance documentation or they can use a default value of 100 kg for each passenger and his checked baggage. Further details about monitoring of transport data will be published in the respective "monitoring guidelines".
What are the financial implications?
Given that the cap on aviation emissions relates to emission levels of 2005 and that the sectors' emissions are expected to grow to 140% of 2005 level by 2012, and a 15 % auctioning level, the sector in total will receive in 2012 only about 60 % of the allowances needed to compensate for the prospective emissions. This shortfall equals costs of about 3.5 billion Euros per year for the aviation sector assuming a price level of 30 Euro per allowance. The impacts on a specific airline will be different for the affected operators, as specific emission levels vary widely between aircraft. Aircraft operators flying more modern fleets may have a substantial advantage. In addition, specific emissions are often proportionally higher on short distances, so aircraft operators flying a greater number of short-haul flights may find themselves more greatly impacted. Occupancy rates especially in the baseline period will also have a substantial impact. Passenger carriers who are able to achieve higher occupancy rates and freight carriers with greater loads may have an advantage over competitors, as they receive a greater number of free allowances.
What happens in case of non-compliance?
In case of non-compliance, operators face a penalty of € 100 per missing allowance on top of the obligation to purchase (and surrender) these missing allowances. Additionally, administering member states may request that the EU Commission imposes an operating ban on the aircraft operator.
What are the next duties for operators?
The first compliance period will start in 2012. However, the benchmark for free allowances will be based on data from 2010. As a result, operators need to have reliable systems in place to generate the baseline data by 2010 – and monitoring plans for allocation will have to be approved as early as mid-2009. Emissions will also need to be reported by 2010 two years before the first flights. The respective monitoring plan has to be submitted for approval to the competent authority in advance.
Does data need to be verified?
Both transport data for baseline allocation and for CO2 emissions reports have to be verified by an independent auditor before being submitted to the competent authority.
What are further challenges for operators?
The challenges of the ETS for aircraft operators go beyond the immediate legal obligations.
The costs for emission rights need to be considered in the short-term as well as in the long-term decisions of aircraft operators. Whether surplus costs can be passed through to customers depends upon the competitive position of the company compared with other operators, as well as to alternative modes of transport. The possibilities of reducing carbon costs by investing in new fuel-efficient aircraft need to be considered at an early stage of investment planning. Carriers need to check if contractual relations (especially regarding leasing arrangements) are appropriate for ETS consequences. Purchasing emission rights (EUA, CER, ERU) and managing carbon products with the associated specific risks requires detailed know-how of carbon markets and suitable market models. Furthermore, the approaching ETS scheme poses legal, tax and accounting problems. Finally, affected aircraft operators need to adapt their organizational structure and processes to the new obligations.
What is the legal background?
The legal background for the EU ETS is the directive 2003/87EC which has been transposed into national law from EU member states. This directive will be amended to include aviation. On 8 July the European Parliament (EP) held the second reading of the proposed directive to include aviation in the European emissions trading scheme (ETS). In this reading the EP approved the text with a number of amendments that it had negotiated in advance with the Council. The Council is set to formally approve the same text within four months - and after this formal approval the directive will enter into force. From that date onwards EU member states have up to one year to transpose the directive into national law. In short, in roughly a year from now there will be legislation in force to make aviation subject to emissions trading. Meanwhile, comprehensive provisions on monitoring and reporting ("monitoring guidelines") are being prepared at a European level. These will set out the principles of how to monitor and report emissions and transport data. There is some controversy if European regulation on emissions trading is also applicable to carriers from Non-European countries.
