The prospect of EU ETS non-compliance by foreign airlines fills European carriers with grim foreboding

The prospect of EU ETS non-compliance by foreign airlines fills European carriers with grim foreboding | Aviation Carbon 2012

Cathay Pacific's Head of Environmental Affairs, Dr Mark Watson


Fri 17 Feb 2012 – While European airlines remain supportive of carbon pricing as the most effective way of dealing with the industry’s emissions, they are becoming increasingly alarmed with events on the wider political international stage that could see them competitively disadvantaged under the EU ETS. Despite differences on the scope of the scheme, international and regional airline representatives have expressed deep concerns over the potential impact of airlines operating to Europe that are prohibited by their governments from complying with the EU legislation. At a London conference last week, British Airways called for an exemption for all airlines on routes affected by non-compliance issues or financial compensation where retaliatory measures are enforced by foreign regulators. A European Commission representative said there was no question of amending or suspending the scheme but said the EU would continue to support a global approach through ICAO.


BA’s Head of Environment, Jonathon Counsell, said the aviation industry’s carbon reduction long term targets could not be achieved without market-based measures, and carbon pricing and trading, rather than taxes, was the right instrument.


“Carbon trading is the most cost-efficient way to reduce CO2, and the EU ETS, if implemented appropriately, can be an effective first step towards a global scheme,” he told over 300 delegates at the Aviation Carbon 2012 conference at London Heathrow. “However, we have significant concerns about the current scope of the EU ETS, particularly about the retaliatory and non-compliance risks. We urge the EU and the member states to seek solutions to address these issues because they could be extremely damaging to EU carriers.”


In order to dispel non-EU concerns, Counsell suggested a number of options such as going back to the original plan of keeping the scheme intra-EU initially, including only emissions within EU airspace or just charging for outbound flights. Another way out, he said, would be to offer non-EU states who signed up to a binding emissions reduction road map at ICAO an exemption on inbound flights.


“This would deal with opposition to the EU scheme and at the same time drive the process towards a global deal,” he believed.


Counsell revealed British Airways had discussed with the UK authorities what protection might be given in the event of non-compliance by competing airlines. In order to limit commercial damage, the airline would seek exemption on routes served by non-compliant carriers, he said.


“However, that presents timing issues as the non-compliance might not become apparent until later on,” he said. “So we want to be compensated on routes where we face non-compliance or retaliatory action. This could come from a reserve fund from auctioned allowance revenues.”


Simon McNamara, Deputy Director General of the European Regions Airline Association (ERA), said the current uncertainty over the EU ETS would impact EU airlines in different ways. “It has nothing to do with the legality or cost of the scheme – it’s all to do with the politics,” he said.


The ERA’s position was that the scheme should be implemented and complied with as planned, he said, adding: “If that is not likely then it should be suspended until the conflicts have been resolved. It is clear that everyone should operate on the same level playing field.”


McNamara doubted there would be full compliance by all non-EU carriers and he questioned how the European Commission and member states would handle this.


“It’s one thing dealing with relatively small amounts of air navigation charges but how will it cope with non-compliance by a significant group of operators. What would be the diplomatic and political consequences of banning operators? It is likely non-compliance would go unpunished, perhaps indefinitely.”


In that event, the international credibility of the scheme would be damaged, he said, “and we will end up with a distorted market where EU carriers would be disproportionately burdened with more costs.


“Airlines clearly accept their environmental responsibility but they also want to make sure they remain a competitive and successful industry. This uncertainty is lowering confidence in European air transport and we simply don’t need that.”


Andrew Waite, an environment partner with law firm Berwin Leighton Paisner, advised non-EU operators faced with a compliance ban by their own national authorities to negotiate with the authorities of the EU state they report to under the scheme, in order to make clear their non-compliance was not wilful.


“It is very important to engage with the regulator to secure an understanding that penalties are not going to be imposed, he said.


Representing the European Commission’s Climate Action Directorate, Philip Good said considerable effort had gone into designing the scheme in order to comply with ICAO principles and international law. However, he agreed that there was a clear need for a political process.


“We have always been committed to a global approach and we’ve been working in ICAO for 15 years to achieve that,” he said. “We’ve never left the table and we look forward to constructive discussions over the next 12 months.”


Good said the Commission had been involved in “serious” discussions with some unnamed states over equivalent measures but believed these states would wait until they saw what transpired at ICAO during the course of this year before acting further.


