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Emissions Trading Scheme: Time stands still

The European Commission has stopped the clock on its Emissions Trading Scheme. Can a global agreement be reached before it starts ticking again?

On 12 November 2012, the European Commission proposed that all intercontinental flights should be suspended from the European Union Emissions Trading Scheme (EU ETS) for a period of one year.

The move has been universally welcomed. The European Commission has done well to raise the environmental issue. And the EU ETS—which has been up and running for eight years—is enormously important, representing some 85% of the international carbon trading market, with 30-40 million allowances traded each day.

But the decision gives governments an invaluable window of opportunity to agree a comprehensive international framework to address aviation’s CO2 emissions and resolve the increasingly contentious issue of how to apply market-based measures (MBMs) to international aviation. 

Stopping time

“ICAO has been mandated to explore two ideas,” says Paul Steele, IATA Director, Aviation Environment. “The first is the feasibility of some form of global MBM. There are three possible ways of doing this: carbon offsetting; carbon offsetting with revenue; and a full, global ETS.”
With a straightforward carbon offsetting scheme, an airline would have to buy carbon credits to cover any excess emissions from an agreed baseline. Monitoring, reporting, and verification procedures would be subject to global standards, as would the environmental schemes supported.

This could be combined with extra revenue. A further charge would be linked with the amount of credits being bought. The extra revenue would then be used as a cash pot to support further environmental mitigation projects.

A third suggestion is a non-discriminatory, non-distortive, global ETS. This would have to include commitments on how to spend any money raised and would obviously mitigate any sovereignty issues.

None of the above options has yet gained prominence. What is certain is that the more cost-effective the instrument, the greater the reductions that can be made for the same cost. “The three proposals can all support the industry target of carbon-neutral growth from 2020,” says Jonathon Counsell, Head of Environment for British Airways. “We believe a pragmatic first step enabling the industry to meet this target will be some form of global carbon offset scheme.”

Harmonizing market-based measures 

The second idea that ICAO will explore is a MBM rulebook. “This will guide those countries that wish to implement their own MBM in the absence of a global agreement on a single scheme,” says Steele. “It will ensure the harmonization of environmental and administrative measures between current and future MBMs.”

Schemes covering Australia and intra-Europe flights are among those that must be incorporated in an overall framework that ensures airlines pay only once for their emissions. “It is important to understand that this is not just about the EU ETS,” adds Steele. “We don’t want a future patchwork of MBMs because that leads to confusion, duplication, and extra costs.”

Discussions will also be focused on the appropriate legal structure and how any guidelines would be implemented and enforced. There are questions about whether a local MBM would apply to all carriers in a particular country or just departing flights or even flights within a specified airspace, for example.

Ideally, an airline should be able to report to only one regulator and needs to be confident that all other airlines operating the same flights are regulated in a consistent manner.

Reasons to be cheerful

A lot remains to be done before the ICAO Assembly in October 2013 and many observers have suggested that countries will have to move out of their comfort zone if an agreement is to be reached.

But Steele is optimistic. “There has been great progress already,” he says. “Most importantly, there is recognition that a regional basis as typified by the EU ETS is not the way forward. Moreover, ICAO has identified three possible options for a single scheme and the policy issues that need to be resolved. So an enormous amount of work has been done already. It is a complicated process, of course, but negotiations are active at a high level and that is a positive sign.”

No major announcements are imminent, but there are further meetings in January and March prior to October’s Assembly session. The group of countries discussing these fundamental policy issues include Australia, Belgium, Brazil, Canada, China, France, India, Japan, Mexico, Nigeria, Russia, Saudi Arabia, Singapore, Uganda, the United Arab Emirates, the United Kingdom, and the United States.

For its part, the EU has made clear that there will be an automatic snapback to its previous position if there is no global agreement. Several states had signaled their strong objections to the EU ETS, however, so how possible the snapback will be is questionable.

Nevertheless, the wording of the original directive to include international aviation hasn’t been changed; the EU is merely choosing not to enforce its rules until October.

Connie Hedegaard, European Commissioner for Climate Action, has made plain the consequences for any failure to reach a consensus. “Let me be very clear,” she says. “If this exercise does not deliver, and I hope it does, then needless to say we are back to where we are today with the EU ETS. Automatically.”

The EU has also made clear what it expects from a global agreement. A realistic timetable and roadmap is the bare minimum, whatever the exact style of the final outcome. The adopted framework should urge states to avoid market distortions, limit administrative complexity, and promote comprehensive coverage of international aviation emissions.

The EU also expects there to be progress on the development, submission, and review of state action plans, outlining states’ respective policies and actions, including annual reporting on international aviation CO2 emissions to ICAO.

Of course, it is not only the EC that is pushing for a solution. All parties agree that MBMs are an important component in the industry’s four-pillar environmental strategy, alongside improved technology, operations, and infrastructure.

Growing passenger demand for the benefits of aviation will mean the industry’s gross emissions will grow after 2020. Capping emissions at 2020 levels through MBMs and other measures will be a key ingredient of sustainable growth.


Keep monitoring

While the clock has stopped on the EU ETS, airlines cannot afford to stand still in case intercontinental flights are integrated back into the EU ETS in November 2013.
Airlines operating intercontinental flights will still need to submit a verified 2012 annual emissions report. Non-compliance penalties will not be enforced, however, as long as the airlines return any allowances allocated to them.
It is business as usual for airlines operating intra-EU flights. A verified 2012 annual emissions report is required by 31 March 2013, and allowances corresponding to the 2012 emissions would have to be surrendered by 30 April 2013.

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