Emissionary positions: will the EU get its way on emissions trading?

The global wrangle over whether airlines should take part in emissions trading is dividing into two camps: Europe is pressing on with its own scheme, whereas most others want an international solution. Who is right and what could it cost?

Everyone seems to have a different position on the inclusion of aviation in emissions trading, with European moves to impose it in under three years' time the most controversial. But Europe is on its own in backing emissions trading, for the moment.

The European Union potentially faces a protracted and acrimonious legal battle over its decision to press ahead with a plan to include all airlines operating to and from Europe in its emissions trading scheme. The consensus reached in September by a majority of countries at ICAO's 36th Assembly, which agreed that "states should not apply emissions trading systems to the airlines of other states except pursuant to mutual agreement", only seems to have strengthened the EU's resolve.

Europe has entered a formal objection to the ICAO result on the mutual consent issue and, undeterred, it is pressing ahead with its own plans. For example, a European Parliament committee has proposed including all carriers operating to, from and within the EU in its ETS from 2010. This is a little sooner than the original European Commission proposal, which calls for intra-EU carriers to be included from 2011 and all arriving and departing flights to be included from 2012.

Alongside the issue of when emissions trading is introduced, the debate is raging over how many emissions permits will be given free to airlines and how many they will have to buy. The EC's original ­proposal calls for capping emissions at 100% of an operators' ­average annual emissions during the 2004-06 period. This would mean a carrier paying for any emissions above the cap. In addition, carriers are likely to have to pay for a sizeable chunk of emissions below the cap. Airlines are lobbying for the cap to be set as high as possible, and to be given as many free emissions permits as possible.

The European Parliament's environment committee has voted for a 75% cap of 2004-06 emissions, much to the dismay of ­organisations such as the Association of European Airlines, which wants the emissions cap to be set at 110%. "The environment committee has proposed 75%, but 50% of that would have to be obtained through auctioning," says the AEA. "That means that only 37.5% is given out and for anything above that cap, we would have to pay twice as much as other industries because of the multiplier factor, which is added to aviation to take non-CO2 effects into account." The AEA also disagrees with using 2004-06 as a baseline, arguing that it is "too far from the trading period".

But Peter Liese, the European Parliament's rapporteur on including aviation in the EU ETS, points out that the eventual cap voted into law will probably not be as low as 75%. "The final result will not be 75% and it will not be 110% - it will be somewhere in between and it will take [the AEA's] concerns into account," he says. "If you put aviation in line with other sectors, the cap should really be 50%, but I understood that this would be too difficult." Liese was personally in favour of setting the cap at 90%.

Similarly, there is likely to be an eventual compromise both on the implementation date and the level of permit auctioning, according to Liese. "A 2010 start date for everyone is feasible, but there are different views from different committees. Again there will be a compromise on the start date. I think the auctioning level should be higher than proposed. The transport committee proposes 20% and the environment committee proposes 50%, but it will end up being somewhere in between."

Europe's final agreement on including aviation in its ETS is scheduled to be reached in mid-2008, although Liese says "it may be earlier or later than that". In the meantime, with all of this uncertainty it is difficult to predict what the eventual cost to the airline industry will be. Nevertheless, industry sources estimate that, based on a permit price of �33 ($47) per tonne, the cost to EU-based carriers in the first year will be �500 million. If and when all flights to and from the EU are included, this estimate rises to �2.3 billion. The price of permits that are currently traded in Europe is very volatile, ranging from almost zero up to the �33 level.

However, with emissions rising over time relative to the cap, which stays the same, more and more allowances will be required, which means that by 2022 the annual cost of allowances could have risen to �8.8 billion, based on the above assumptions. One industry source says that if the European Parliament's environment committee's proposed amendments are adopted, "it appears that [in 2012] it will cost over �12 billion, ie, over five times as much as the original proposals".

"In 12 years ICAO has done nothing on the environment" Peter Liese, Rapporteur, European Parliament

The AEA commissioned its own impact assessment with Ernst & Young, which found that the cost of purchasing allowances for EU-based carriers would be more than �45 billion over 10 years, which it believes would reduce airline profits by around �40 billion. "This is an optimistic estimate because it doesn't take auctioning into account," says the AEA. "Also, it's based on the EU's original proposal and doesn't take proposed amendments into account. The cost will be at least twice as much if the environment committee's proposals are approved."

But Andrew Herdman, director general of the Association of Asia Pacific Airlines, believes the cost can be passed on to consumers and will not be absorbed by the industry because the level of price increase to the passenger will not impact demand. "Let's say the permit price is $20 per tonne - a total of 650 million tonnes of carbon is emitted globally by aviation in one year," says Herdman. "So even if you're paying for 100% this works out at about $13 billion a year. This is a $470 billion industry, so this would work out at about a 3% increase in fares."

