On January 1 2012, the aviation sector is set to become part of the European Union’s Emissions Trading Scheme (ETS). The move has been on the cards since 2008, but as the start date nears, the voices of protest against it – from airlines and governments outside the EU – grow ever louder.
From the start of next year, airlines will have to account for the emissions produced on flights to and from EU airports. In the first year of the scheme, airlines will be given allowances matching 82 per cent of their historic emissions, with 15 per cent auctioned and the remaining 3 per cent held in a special reserve for new entrants.
Under the Kyoto Protocol, the International Civil Aviation Organisation (ICAO) is responsible for reducing the environmental impact of the industry which would prefer a global scheme. “Market-based measures require international consensus because of the nature of aviation,” says Ulrich Schulte-Strathaus, secretary general of the Association of European Airlines.
The EU proposed extending the ETS to aviation because of what it saw as a lack of progress on the issue at the UN body. Despite the insistence on the need for a worldwide scheme, there is still no global agreement. ICAO’s “roadmap for action” merely invites its members to submit – by June 2012 – action plans outlining “the specific voluntary measures they intend to take in order to improve efficiency”.
For the EU, the inclusion of aviation in the ETS is a matter of common sense. “Firm action is needed,” climate commissioner Connie Hedegaard said earlier this year. “Emissions from aviation are growing faster than from any other sector, and all forecasts indicate they will continue to do so under business-as-usual conditions.”
Greenhouse gas emissions from aviation have more than doubled since 1990 and are forecast to continue to rise, says David Symons, director at WSP Environment & Energy, a consultancy. “Aviation accounted for 9 per cent of UK greenhouse gas emissions in 2005, and this is expected to increase to 15 per cent by 2020 and 29 per cent by 2050.”
But the plan has aroused strong opposition. The US, Canada, China, India and Russia have all protested against the plan, while the US Air Transport Association has attempted to stop it going ahead through a case at the European Court of Justice, where it has argued that tackling emissions must be done on a global basis and that the EU scheme was illegal.
“ATA challenges EU ETS because it is a unilateral measure, which has not been agreed by countries outside the EU, yet nevertheless applies EU law to third country carriers in third country airspace,” the association told the court.
However, in testimony to the House of Representatives Transportation and Infrastructure Subcommittee on Aviation, Nancy Young, ATA vice-president, environmental affairs, spelt out one of the main bones of contention for those opposed to the ETS: that the EU is taxing airlines and not using the money for environmental improvements. The ATA estimates that “US airlines will be required to pay more than $3.1bn into EU coffers between 2012 and year-end 2020”.
Elsewhere, Emirates airline has estimated the initiative will cost it €500m-€1bn, Lufthansa says it will cost €350m per year and China says its airlines will have to pay €123m in the first year, a figure that will triple by 2020.
Even though the Commission insists that all the money the scheme raises should be spent on reducing climate impacts, “none of the monies collected by the Europeans are required to be used for environmental purposes”, Ms Young told the committee, which has proposed a bill that would prevent US airlines from complying with the ETS.
In one sense, the opposition from non-EU airlines is irrational, says Anna Sargeant, assistant director of PwC Strategy.
“It is a charge that everyone flying to Europe has to pay, but for US and other airlines, this makes up a far smaller proportion of their business than for European airlines, which puts non-EU airlines at a competitive advantage.”
The assumptions upon which some of the cost projections are based are unclear, according to Andy Taylor, who deals with aviation and the ETS for verification company Bureau Veritas. “If you think about rules of the free allocation system, you do wonder how some of the public statements on potential financial impact have been calculated,” he says. For every $1,000 spent on fuel, at current prices the total cost of the CO2 allowances would be about $60, and airlines will get more than four-fifths of their allowances for nothing.
It is also important to remember that airlines “do have the option of doing something about it – something that is very much in their interests”, adds Mr Taylor. By becoming more efficient, the airlines will make huge savings on fuel costs that will far outweigh any costs of the ETS.
The European Commission argues that to exclude non-EU airlines from the ETS would be discriminatory to European companies and it is standing firm in the face of the growing pressure. “The Commission’s position has not changed. We are not modifying or amending our adopted legislation. There’s no plan B as we are confident that ECJ will side with us and understand our arguments,” a spokesman says.
Brussels also points out that airlines can be exempt from the scheme if their governments introduce “equivalent measures” to cut pollution from aviation, although it remains deliberately vague on what such measures might be.
“It’s up to the third country to table the measure it feels more comfortable with and then the Commission and the member states will analyse it and decide whether its equivalent environmental impact is guaranteed,” the spokesman adds.
Assuming the scheme goes ahead, it is likely to intensify pressure for efficiency improvements not just within aircraft and through an increased use of biofuels but also in making routes more efficient through initiatives such as the Single European Sky, which aims to co-ordinate the management and regulation of EU airspace.
European hubs may lose out to rivals in the Middle East in the battle for long-haul flights to and from Europe. There may also be an increase in global dealmaking and alliances as airlines try to diversify from European markets. The creation of IAG through the merger of BA and Iberia is an example of this, says PwC’s Ms Sargeant.
As far as the carbon markets are concerned, the arrival of the aviation sector is welcome, says Alban Brindle, chief operating officer of the London Energy Brokers Association. “We are looking forward to the inclusion of airlines because it will provide a broader range of participants and will provide additional dynamics to the market.”
However, the move is likely to have little effect on the carbon price because the market has already factored in the extra demand, says Andreas Arvanitakis, associate director at Point Carbon.
Once the sector’s inclusion in the ETS is a reality, some of the opposition could recede, he adds.
“The experience of other sectors is that once they have factored in the extra costs, then engaging in the market as effectively as possible becomes a priority. Already the big airlines are pretty advanced in their preparations.”