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Inclusion of aviation in the EU ETS

Setting the right example in curbing climate change

, by Mathias Maertens

As of 1 January 2012, the aviation sector is included in the Europe-wide emission trading scheme (ETS) for reduction of greenhouse gasses (GHGs), and not a moment too soon. Not only is the EU finally sanctioning a heavy-polluting industry, but is also sending a powerful political message to the international community that she will not waste any valuable time in battling climate change.

The incorporation of the aviation sector in the ETS is an essential prerequisite to attain the goal that the EU has set itself to become a low-carbon economy in 2050. Swift action is needed as over the last two decades the volume of GHG emissions caused by aviation have more than doubled, hence making them the fastest growing GHG emitter in Europe. Furthermore, the IPCC has made it clear that the climate effect of aviation is more extensive than the mere effect of the carbon dioxide emissions.

The aviation sector currently contributes to 5% of total emissions in the EU and until now there were no incentives in place to discourage the use of GHGs. The international character of the aviation industry calls ideally for an integrated global approach. Under the authority of the International Civil Aviation Organization (ICAO), a global scheme is still being discussed by the different member states. However these negotiations have led thus far to nowhere due to a lack of political willingness among most parties. After a decade of fruitless discussions, the EU has taken on the unilateral but quintessential approach to abate greenhouse gas emissions of the aviation sector.

A cost-efficient Europe-wide system…

The mitigation of the climate impact of aviation will be achieved by including them in the cap-and-trade mechanism already in place for other polluting sectors. In essence this means that the EU member states will distribute yearly allowances to the airline companies, which they can freely acquire and sell on the common market, giving them the right to emit a certain amount of GHGs. The total number of allowances for this year is 3% less than the emission of the base period (2004-2006) with the intention of lowering these to 50% under the business as usual case in 2020. 85% of these allowances will be distributed for free to smoothen the transition period. The other fraction will be distributed through an auctioning system by the member states. Special exemptions are made for new entrants and developing aviation markets so that competitiveness is not harmed. The system has hitherto proved the capability of restricting greenhouse gas emissions in a cost-effective manner in other industries.

Determining the emission base has proven to be difficult due to the transnational character of the aviation sector. Emissions of the whole flight are taken into account from airplanes that either take off or land on EU soil, indifferent as to whether the airline is European or not. This implies that an intercontinental flight will bear the cost of the total GHG emission during that flight although only a part of the GHGs were emitted in European airspace. This approach has two major benefits for the EU market.

First of all the carbon dioxide cost for non-European firms and European firms is equal for the same operations on the EU market. Secondly, intra-Europe flights will bear the same GHG costs as an equidistant international flight that departs or leaves on EU soil, thus rendering no difference between a flight from Rome to Budapest and a flight from Cairo to Athens.

…that provokes strong international reactions…

The implementation evoked firm reactions from the international community. Last September, 26 countries asked for the repeal of the EU’s plan because of the unilateral approach and the supposed infringement of their sovereignty and international law. It disturbs them that their companies too will be burdened with the extra carbon costs. China, India and the United States are the toughest opponents of the new legislation and they will not easily give in.

The United States filed a lawsuit against the directive but last month the case was ruled in favor of the EU legislation by the European court of justice. Meanwhile a bill was passed in US congress that makes it illegal for American airline carriers to comply with the European ETS regulation. However, chances are slim that this bill will pass the Senate and thus instigate a trade war. India and China on the other hand, are setting out on a mission to torpedo the EU aviation directive by calling on their airlines not to comply with the regulation and threatening with a trade war. Airbus has already suffered the loss of an order of A380’s for the Hong Kong market because of the dispute.

…but lets the consumer pay for the harm he costs.

The greatest burden however will be carried by passengers and airfreight clients which accord entirely with the polluter pays principle. Since demand for airline transport is not price sensitive it can be expected that the average fare will increase by 5% with no decline in aviation activity. Because of the opacity of tariffs in the sector, it is likely that airline companies will even charge clients the allowances they receive for free and thus earning windfall profits. This was the case in the allowance market for electricity and should be prevented by evolving towards a full-blown auctioning system.

By including the aviation sector into the ETS, the EU finally internalizes the carbon cost of the fastest growing GHG emitter. This will lead to an overall decline of GHG emissions and will intensify, through the market working, the incentives for all polluters to advance to clean technologies. Given the presumption that the earnings for auctioning are reinvested in R&D regarding fuel efficiency and biofuels, the effect should even be strengthened.

The EU demonstrates that it is very serious about reaching its climate obligations and will not stand by idly while precious time is lost in abating GHG emissions. Although this unilateral approach agitates the international partners, the radical shift towards a system where also non-European firms are taxed, should raise worldwide awareness of the inevitability of internalizing carbon costs and thus fastening the pace of introducing a global trading scheme.

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