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In less than ten weeks, aviation will be brought within the EU emissions trading scheme (EU ETS), which will place a cap on international transport-based emissions for the first time anywhere in the world.
The European Commission claims that applying the scheme to aviation will save 72 million tonnes of carbon dioxide a year (roughly twice the annual emissions of Austria) by 2020 in passenger and cargo aircraft emissions, achieving a 26% reduction compared with ‘business as usual’.
Despite ongoing questions from various organisations about whether it really goes far enough, the EU ETS is the only regulatory game in town if emissions from this rapidly growing sector are to be kept in check, because all other international efforts to secure a global deal have proved ineffective.
Merits aside, serious doubts remain during the countdown to commencement. Pressure on the EU to abandon the scheme has been mounting, with numerous airlines, industry associations and even foreign governments now entering the fray.
The past year has seen an international crescendo of threats, ranging from trade wars to boycotts. One high-profile court case seeking to overturn the scheme is under way in the Court of Justice of the European Union (although a crucial advisory opinion recently fell in favour of the commission) . The US House of Representatives has also proposed a legislative bill directing the US Department of Transportation to prohibit US airlines from participating. But the EU shows no signs of backing down, and regulatory authorities in member states are pressing ahead with preparations. Despite their public protestations not a single major carrier in Europe or beyond has failed to jump through the precursory compliance hoops.
The scheme commences on 1 January 2012, when any airline with a domestic or international flight landing or taking off from an EU airport will be obliged to surrender EU carbon allowances (EUAs) equalling that flight’s CO2 emissions. They will be given most of the EUAs they need, but will need to buy some at auction or in the open market. The idea is to make the sector monitor and curb its emissions, which have been rising sharply for decades. If airlines want to increase emissions they will have to purchase more EUAs (or equivalent international offsets) to cover them. If they cut emissions significantly, they can sell surplus EUAs on the market.
In 2009, European carriers were assigned to individual member states for regulation, according to where they are registered; Ryanair, for example, now Europe’s biggest carrier, was assigned to Ireland. Non-European carriers were assigned to whichever EU state had the biggest share of their landings and take offs. In total, 891 operators – mostly small, with very few aircraft – were allocated to the UK for regulation under the Environment Agency.
Voluntary scheme
The UK’s biggest aviation name, British Airways (BA), also participated in the UK’s pilot voluntary emissions trading scheme, which was set up in 2002. BA says this has left it well placed compared with many other carriers. At the time, the scheme was the first multi-industry carbon trading system in the world. The idea was partly to allow government and corporate early movers to gain trading experience and to establish London as a centre of emissions trading.
BA was the first airline to take part, allowing it to establish emissions monitoring, data collection and reporting capabilities early. The UK ETS did not initially incorporate transport, but BA lobbied to have aviation included.
Andy Kershaw, BA’s climate change manager, gives an example: “One of the [EU ETS] requirements is to not only monitor fuel for the plane whilst it’s flying, but also for when it’s on the ground – more complicated than you might think. By coming up against these issues early, we had already done a lot of the leg-work. This is one of the reasons the scheme hasn’t been over-burdensome on us, whilst for some smaller carriers it probably has.”
BA has set up a small company-wide working group to manage compliance, with two members of staff spending “significant” time on it. It has collected much of the EU ETS data required “as a matter of course”, with processes now simply having to be formalised, says Mr Kershaw. The process has been “fairly smooth, with no significant challenges or problems verifying our data”.
But BA is just one of over 4,000 aviation companies participating in the scheme. For smaller carriers, the experience will have been very different. “Big airlines typically operate more modern fleets which capture a lot of the required data automatically, making compliance a lot easier,” says Barry Moss of aviation consultancy Avocet. “But with low awareness levels of what is actually required – let alone the resources to deliver it – it’s the smaller operators that will suffer.”
