EU’s aviation scheme hits turbulence

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.”

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