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ETS Confusion Reigns

Special Report - European Aviation

In January 2012, aviation will be integrated into the existing European Union Emissions Trading Scheme (EU ETS) by Directive 2008/101/EC. Flights that arrive at, or depart from, an airport in the EU will be subject to the scheme. This will include non-EU and EU aircraft operators.

Such an encompassing remit has led to a legal challenge by the Air Transport Association of America (ATA). The High Court of England and Wales has allowed ATA to proceed with the challenge, which will now pass to the European Court of Justice in Luxembourg. As yet, it is not known when a final ruling will be announced, although some time before the end of 2011 appears likely.
“The unilateral extension of the EU ETS to international aviation is contrary to international law both as an extraterritorial action and an improper tax or charge,” says ATA Vice President, Environmental Affairs, Nancy Young. “It also clearly stands in the way of an appropriate and effective global solution.”

Compliance with the EU ETS has already begun for airlines. Albeit under protest, all airlines are doing their best to submit the appropriate data. Even here, however, there is a large degree of uncertainty. The methodology is extremely confusing. The Commission has insisted on using the existing Monitoring, Reporting and Verification (MRV) requirements that were originally developed for fixed installations such as power stations. These are unnecessarily complex and burdensome for airlines.

For example, airlines account for their fuel by volume but the MRV requirements are specified by mass. Local temperature fluctuations mean fuel density can vary by as much as 5% and there are a number of other complications in converting the figures. Equally important, with 2010 acting as a baseline year for determining allocations, the ash cloud crisis has caused a significant distortion. Exactly how this will be remedied has yet to be decided.

Meanwhile, the draft Auctioning Regulation is now under review and is due to be finalized by year-end. Auctions for aviation allowances will start in 2012 and will take place at least once every two months.
The whole affair must also be seen in the context of the bigger environmental picture. A regional scheme is clearly impractical in light of aviation’s global nature. The solution to aviation’s environmental issues is in a global approach. And should the EU ETS go ahead for aviation then other so-called green taxes need to be revoked.

For example, in June, Germany introduced a new $1.2 billion (EUR1 billion) “environmental” departure tax with no guarantees that the tax would be rescinded when the EU ETS for aviation starts in 2012. This is totally contradictory to the purpose of paying for carbon emissions through the EU ETS. In effect, airlines will end up paying over and over again for the same emissions. The UK Air Passenger Duty, which has risen some 325% in four years, was also implemented as an environmental measure. EU ETS coordination with other measures seems to be in short supply.

“EU ETS regulations are a shambles,” says Paul Steele, IATA Aviation Environment Director. “We need governments to agree on a global solution to address aviation emissions. The prospect of double taxation in Europe is not only an EU problem but one that affects airlines worldwide.”

Bernard Gustin, co-CEO of Brussels Airlines, also points out that European carriers will be at a disadvantage compared with international competitors. “The EU ETS could unintentionally support some non-EU carriers in drawing passengers away from the EU markets and rerouting transit traffic through their airports,” he says. “These connections are longer than direct flights from Europe, which results in a higher fuel consumption and rising CO2 emissions.”

Europe Lags Behind

IATA’s latest industry outlook paints a more positive picture for Europe. But the region’s figures still put it at the bottom of the global table.

Traffic into Europe is the main driver behind the mini recovery. This has been boosted by the low currency, which has stimulated air cargo in particular. Improvement will continue into 2011 but it won’t be enough for a complete reversal of fortune. From a loss of $1.3 billion in 2010, Europe will break even in 2011.

On the positive side, Europe is the only region expected to increase GDP growth next year compared with 2010 and fuel prices should remain in a predictable band. But inventories will have been restocked while consumer spending will remain slow due to high unemployment rates. Europe will also have significant capacity coming online next year, which will keep yields depressed.

“Europe suffered heavy losses in 2009 and it is the only region expected to lose money in 2010,” says Brian Pearce, IATA Chief Economist.  “2011 offers some respite but there is a long way to go to recover lost ground.”

Passenger Rights

Passenger rights in Europe have a long and complicated history. The trend shows little sign of abating as they are again under review. Whether or not this is a good thing is open to interpretation. “After the ash cloud, compensation regulations for flight cancellations and delays were applied in a way never intended by the original legislation,” says Monique De Smet, IATA Director for Government and Industry Affairs in Europe. “But it is always possible that any revisions could be even harsher.”

The ash cloud gave rise to passenger compensation claims that were many times greater than the original fares. Yet the consultation document issued by the European Commission hints at yet more regulation of an already over regulated industry.

The aviation sector expects three communications from the European Commission. The first two are expected by year end and will cover Regulation 261/2004 and the carriage of passengers with reduced mobility (PRMs). The third (expected in the first half of 2011) is a “horizontal” communication on air passenger rights. It will cover a wide variety of items, such as liability of carriers regarding lost or damaged bags, and general business practices such as online reservations, no-show policy, and the rescheduling of flights.

These communications could lead to new or revised regulations within two years. IATA has responded to each point of the consultation and is in close contact with the Commission and the other airlines associations.
Several important points have been raised. First, European competition law means that many subjects can no longer be discussed by competitors, so the notion of harmonized conduct—for example in baggage allowances, as suggested by the consultation document—runs against the grain.

“IATA does not share the view that better passenger experiences can be created by new and more regulation,” says De Smet. “Indeed, our experienced view is that competition within the airline industry is the best provider of benefits to the consumer. Competition always effectively and promptly responds to the variety of customer needs and expectations. Indifference to these needs is punished swiftly in the marketplace.”

In terms of compensation, airlines seem unfairly singled out. European law for other modes of transport, including rail, ferries, and buses, imposes no compensatory obligations. And yet the EU also talks of “equal treatment of passengers”, irrespective of the mode of travel.

“Clearly, airlines cannot be responsible for events outside their control,” concludes De Smet.

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