According to Bart Boon, a senior researcher with CE Delft - which is advising the EC on including aviation in its ETS - there is even the "potential for windfall profits" depending on the level of free allocation of permits. He adds that the industry could find it "very cost effective to be included" in the scheme.

The idea behind including aviation in emissions trading is that by paying for permits to emit CO2, the airline industry is helping to incentivise other industries that do have alternatives to burning fossil fuels to invest in improving their efficiency and reducing their CO2 emissions.

But there are conflicting views about whether aviation should be included in emissions trading at all. Emirates president Tim Clark questions whether the EC is aware of the "level of disadvantage this would cause", while British Airways chief executive Willie Walsh, who is a strong proponent of including aviation in the ETS, warns that Europe "needs to be realistic in terms of its ­ambitions", and that "to think it can dictate to the rest of the world is taking it a step too far".

And Europe will have a fight on its hands as it moves to force its proposal on other nations, a fight which will likely end up in the courts if no diplomatic resolution can be reached. John Goetz, a US-based partner in charge of law firm Jones Day's aviation practice, warns that Europe and the USA could be heading towards another dispute similar to that which took place when the EC, as a noise reduction measure, tried to ban additional aircraft fitted with hushkits from the continent.

"The USA as a country, along with other countries, would initiate legal proceedings similar to those initiated in the hushkits ­dispute - hushkits may provide a blueprint of what's to follow here," says Goetz. In the hushkits dispute, the EC eventually compromised and adopted a proposal for a new aircraft noise directive which included resolutions reached through ICAO.

"There will be extensive diplomatic efforts first, but if there is no resolution legal proceedings will be initiated under Articles 84 and 85 of the Chicago Convention," adds Goetz. The USA believes the EC's proposal violates Article 15 of the Convention, which states: "No fees, dues or other charges shall be imposed by any contracting state in respect solely of the right of transit over, or entry into, or exit from its territory of any aircraft of a contracting state." The EC will use another Article of the Chicago Convention to support its case.

Liese believes the final decision will be political rather than legal, and is confident that the presidential elections due to take place in the USA next year will have a positive impact. "Politically, everything depends on the US administration. There will be a new US president in 2008 and they will have a different policy on climate change to the existing president," he says. "The next 12 months will be difficult, but after that it will be a new picture. It's not completely unrealistic that a new US president would also argue against [EU ETS], but we don't think a new US president would allow it to escalate too much."

The main bone of contention over Europe's plan is that the EU seems to be taking unilateral action on emissions trading, and has not consulted with other nations. "Any emissions trading scheme has to be designed around allocations and auctioning, but the way the European scheme is going through parliament means that only European politicians are getting a say," argues Herdman.

However, Liese says Europe is open to suggestions but so far nothing concrete has been put forward. "We have been speaking to other states and we've said that if they have something concrete to make the proposal more acceptable to them, please tell us. But so far nobody has proposed anything concrete - they are just saying no."

Many in the industry believe there should be a global solution to emissions trading, led by ICAO. But sceptics criticise ICAO for its lack of progress in this area. "In 12 years ICAO has done nothing on the environment," says Liese. "How can we trust that ICAO will solve the problem? It would be irresponsible for our children and grandchildren to think that this organisation will do anything to save the planet." There is also scepticism within the airline industry, with Clark of Emirates saying that "there is as much chance of ICAO developing a global emissions trading system as there is of Carling running out of beer".

ICAO in 2001 decided against implementing a global emissions trading system, and has since advocated voluntary and regional schemes, but only on the basis of mutual consent. However, Ron Wit, lead author for the mitigation section of the influential Intergovernmental Panel on Climate Change's (IPCC's) fourth assessment report, cautions that voluntary measures rarely provide any difference to the "business as usual" approach.

What did emerge from ICAO's 36th Assembly in Montreal was a commitment to create a new group of senior government officials with a mandate of recommending "an aggressive programme of action on international aviation and climate change". The group will study options including voluntary measures, technological advances, economic incentives and market-based measures. But for some this is too little, too late. Several voices in the industry are now calling for responsibility for aviation's impact on the environment to be taken away from ICAO and awarded to the United Nations Framework Convention on Climate Change (UNFCCC). Action towards such an outcome would have to wait until post-Kyoto climate negotiations in 2012.

Regardless of which body ends up shouldering overall responsibility, Herdman says the airline industry has to face up to the statistics and embrace some kind of market-based solution: "It is not a question of foot-dragging by the industry - the industry is doing as much as any other sector on improving efficiency, and it's improving by 2% per annum. The problem is that traffic is growing by 5% per annum, so we have to face up to the inconvenient truth that this gap cannot be narrowed by technology alone. There has to be some element of market-based measures."

Source: Airline Business