Trading aviation emissions

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Trading aviation emissions

Posted 1/02/2012 by Anita Talberg

For the first time, Qantas and other airlines are being held accountable for greenhouse gas emissions from their international flights—at least for those flights using an airport within the European Union (EU). The move by the EU to price and restrict greenhouse gas emissions from European flights has been a contentious one. This FlagPost explains the basic mechanics of the EU’s decision and highlights some of the issues being raised.

The latest report from the Intergovernmental Panel on Climate Change anticipates that by 2050 international and domestic aviation emissions will be around five percent of what global annual ‘man-made’ emissions were in 2000. International aviation was excluded from the Kyoto Protocol because of negotiating difficulties. The responsibility of delivering an emissions reduction policy response was referred to the International Civil Aviation Organisation (ICAO). By 2005, with aviation emissions increasing and no likely outcome from the ICAO process, the EU began investigating alternative options and finally resolved to bring aviation into the EU emissions trading scheme (ETS).

Bringing aviation into the ETS
The EU ETS has existed since 2005 and is currently in its second phase. The Aviation Directive amends the EU ETS legislation to include aviation activities from 1 January 2012. For this year, aviation emissions will be capped at 97 per cent of the average annual aviation emissions that occurred in the period 2004-06. After 2012, the percentage will be reduced to 95.

Each year, airlines will receive emissions allowances—known as EU Aviation Allowances (EUAAs)—up to their cap. One EUAA represents the right to emit one tonne of greenhouse gases. If an airline exceeds its cap it will need to purchase supplementary allowances from the market. In theory, airlines will choose to reduce their emissions if they can do so at a cost below the price of allowances, and then sell surplus EUAAs at a profit. However, in practice, at least at first, the price of fuel is likely to have a stronger impact on such decisions than that of EUAAs.

At the beginning of each year, at least 15 per cent of EUAAs will be auctioned by EU Member States. The rest will be provided free of charge with a small percentage being kept aside for new market entrants. The penalty for non-compliance is €100 per tonne of carbon dioxide equivalent plus the cost of allowances not surrendered. The Aviation Directive exempts from liability any non-EU countries that have adopted ‘measures, which have an environmental effect at least equivalent to that of this Directive’.

Airlines fly off the handle
The US was the first and loudest opponent to the EU’s decision to bring aviation into the ETS. The U.S. House of Representatives passed a Bill ‘to prohibit operators of civil aircraft of the United States from participating in the EU ETS’ and a similar Bill was introduced into the Senate. US Secretaries of State and Transport sent a letter to the European Commissioner urging the EU to end plans to include US airlines in the ETS, or the US would be ‘compelled to take appropriate action’.

American Airlines, United Continental and US airline industry association Airlines for America (A4A) brought a case against the EU before the London High Court of Justice. They claimed the Aviation Directive breached the Chicago Convention, the EU-US Open Skies Agreement and customary international law. The case was referred to the European Court of Justice (ECJ), which ruled on 21 December 2011 in favour of the EU.

Conclusions from the ECJ’s process have not deterred the China Air Transport Association (CATA), acting on behalf of four Chinese airlines, from wanting to sue the EU. Some fear a trade war could develop as Chinese airlines refuse to pay their dues to the EU scheme.

Following the ECJ’s ruling, a number of US airlines decided to pass on some of the anticipated costs to passengers by increasing the price of flights to and from Europe by US$3 per ticket. Qantas will also increase ticket prices by up to AU$5 and Europe-based low-cost airline, Ryanair, has announced a 25p surcharge for each passenger on all flights. One Asian airline, AirAsia X has gone so far as to cancel some of its European flights; although whether the EU ETS is solely responsible for this decision is questionable (increased UK air passenger duty taxes are also a factor).

Staying grounded
The European Commission estimated (based on higher permit prices than exist today) that the EU ETS’ impact on the price of airline tickets should be less than €12 per passenger on intercontinental flights and less than €9 for internal European flights. Independent news and consulting service, Thomson Reuters Point Carbon, estimated that the shortfall between free allowances and those needed for compliance will cost about €1.4 billion in 2012, and may reach €7 billion by 2020. However, some airlines will do better out of it than others with 23 per cent borne by the top 10 airlines. Independent aviation market intelligence group CAPA is concerned that smaller operators will struggle to deal with the added requirements on data collection and reporting and the impacts on route and fleet planning.

Despite the strong resistance, the EU is confident that airlines will comply (as was reflected in the EU Commissioner’s letter of response to the US Secretary of State). The cost for non-compliance has been set high and airlines risk a possible ban from operating in the EU. Qantas has accepted its fate and A4A, after losing the ECJ case, said its airlines would ‘comply under protest’ while the group reviews its legal options.

Initially, trading will be the only way for airlines to comply with EU ETS. In the medium term, airlines will explore ways to reduce fuel consumption by altering routes and building more efficient aircraft. Biofuels are another attractive option. Using pure biofuels may reduce emissions by two per cent but they are more costly than traditional aviation fuels and depend heavily on the availability of sustainable biomass production. The highest biofuel blend approved for the aviation industry is currently 50 per cent. This blend was used by Lufthansa on 12 January 2012 for a trial flight from Frankfurt to Washington. The flight was successful but the fuel cost was more than twice that of conventional aviation fuel. Lufthansa is keen to see a 100 per cent blend approved.

Will the idea take off?
Some airlines are embracing the scheme. While stating that it believes regional markets distort the competition, Lufthansa is one of several airlines already buying or planning to buy allowances (especially as permit prices are currently so low). Some airline partnerships, such as Star Alliance and SkyTeam, are looking to buy as groups, or give each other preferential trading rights. Some economists are suggesting that airlines could actually make windfall profits from it all.

Discussions are now ramping up on how to deal with international shipping emissions. Maritime emissions were also excluded from the Kyoto Protocol and have not been properly addressed on a global level. The EU has floated the idea of extending its ETS yet again. The early results of the aviation experience may help inform negotiations on shipping.

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