Europe’s emissions trading scheme expands to new heights

Posted by () on Feb 24 2012
VERTIC Blog >> Environment

Grete Luxbacher, London

As of 1 January 2012 aircraft operators with flights originating or terminating at airports within the European Community must participate in the European Greenhouse Gas Emission Allowance Trading Scheme (EU ETS). The EU ETS has been in place for energy intensive industrial installations since 2005, and is now the first market-based trading scheme to include emissions from aviation activities. As the expansion covers all incoming and outgoing flights, non-EU states have begun questioning its international legitimacy. Do the monitoring, reporting and verification procedures for the expanded emissions trading scheme shed any light on their concerns?

EU Emissions Trading Scheme
The EU ETS is an EU-wide carbon market, covering 11,000 industrial installations based within the 27 EU member states and three European Economic Area (EEA) member states (Iceland, Liechtenstein, and Norway). These installations account for approximately 50% of the EU’s carbon dioxide (CO2) emissions. The scheme aims to reduce these emissions in a cost-effective manner by 8% from 1990 levels during the 2008 to 2012 period, in line with EU obligations under the Kyoto Protocol. After the expiration of the first Kyoto Protocol commitment period this year, the EU ETS aims to cut GHG emissions by a further 21% from 2005 levels by 2020.

Under the scheme, each country sets an emissions limit and allocates allowances to individual installations that have obtained the necessary GHG emissions permit. Under the scheme’s compliance cycle, an installation’s emissions must be monitored, reported and verified. Once this process is complete, each installation must surrender the corresponding number of emission allowances to the competent authority of the member state.

Climate Change & Aviation in the EU
For the 2008 to 2012 period, the EU seems to be on track to meet their GHG emission reduction targets under the Kyoto Protocol, coming in at 17.9% below base year levels. Furthermore, the EU also seems to be on track for meeting its goal of reducing domestic emissions by 20% below 1990 levels by 2020. As the EU is on track to meet all of these targets, why did it decide to add aviation activities to the EU ETS?

Currently, emissions from aviation activities account for approximately 3% of the EU’s GHG emissions. However, this figure is set to rise. While other emissions have decreased, aviation emissions have experienced a rapid increase, having doubled from 1990 levels. Emissions from aviation activities are not only on the rise in Europe, they are rising globally. It is estimated that by 2020 emissions from aviation will be 70% higher than 2005 levels. In 2010 the International Civil Aviation Organization (ICAO) received a mandate to work towards a global solution to decrease aviation emissions.

Despite this, the EU proceeded with its own plan while not ruling out the option of future collaboration for a global solution with ICAO or other international bodies. The EU formally announced the addition of aviation emissions to the EU ETS in January 2009. The first trading period to include aviation emissions began at the start of this year and will end in 2013. This trading period is set to reduce EU aviation emissions by 3% compared to the average level between 2005 and 2006, equivalent to a 97% cap on what is known as ‘historical emissions’. The next trading period (2013 to 2020) is set reduce aviation emissions by a further 2%, capping emissions at 95% of this historical level.

From the outside looking in
Numerous non-EU countries have spoken out against the expansion of the EU scheme, arguing instead in favour of a solution through the ICAO. A major concern for these countries is the fact that if a flight originates at an EU airport and terminates in Beijing, the emissions from the entire flight are counted, not just those emitted in EU airspace. This has led to calls from countries such as the US, Russia, and China over infringement of sovereignty as they claim the EU is imposing its laws in other countries. When the EU ETS monitoring, reporting and verification (MRV) process is examined in detail, there are a number of elements which indeed seem to reflect these concerns.

The EU ETS MRV process for both stationary installations and aviation activities is known as ‘the compliance cycle’ and is outlined in Directives 2003/87/EC and 2008/101/EC. While the MRV processes are similar, there are several additional verification provisions for aircraft operators. The compliance cycle begins with the annual monitoring of an installation’s or aircraft’s GHG emissions. These emissions are monitored via a plan approved by their member state’s competent authority. Aircraft operators not based in the EU are assigned a member state, known as an administering member state, to which they will report. Each installation and aircraft operator must then compile and submit an annual report detailing their activities and emissions by 31 March of the following year. This report must be verified through an independent EU-accredited verifier prior to submission.

The verification process includes the strategic analysis of activities, an on-site analysis for stationary installations, a risk analysis, the actual verification, and both an internal verification report and a verification report outlining the methodology and opinion of the verifier. There are several additional verification provisions for aviation activities falling under the scope of the EU ETS. These provisions include the confirmation by the verifier that all aviation activities falling under the scope of the EU ETS have been accounted for and the uniformity of fuel consumption and purchase data. To clarify any confusion that may occur, the EU ETS Compliance Forum published detailed non-binding guidance for aviation verifiers.

Once verification is complete, installations and aircraft operators have until 30 April to surrender allowances covering their emissions, thereby completing the compliance cycle. One allowance is the equivalent of one tonne of CO2 emitted by an installation. If an installation emits more than their allowances cover, they have the option of buying surplus allowances from other installations on the carbon market. Those installations that do not hand over the correct number of allowances will be charged EUR 100 per tonne of CO2 not covered. Aircraft operators who fail to pay for excess emissions could also face an EU-wide ban.

Throughout the verification process, the verifier considers the national laws and legal framework of the administering member state, not those of the state that the aircraft operator is based. Aviation companies on the outside of the EU looking in therefore have to accept that they will be assigned to an EU state, and that they will have their compliance judged against this state’s laws. For some countries in which these airlines are based, this could seem like a step too far away from their right to sovereignty.

Trade War?
Indeed, the addition of aviation emissions from flights originating or terminating at any airport within the EU has been highly controversial. While numerous countries have spoken out against the inclusion, China has gone further and banned its airlines from paying any charges without government consent. Furthermore, several airlines from the United States brought the matter to the European Court of Justice (ECJ). However, the ECJ ruled in favour of the EU ETS asserting that it did not infringe on sovereignty as it was in line with international law.

The major complaints from both the air industry and governments include the previously mentioned sovereignty infringement and the possibility of higher costs for both airlines and customers. Thomson Reuters Point Carbon has estimated that by 2020 the addition of aviation to the EU ETS could cost airlines EUR 9 billion. The EU asserts that consumer costs will be minimal, even if the extra costs are reflected in the ticket prices. It predicts that by 2020 there could be a possible increase of EUR 1.8 and EUR 9 for domestic EU flights, while international flights would obviously have higher prices dependent upon the length of the trip and carbon prices.

In recent weeks the media has been speculating as to the possibility of a trade war between EU and non-EU countries. Events came to a head this week, when 23 non-EU countries including China, Russia and the US met in Moscow to discuss possible courses of action. These countries issued a declaration, which laid out possible actions including the prohibition of airlines from participating in the scheme, a review of the open sky agreements, and possible fees for EU airlines when flying in non-EU airspace. Russia even put forward the possibility of reducing the availability of permits that allow EU airlines to use the airspace over Siberia. All of these countries also endorsed finding a global solution through ICAO.

Despite the controversy, the EU has stood by its assertion that the addition of aviation emissions to the EU ETS is not only legal, but is currently the most cost-efficient and environmentally beneficial solution. It also emphasizes the fact that if a global initiative were created it would suspend this portion of the scheme.
 

Last changed: Feb 24 2012 at 12:16 AM

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