Since 60% of the emissions covered by the aviation scheme come from just 40 companies, small carriers will not be affected in the same way. Peter Hind, managing director of RDC aviation, a consultancy specialising in the EU ETS, says: “Costs for smaller carriers will come from developing ETS strategies and monitoring systems, rather than from buying the small numbers of allowances they’ll need.” All carriers have to get their emissions accredited by an independent verifier.
However, a reported bottleneck in this process does not seem to have eased much since last year, when Sunil Chadha, BA’s programme and compliance manager, told ENDS many operators were struggling to find an accredited verifier. A spokeswoman for SGS United Kingdom – BA’s verifier – recognises that meeting March 2011 deadlines was a problem and suggests two reasons for this: carriers engaging verifiers too late and a lack of available verifiers. UKAS, the body responsible for accrediting verifiers, has accredited three new bodies for the UK aviation sector in the past year, bringing the total to nine.
A spokesman insisted there had been no delays in processing applications, implying a simple shortage of applicants. Once the scheme is up and running, operators must surrender each year’s worth of EUAs by 30 April the following year, with a €100 penalty for each tonne of CO2emitted without an allowance. To put this in perspective, a Boeing 747 flying from London to New York emits about 170tCO2. “Fines of that magnitude could put any airline out of business,” says Mr Moss of Avocet. In extreme cases of non-compliance, the Environment Agency has the power to detain and sell aircraft. This raises some potentially awkward questions. “Around a third of the world’s aviation fleet is leased,” Mr Moss points out. “The risk of the agency impounding and selling non-complying aircraft significantly increases exposure for banks and financiers, who are leasing aircraft to carriers.
At the moment, the finance sector doesn’t seem too concerned, but I’m not so sure… I can see the scheme having big implications for them,” he adds. Controversy The way in which EUAs are assigned to airlines has proved highly controversial. As the sole benchmarking year, 2010 saw airlines perversely incentivised to maximise their share of emissions and thus the number of free EUAs they received. But 2010 saw unprecedented disruption to some carriers’ operations due to the ash cloud from Iceland’s Eyjafjallajokull volcano. Figures from consultancy RDC Aviation suggest UK aviation emissions fell by about 4% that year and by 15.5% in Ireland.
Another area of controversy is how revenues generated from EUA auctions to airlines will be spent. Airlines, industry associations, green NGOs and MPs have all argued that these should be ring-fenced for climate-related projects. “Channelling revenues into environmental measures, such as the development of advanced biofuels, is not only the right thing to do [but] would also help appease some of the opposition who are understandably complaining that EU states are simply using the ETS as a windfall,” says BA’s Mr Kershaw. However, the Treasury has stayed firm on its position of not hypothecating revenues for specific purposes. Most opposition to the EU ETS concerns the costs that will be imposed on the aviation industry, estimates of which vary wildly.
A recently published study by Thomson Reuters Point Carbon and RDC Aviation estimates additional costs of €1.1bn for airlines in the scheme’s first year accumulating to €10.4bn by 2020. This is based on an assumption that the industry will need to purchase 88 million EUAs in the first year – on top of the estimated 176 million it receives free – at the recently stabilised trading price of €12. But Steve Ridgway, Virgin Atlantic chief executive and chairman of trade body Association of European Airlines (AEA), estimates significantly higher costs of €3.1bn annually. This compares with the €82bn combined annual turnover of the 36 carriers represented by his organisation.
Much will depend on the extent to which carriers make use of their quotas to import international Kyoto Protocol offsets (certified emissions reductions or CERs) through the Clean Development Mechanism. Irrespective of the exact costs, Simon Buck, chief executive of the British Air Transport Association, says: “At a time of record increases in fuel prices and a £2bn per year air passenger duty (APD), the ETS is a very unwelcome additional cost if we’re not going to see an equivalent reduction in APD.” It remains to be seen how much of this extra cost will be passed onto passengers and cargo shippers.
