Taking Off? The Inclusion Of Aviation In The EU ETS

Introduction

The EU decided recently that the aviation industry should be

covered under the EU Emissions Trading Scheme (EU ETS) to help meet

emission reduction obligations under the Kyoto Protocol. Inclusion

within the scheme will result in a further set of regulation for

aircraft operators with potentially serious penalties for those who

do not comply. This article explores the main provision of the new

directive that sets out how the EU ETS will apply to aircraft

operators and suggests some steps that aircraft operators should

take in the run up to 2012 when the scheme will apply to them.

Overview of the Kyoto Protocol, the EU ETS and how the impact

of emissions from aviation has been treated so far

The major feature of the Kyoto Protocol is that it sets binding

targets for 38 industrialized countries and the EU for reducing

greenhouse (GHG) emissions in the commitment period that runs

between 2008–2012. Such countries (listed in Annex B

to the Protocol) are obliged to reduce their collective emissions

by at least 5 per cent during 2008–2012 from a 1990

baseline (5.2 per cent is the average). The EU approved

the Protocol in 2002 through Decision 2002/358/EC. The EU has

a burden sharing agreement that distributes between Member States

the EU's commitment under the Protocol to reduce its emissions

by 8 per cent on 1990 levels by 2008–12.

The Kyoto Protocol provides that countries must meet their

targets primarily through national measures but it also allows

three market–based mechanisms as additional ways to meet

the targets: international emissions trading between government of

Annex B countries of emissions allowances, the Clean Development

Mechanism (CDM) and Joint Implementation (JI). The latter two

are project–based mechanisms where projects that reduce

emissions (eg energy efficiency or renewable energy projects) are

set up in a developing country in the case of CDM, or another

developed country in the case of JI, with investment from a country

with emissions reduction targets under the Kyoto

Protocol. Carbon credits (certified emission reductions (CERs)

and emission reduction units (ERUs)) that are generated from such

projects can be used by the country investing in the project to

meet its reduction targets or can be traded in the carbon

market.

Emissions from aviation are not covered by the targets in the

Kyoto Protocol. The International Civil Aviation Organisation

(ICAO) was tasked with developing a programme of action regarding

international aviation's impact on climate change in

1997. It has produced a number of reports and held a number of

meetings but a plan of action is still outstanding. Owing to the

lack of progress, the EU has decided to take unilateral action in

respect of emissions from aviation.

In 2003, the EU set up an emissions trading scheme as a way to

put Member States on a path to compliance with the Kyoto

Protocol. The principal piece of legislation to set up the EU

ETS is Directive 2003/87 (the 'Emissions Trading

Directive'). There is also a second directive

(2004/101/EC) known as the Linking Directive which amends the

Emissions Trading Directive and establishes that some Kyoto

mechanism credits (CERs and ERUs) can be used to meet the

obligations of entities covered by the scheme. Member States

have introduced legislation to implement these Directives.

The EU ETS is currently in its second phase

(2008–2012) having started with an introductory phase

which ran between 2005–2007. The EU ETS covers large

entities involved in electricity generation and heavy industry in a

variety of sectors including production and processing of certain

metals and the mineral industry.

The scheme currently works as follows: each Member State sets an

overall domestic cap on CO2 emissions from relevant industry

operators. Each industry operator (known as an installation)

is required to limit its CO2 emissions based on a mostly free

allocation of this domestic cap (represented by carbon credits

called EU Allowances (EUAs) equating to a tonne of or an equivalent

amount of CO2). An operator must surrender a sufficient number of

EUAs following the end of each scheme year to cover its actual

emissions during the scheme year (which it has monitored and had

verified by an independent auditor). If an operator has a

shortfall of EUAs it will have to pay an excess emissions penalty

(which was €40 in the introductory phase and which is now

€100) but it must still surrender sufficient

EUAs. Allowances can be purchased from other operators which

have met their reduction targets (perhaps by introducing energy

efficiency or renewable energy measures) and therefore hold a

surplus of EUAs.

Following a review of the operation of the scheme during the

introductory phase, it was recognised that an excessive number of

allowances were allocated by most Member States which resulted in a

price collapse at the end of the first scheme year. The Commission

has therefore proposed amendments to the scheme which were approved

by the EU Parliament in December 2008 and which will take effect in

2013 (ie at the start of the 3rd scheme phase). The main

amendments relate to the expansion of the scheme to cover other

greenhouse gases and additional sectors, a transition to the

auctioning of allowances from free allocation and the setting of a

central EU–wide cap rather than national caps set by each

Member State.

Details of how aviation will be incorporated in the EU ETS

In October last...