Although equivalent measures were allowed for in the EU ETS directive, there was no possibility of the scheme being suspended, he told delegates. “It’s not realistic to assume the legislation can just be suspended – that’s not how it works and the law has to be enforced,” he stated. “In the event of a global deal, we are perfectly willing to come forward with a revised legislative proposal but the co-decision process can take up to two years.”


The ERA’s position of an ‘all or nothing’ rather than an intra-EU only scheme was mirrored by John Hanlon, Secretary-General of the European Low Fares Airline Association (ELFAA), which represents low-cost carriers such as easyJet and Ryanair.


“As 80% of all EU aviation emissions are from long-haul flights, you have to include them all or you have a punitive scheme that only does a fifth of the job,” he told delegates.


He said the challenge for the industry was to achieve its environmental objectives but still be permitted to grow. With an all-new short-haul aircraft not expected from Boeing and Airbus within the next 15 years and technologies such as biofuels being long-term solutions, emissions trading permitted the continued growth of aviation whilst rewarding good performance and penalising the bad, he said.


However, his association’s support for the EU ETS was conditional on the withdrawal of “so-called” environmental taxes by national and, possibly in the future, EU regulators.


“States have seen an opportunity to don a green mantle and look environmentally aware and impose taxes that do absolutely nothing for the environment,” said Hanlon. “Their keenness for levying those taxes is not matched by any willingness to plough the proceeds into research that would actually help us to reduce our impact on the environment.”


He said European taxation as a market-based measure was inferior to an ETS because it was regressive, penalised consumers, constrained growth and socio-economic development, and restricted the mobility of EU citizens. ELFAA, he said, was looking to national governments to acknowledge the EU ETS was addressing aviation’s environmental impact and withdraw all existing environmental taxes, and any potential EU taxes under consideration.


From a non-EU airline perspective, Andrew Sellick, Group Manager Environment and Carbon for Qantas Airways, said his airline believed effective carbon pricing mechanism was the right way of dealing with aviation emissions, as long as key principles were adhered to. He said competitive distortions, not just between airlines but also industries and locations, had to be avoided and stated Qantas was now at a competitive disadvantage with Middle East carriers on routes between Europe and Australia due to the different sectors they operated.


Schemes had to be about reducing emissions and not just revenue raising, with those revenues being used to help develop sustainable fuels and drive continuous technology developments, he argued.


In addition, schemes should be administratively simple. He said Qantas was unique in that it was now faced with the challenge of complying with different carbon schemes in Australia, New Zealand and Europe. For example, he explained, each scheme had different types of emissions reduction units that were eligible.


“From a carbon procurement perspective, it’s making my life particularly difficult,” he said. “Greater alignment between schemes is essential for us. The sooner we can manage this at a global level the better for the industry.”


Sellick saw carbon pricing as having the biggest impact in accelerating the commercialisation of alternative aviation fuels and would drive this activity in both Australia and Europe.


Mark Watson, Head of Environmental Affairs at Cathay Pacific, said that as a result of the EU’s “ill-conceived” policy, airlines caught up in the international conflict had been put in the impossible position of being forced to choose between breaking the law in either their own country or in Europe.


He agreed with the assertion by Qantas and British Airways that the scheme would cause significant competitive distortions. “It penalises non-stop long-haul flights like ours, which are more fuel efficient than those with intermediate stops,” he complained.


Cathay Pacific supported the concept of emissions trading, said Watson, as it could have a positive impact in reducing emissions, drive environmental improvements and incentivised industries if properly designed. “But not where such schemes are imposed on a regional basis or extra-territorially,” he said. “We fully endorse the need for a global agreement and as a business have been calling for our emissions to be regulated in a global agreement under ICAO since 2008.


“Let us be clear. A global agreement based on the principles and mechanisms of the current EU ETS ... is far from desirable.”


What was needed, he said, was a global scheme that is based on a number of already agreed core principles including cost effectiveness, equity, transparency, non-distortion, environmental effectiveness, and that can accommodate the differing needs of states.


“The EU ETS has already given us a taste of what we may get if we fail. Climate change requires urgent action at a global scale. Given this, the only remaining question we need to ask ourselves is, can we afford to fail? And I think we all know the answer,” he concluded.


Aviation Carbon 2012, co-organised by GreenAir Online, brought together for the first time airlines and business jet operators covered by the EU ETS and the carbon trading sector.




Aviation Carbon 2012

Text of Mark Watson’s speech (pdf)



Below, left to right: Simon McNamara (ERA), Philip Good (EC), Andrew Sellick (Qantas), Andrew Waite (BLP) and Jonathon Counsell (BA)





Below centre: John Hanlon, Secretary General, ELFAA





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