Stopping the clock a third time Aviation was brought into the EU’s emission trading system (ETS) in 2012 covering all flights to and from EU airports. Following significant international and industry pressure, the scope was reduced to cover intra-EU flights only (known as “stop the clock”). This was ostensibly to give time for the UN agency which regulates aviation, ICAO, to agree a global measure. A second stop-the-clock regulation to extend the reduced scope was agreed in 2014 to afford ICAO more time. That expired at the end of 2016, so in strictly legal terms, the ETS is now back to full scope and all airlines operating into and within the EU are required to comply with the ETS. However airlines are not required to report emissions and surrender allowances until mid-2017 and the European Commission has proposed extending the exemption once more. The global scheme In October 2016, after many years of discussions, ICAO agreed to implement a global market-based measure, called the Carbon Offset and Reduction Scheme for International Aviation (CORSIA), aimed at stabilising emissions at 2020 levels by requiring all airlines to offset their emissions above this level. The measure will be voluntary until 2026 and mandatory thereafter. Some 68 countries have so far opted into the voluntary phase meaning about 80% of the promised “carbon neutral growth in 2020” will be addressed. However the 2016 Assembly did not finalise many of the details which will determine the CORSIA’s environmental effect – for example: environmental and double-counting criteria for offsets; whether and how an emissions register could function; monitoring reporting and verification; how to account for aviation biofuel usage; compliance and enforcement. Protracted and difficult negotiations on these issues continue. Europe responds As envisaged in the 2014 stop-the-clock regulation, the European Commission reviewed the 2016 ICAO assembly outcome and put forward a proposal in February 2017 to stop the clock for a third time. The Commission’s intention is to see the regulation approved, thus maintaining the intra-EU scope only, before airlines would have to comply by the end of March 2017 with full scope 2016 emissions. This time the Commission set no specific date for a further review of scope in order to provide flexibility as to a final assessment of the CORSIA. The Commission intends to bring forward a further proposal to implement the CORSIA into EU law in time before the voluntary phase begins in 2021. That proposal will consider how to continue the EU ETS and CORSIA as complementary measures, in a manner which facilitates CORSIA implementation and the achievement of the EU’s 2030 climate targets which includes aviation emissions. The February 2017 proposal gave some insight into how these two systems may interact, by, for example, proposing that the emissions cap for aviation ETS decreases annually from 2021. The Commission proposal must be agreed by both the European Parliament and the Council of Ministers, with the aim of reaching a decision before the end of 2017. How does the EU ETS work? Each year, polluters have to surrender a number of permits equivalent to the amount of CO2 they emitted in the preceding year. Polluters acquire permits through an annual allocation system and some are issued by member states for free. If polluters don't have enough allowances to acquit their previous year’s emissions, they can buy additional permits at auction or from other companies having a surplus. The EU puts a maximum cap on the CO2 emissions that can be emitted by restricting the number of permits available on the market. As issued permits become scarcer due to progressive reductions in the cap, the permit price goes up, providing emitters with an incentive to reduce their emissions where that is cheaper than buying permits. Under what terms is aviation included in the EU ETS? Aviation was incorporated in the EU ETS, effective as of 1 January 2012, and required all airlines departing or arriving at an EU airport to surrender allowances covering the emissions of all EU flights they had operated in a given year. Following an international outcry orchestrated by US carriers against the inclusion of foreign carriers in the scheme, the European Commission limited the scheme’s application to airlines operating flights in and between EU airports only (“stop-the-clock”). This was billed as a temporary measure to give ICAO time to agree a global measure. When minimal progress was made at ICAO’s 38th assembly in October 2013, the clock was stopped again. After reviewing the 2016 ICAO outcome, when a global market-based measure was agreed, the Commission proposed to extend the exemption indefinitely pending a review of the effectiveness of the CORSIA. Does the inclusion of aviation in the EU ETS lead to big cuts in actual airline CO2 emissions? Not at present. For so long as the ETS for fixed installations in Europe suffers from a gross over-allocation of permits, then the ‘scarcity factor’ due to a declining cap does not function by progressively raising permit prices. At present airlines have effectively unlimited access to cheap ETS credits, the cost of which hardly impacts on growth in any way. So aviation traffic and emissions keep growing uninhibited and will continue to do so until the permit surplus problem is resolved. That’s why other measures such as kerosene taxes and VAT on airline tickets are urgently needed. How can the EU ETS be made more effective? Aviation is part of the overall EU ETS, which needs to be reformed to be made more effective. Those reforms are currently being negotiated and revolve primarily around increasing the rate at which the cap falls and removing the surplus which has built up. These reforms are essential if the aviation aspect is to be effective, as aircraft operators purchase allowances from this overall EU ETS. There are also a number of aviation-specific aspects of the EU ETS which need to be reformed. For example, the cap in aviation allowances is static at -5% below 2004-2006 levels. This needs to be decreased over time if the sector is to be incentivised to cut its emissions. At present, the aviation sector receives 85% of its allowances for free. Free allowances were introduced to avoid carbon leakage (where industry moves to states in which they don’t incur the cost of such a scheme). However, with the scope reduced to just flights within Europe, and with the low price of allowances, this risk of minimal. Also, given that the sector is already exempt from fuel taxation and VAT, there is no reason why it should receive free allowances. What is the cost of the EU ETS for the aviation industry? The costs that the ETS would impose on the industry and passengers were at the forefront of the industry attacks on the inclusion of aviation in the EU ETS. In 2008, IATA claimed that “[i]n its first year of operation, the ETS will add €3.5 billion to industry costs and this will rise year-on-year. […] The plain fact is that the only sure beneficiaries of the €3.5 billion cost will be national government coffers. There is no assurance that any of the money will go to environmental programmes”. A T&E study shows, however, that between 2013 and 2015 the actual costs for the industry were between €150 and €180 million and, even though the ETS costs are generally passed on to passengers like all other costs of doing business, they have negligible impact on ticket prices. Also, much of the revenue raised was directed at climate-related projects.