According to analysis by the Carbon Trust in 2009, the EU ETS may actually give airlines a windfall. This is because, like their land-based counterparts in the power sector, they are likely to pass the full market price value of allowance costs onto passengers, despite being given most of them for free The airlines and their trade associations strongly reject the idea that they will find it easy to pass on the costs of the permits they have to buy, let alone those they are given free. “To refer to carbon permits as revenue is totally absurd,” says Ulrich Schulte-Strathaus, AEA secretary general. Avocet’s Mr Moss is also sceptical, suggesting that the industry’s high elasticity of demand would be a key factor. “Most airlines will feel pressured into absorbing the bulk of the costs. People switch carriers for as little as €10, especially in the budget sector – it’s that competitive.” Individual airlines, such as BA, are unwilling to reveal the level of premium they might pass through to their passengers.
But in a highly competitive industry, with profit margins as narrow as 0.7% for some members of the International Air Transport Association, many carriers will find themselves caught between a rock and a hard place: increase ticket prices and risk losing passengers, or take a direct financial hit they cannot afford. Debate still rages as to whether the scheme will meaningfully reduce emissions.
Roughly 3% of EU greenhouse gas emissions come from aviation (6% for the UK), but as economies decarbonise and aviation continues to grow, particularly in developing countries, the sector will account for an increasingly large share.
Critics point out that the EU aviation cap is a fraction of that applied to other land-based industries. While other sectors are being required to reduce their emissions by 20% relative to 1990 levels by 2020, aviation’s required reduction is just 5%, and this is relative to its 2004-06 baseline – roughly double its 1990 levels. And unlike ground-based installations, the sector is being given the vast majority of its permits for free. “Both the cap and the grandfathering [free permit allocation] levels seem remarkably generous compared to other sectors,” says Tim Johnson, director of green group Aviation Environment Federation. Furthermore, the ‘cap’ does not actually place a cap on Europe’s aviation emissions. If airlines flying to and from the bloc find their emissions keep growing, they can buy EUAs from other industries covered by the EU ETS in order to cover their excess CO2 True, the EU ETS places an overall cap on total emissions from all participants across all sectors – so the more EUAs airlines buy up, the more other sectors will have to cut their emissions.
But aviation can also cover any rise in emissions by purchasing cheaper, international CO2offset credits from outside of the EU. The scheme also fails to cover the industry’s other, non-CO2 global warming impacts, which are uncertain but significant. The UN’s Intergovernmental Panel on Climate Change (IPCC) estimates that aviation’s total warming impact is between two and four times higher than that of its CO2 emissions alone. This is the result of the altitude-sensitive warming effects of NOx emissions, jet engine contrails and cirrus clouds. When the scheme was negotiated between the European Commission, Parliament and Council, the parliament wanted it to cover all aircraft greenhouse gas emissions – not just carbon.
The council of ministers disagreed, and a compromise to draw up separate legislation to cover other greenhouse gas emissions was reached. But such legislation has not materialised. “Across those three areas – the cap, the grandfathering and the sector’s non-CO2 impacts – there is certainly scope to make the ETS more stringent in future,” says Mr Johnson. It represents “a legitimate first step, but with major scope for improvement.”
Despite the scheme’s flaws, the EU remains a world leader and pioneer in applying a mandatory cap-and-trade scheme to international aviation. More than a decade of discussions at the International Civil Aviation Authority, the UN aviation body, have done nothing to effectively curb the sector’s fast-rising CO2 emissions. The UN’s Framework Convention on Climate Change (UNFCCC) has been equally ineffective and there is little faith that this will change soon. “There is a broader question about the global appetite for taking serious measures to deal with climate change,” says Mr Kershaw. “This isn’t just about aviation – the wider discussions within the UNFCCC process are moving very slowly”.
Despite this, he remains optimistic. “Countries can and do accept that climate change is an issue that must be dealt with. They must eventually find a way of coming to an agreement regarding dealing with climate change, including aviation.”
Please note this article has been republished with the kind permission of the ENDS Report.