Emissions Trading
What is ETS?
The EU Emissions Trading Scheme (ETS) is a market based “cap and trade” mechanism for controlling emissions. These are capped at an overall set limit but (unlike say a straight tax), by converting into tradable allowances, there is built-in flexibility for emissions savings to be made where most cost-effective to do so.
Under the UN’s Kyoto Protocol, the EU is required to cut its CO2 emissions from 1990 levels by 8% by 2012. Phase 1 of the ETS, established under EU Directive 2003/87/EC, commenced in 2005 covering energy production, iron and steel production, mineral, pulp and paper.
The European Parliament and EU Governments decided that aviation would be included in the EU ETS from 1 January 2012, enabling the aviation sector to take responsibility for its carbon emissions in the most cost effective way.
As well as the 27 EU Member States, Iceland and Norway are also included. This affects ALL flights in, out and within these countries, including those operated by non-EU airlines.
Background
The main contributors from aviation to climate change are CO2, NOx emissions and water vapour which in certain conditions can assist in the formation of contrails and cirrus clouds. Efforts by engine and aircraft manufacturers have reduced CO2 emissions for jet engine-powered aircraft by 70% per passenger km over the past 50 years. Manufacturers have committed to ACARE targets: a 50% reduction in CO2 and an 80% reduction in NOx by 2020 relative to 2000 aircraft and engines. Airlines are investing in new technology with a 25% improvement in fuel efficiency by 2020 through better flight operations.
Aviation is frequently considered to be the largest contributor to climate change. In reality, it accounts for 2% (and growing) of global CO2 emissions and 6% of all UK emissions.
Governments have looked at taxing fuel. Fuel taxation for domestic flights already exists in some countries. However, fuel taxes face legal difficulties in the context of international aviation: Article 24 of the Chicago Convention prohibits duties on fuel in transit, and most bilateral Air Service Agreements prohibit taxes on fuel uplifted in either contracting state.
Under the ETS, airline emissions will be capped at 97% of their average 2004-2006 levels in 2012 and at 95% from 2013. Airlines will receive 85% of their emissions allowance for free in 2012 and will have to buy, at auction, the other 15%. This reduces to 82% for 2013-2020. Another 15% of allowances will be auctioned each year. From 2013, the remaining 3% of allowances will be allocated to a special reserve for distribution to fast growing airlines (such as those from emerging economies) and new entrants to the market. Allowances can be bought and sold across the EU. Airlines can buy credits from other industries but can only sell to other airlines.
Airline position
Many non-EU airlines have complained about aviation’s entry into the EU ETS. US airlines filed a lawsuit disputing the inclusion of US airlines in ETS, on the basis that it violated well established principles of customary international law by applying to aviation in third countries’ airspace and over the high seas, the Chicago Convention, the Kyoto Protocol, the EU-US Open Skies Agreement, and that such extra-jurisdictional matters should be regulated by ICAO.
On 21 December 2011, the European Court of Justice upheld the Advocate-General Opinion that inclusion of aviation in the ETS is valid as it doesn’t infringe existing international agreements or sovereign rights.
The US House of Representatives has adopted a bill (HR 2594 - the EU ETS Prohibition Act of 2011) prohibiting US airlines from complying with EU legislation on the ETS, which is making its way through the US legislation process.
Other countries including China, India and Russia are also opposing the scheme with protests and threats of retaliation.
How will it impact on air fares?
The proportion of free allowances allocated to each airline will be based on tonne-kilometre data so airlines will fare differently according to factors including the efficiency of their aircraft fleet, flight distances and load factors.
Given that airlines will receive different proportions of free allowances and the different business models (full-service scheduled, no-frills and charter), the extent of cost pass-on to passengers is expected to vary by airline.
Passengers might expect that in the first year of operation, ETS on an intra-EU return flight will likely cost a passenger an estimated £4, with ETS on return flights to destinations outside the EU an estimated £16. By 2020, these figures could rise to £10 and £60 respectively.
Where will the revenues go?
The revenue raised by auctioning allowances under ETS is expected to be used by Member State governments to tackle climate change. However, UK Government policy is not to earmark tax revenue for particular expenditure.
Emissions Trading is a devolved matter. In England and Wales, ETS is regulated by the Environment Agency; in Scotland by the Scottish Environment Protection Agency and in Northern Ireland by the Northern Ireland Environment Agency.
ABTA’s position
ABTA has long supported that aviation should pay its proper environmental cost and said that once aviation joined the ETS, APD should be scrapped.
11 January 2012
