Thu 22 Sept 2016 – Despite imperfections, the inclusion of aviation into the EU Emissions Trading System (EU ETS) has functioned well and enjoys a high degree of compliance, finds a new report by Transport and Environment (T&E) that analyses performance over the 2013-2015 period. Even allowing for the reduced scope covering just intra-European flights, the cost to airlines has been far less than industry first predicted, says the Brussels-based NGO. T&E has proposed changes and reforms to the EU ETS to realise greater emissions reductions from the sector. Without further legislative intervention, the EU ETS will automatically ‘snap back’ from 2017 to include coverage of all flights between Europe and third countries pending a decision by countries on the proposed ICAO global carbon measure, and the European Commission is currently consulting on the EU scheme’s future.

Launched in 2012, the EU ETS quickly ran into international political and aviation industry opposition and was forced to back down from its original coverage intention, with temporary legislation enacted a year later called ‘Stop the Clock’. It is currently restricted to flights to and from airports within the European Economic Area (EU28 + Iceland, Liechtenstein and Norway). Although these flights are largely conducted by aircraft operators based in Europe, airlines from other third countries are also included in the scheme as they operate occasional or regular intra-EEA flights.

There are key differences in the design of the EU ETS compared with the global carbon scheme currently under negotiation at ICAO – emissions allowances instead of offsets, being binding rather than voluntary and full rather than partial coverage of emissions – which T&E argues makes it far superior. The use of allowances ensures greater transparency of emissions reductions, whereas the quality of carbon offsets can potentially be unreliable, it says, and the global measure as currently proposed falls well short of meeting ICAO’s own target of carbon-neutral growth by the aviation sector from 2020. In addition, points out T&E, the current draft proposal for the ICAO Carbon Offsetting & Reduction Scheme for International Aviation (CORSIA) includes text that is designed to thwart the EU ETS by making CORSIA the only MBM covering international aviation emissions.

“The EU stopped the clock on its own ETS to give ICAO time to develop an environmentally meaningful measure, not a voluntary scheme which postpones serious action for a decade or more,” said Andrew Murphy, Aviation Policy Officer at T&E. “Europe should be proud of setting the global benchmark, and never replace it with something inferior that is open to bogus offset programmes.”

In its report, ‘Aviation ETS – gaining altitude’, T&E calculates verified aviation CO2 emissions covered by the EU ETS for the three years 2013-2015 totalled 165.3 million tonnes. Aircraft operators were given 97.0 million free aviation allowances (EUAAs), leaving them to purchase and surrender allowances (EUAAs and general EUAs) totalling 68.3 million (see graph below).

Growth in 2013-2015 verified emissions (source: T&E)

As emissions grew each year over the period, total costs also increased as a result of a need to purchase more allowances. These costs were approximately €152 million ($170m) in 2013, €148 million in 2014 and €178 million in 2015. While aviation emissions increased in 2014, the lower price of allowances in that year resulted in lower financial cost for operators.

Even taking into account the reduced scope (-75%) of the scheme as a result of ‘Stop the Clock’ (STC), the original forecasts by industry of the participation costs in the scheme have not been realised, says T&E. Under current carbon prices, the additional cost to operators of carrying each passenger to flight is insignificant compared to the broader environmental impact of aviation emissions, it contends.

T&E estimates that using the low carbon price during the 2013-2015 period, the EU ETS adds around €0.26 to a single economy class passenger ticket between London and Frankfurt, €0.76 to a ticket from London to Larnaca and, although exempt from the current scope and so hypothetical, €1.13 to a ticket from London to New York. Even under a hypothetical scenario of a much higher carbon price of €25 per tonne and with no free allocation of allowances, the same additional cost per ticket would be €2.11, €6.07 and €9.05 respectively if passed on to passengers.

The T&E analysis shows EU governments raised around €170 million from auctioning EUAAs during the three-year period as a result of the reduced scope. It estimates that under a €25/tonne scenario, a full scope Aviation EU ETS could generate more than €5 billion in revenue per year.

Besides sovereignty issues, industry and third countries opposed the scheme on the grounds that revenues raised by EU states would disappear into treasury coffers, despite the EU ETS directive recommending member states use at least 50% of auction revenues on projects to tackle climate change. Although states do not distinguish between EUAA and EUA revenues, T&E estimates more than two-thirds of both general and aviation auction revenues are spent on the environment.

T&E finds there has been a high degree of compliance with the current scope of the scheme, and third countries that had initially instructed their airlines not to participate, such as China, had now withdrawn their opposition. However, the NGO is critical of enforcement procedures by EU member states against operators that refuse to comply or settle payment notices, and says there is a lack of transparency and unreasonable delay from some states over requirements under EU rules to publicly disclose information on offenders.

The compliance rate of the scheme is as high as 99% of total aviation emissions covered, with between 93% and 94% of operators complying, and T&E considers Europe’s right to regulate flights within the EEA is now accepted international practice.

“Not only has the EU’s ETS disproved sceptics from both within and beyond Europe, but it has served as a model for nascent trading systems in such countries as China and Mexico,” said Murphy. “Replacing the ETS with the promise of something to take effect in 2021 which is far less than global, which sets a weaker target and lacks environmental safeguards, is not the way to strengthen Europe or the world’s climate ambition.”

The report recommends a number of improvements to strengthen the scheme, including reducing the cap by 2.6% annually and to introduce a similar declining cap for aviation allowances. By phasing out the free allocation of allowances, T&E says it would require aircraft operators to purchase more general EUA allowances “and reflect the true cost of their climate impact.”

To further address aviation’s climate impact, a multiplier of two should be applied to CO2 emissions under the scheme, it adds, to cover non-CO2 warming effects.

Controversially, from 2017 T&E also asks the EU to return to its original intention and extend the scope of the scheme to include flights to and from airports outside Europe, perhaps on a 50% coverage basis. After 2020, when the ICAO GMBM would come into effect, Murphy says a decision does not need to be made until after the outcome of the 2019 Assembly when the design of the global scheme becomes firmer but suggests the EU ETS could still be kept with an intra-EEA scope.

The report concludes the ETS for aviation shows potential to achieve emissions reductions at lower cost through trading allowances with stationary ETS sectors, but only if the EU addresses the oversupply of allowances within the overall system.

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