Aviation in the EU ETS: ECJ clears the runway

The inclusion of the aviation sector from January 1st 2012 onwards represents a new step in the implementation of the EU Emissions Trading Scheme (EU ETS)…

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Following the steady expansion of the EU ETS’ scope to new Member States since 2005, the European Commission is now adding around 5,000 European airline companies and foreign companies that do business in Europe to the industrial and manufacturing sectors.

As the aviation sector aims to reduce its emissions by 3% compared with its average historical (2004-2006) annual emission in 2012, and then by 5% per year between 2013 and 2020, it will receive 214.7 MtCO2 in allowances in 2012, and then 210.3 MtCO2 per year from 2013 onwards. This allocation will be mostly free of charge, although 15% of the allowances will be put up for auction, and 3% will be set aside for new operators. The aviation sector will therefore become the second largest economic sector in the EU ETS, after energy generation.

Against the current backdrop of an economic recession in Europe, a low carbon price, and discussions regarding the potential intervention of the European Commission on the allowance supply, this addition to the sectors included in the scope of the EU ETS could reinforce the EU’s CO2 emission reductions policy, which is based on a carbon price, in three ways:
-The aviation sector is likely to represent a new source of demand for allowances. Assuming that emissions increase by 2.5% per year on average between 2012 and 2014, and then by 2% per year over the period between 2015 and 2020, airline companies would already be short of allowances in 2012. Their overall requirement, in terms of the allowances to be covered by purchases or market credits, is estimated at 420 MtCO2 over the period between 2012 and 2020, i.e. 52.4 MtCO2 per year. The use of Kyoto credits, for up to 15% of the 2012 emissions cap, and then for 1.5% of certified emissions between 2013 and 2020, provides the opportunity to import up to around 63 MtCO2 between 2012 and 2020. Nonetheless, airline companies are expected to enter the market gradually, depending on their emission coverage needs, even though the low carbon price is already encouraging them into action.
-The inclusion of the aviation sector is first and foremost a test of the EU’s proactive climate policy to engage other countries to develop a climate policy, without breaking international law. Indeed, around two-thirds of the airline companies affected by the EU ETS are of non-European origin. Some countries, especially the United States and China, are opposing the system, based on two arguments: the unilateral and extra-territorial nature of the system, and the infringement of the founding UNFCCC principle of “common but differentiated responsibilities”. In response to the legal appeal launched by US airline companies, the European Court of Justice confirmed that the system was compatible with international law in late December 2011. Despite this verdict, the Chinese Air Transport Association (CATA) let it be known at the beginning of 2012 that it would continue its legal action against the EU.
-This sector extension also amounts to a first practical experiment regarding the benefits of an emission allowance trading system for the sector, which could provide material for the International Civil Aviation Organisation (OACI)’s discussions on the possibility of drawing up a future sector agreement.

At term, it is still possible that the European Commission could exempt the airline companies of major emitting countries if they adopt domestic measures equivalent to the EU ETS. This would nevertheless be a significant victory for European climate policy and its leadership.

Émilie Alberola January 2012

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