The EU Emissions Trading System and the Upcoming Inclusion of the Aviation Sector

Kirsten Verclas

ORISE Science and Technology Policy Fellow

Kirsten Verclas is an ORISE Science and Technology Policy Fellow. Previously, she was a Program Manager in the International Department of the National Association of Regulatory Utility Commissioners (NARUC) working on regulatory partnerships in Africa under a NARUC-U.S. Agency for International Development (USAID) Cooperative Agreement. Before coming to NARUC, Ms. Verclas was a Senior Program Manager at the American Institute for Contemporary German Studies (AICGS) at Johns Hopkins University, where she managed the Institute’s grant projects. She initially joined AICGS as Executive Assistant in 2003 and started working in the Institute’s Research Program in 2008. Ms. Verclas has written extensively on energy and climate as well as security policy in the transatlantic context. She holds a BA in International Relations with a Minor in Economics from Franklin and Marshall College and an MA in International Relations with a concentration in Security Studies from The Elliott School at The George Washington University. She also earned an MS in Energy Policy and Climate from Johns Hopkins University in August 2013.

She is a 2017-2018 participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement,” sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).

The Issue

The EU Emissions Trading System (EU ETS) was introduced in 2005 and now operates in 30 countries (the 27 EU member states plus Iceland, Liechtenstein, and Norway). Put in simple terms, the EU ETS is a cap and trade system that allocates an overall cap of CO₂ emissions. Within that limit, participants are allowed to trade and sell CO₂ allowances. The EU ETS initially only covered energy-intensive industrial installations; the aviation sector, among others, was excluded at first. Since 2010, however, airlines have been required to report their emissions to the competent authorities.  In January 2012 the EU ETS will be expanded to fully include the aviation sector by imposing a cap on CO₂ emissions from all international flights that arrive at or depart from an EU airport. However, airlines are not required to buy certificates for 15 percent of their current emissions until April 2013.^[1]

Germany

In order to administer the inclusion of airlines into the EU ETS, airlines are assigned to member states depending on which state issued the operating license to the carrier or which state is affected most by emissions from that airline. Most American airlines are assigned to the United Kingdom. Germany is responsible for over 300 aircraft operators, among them Delta Airlines, US Airways, and UPS (as well as some other smaller U.S. aircraft operators), whose inclusion in the EU ETS is overseen by the German Emissions Trading Authority at the Federal Environment Agency.  German-based Deutsche Lufthansa AG, Europe’s second-largest airline, was the first airline to join the European Energy Exchange AG in April 2011 to directly trade CO₂ emissions permits.  While the German aviation sector has warned the federal government and the EU that including the aviation sector in the EU ETS in January 2012 would lead to unfair advantages for non-European airline carriers and increase overall costs, the German government has held firm on implementing the EU directive on schedule.

United States

The U.S. House of Representatives passed H.R. 2594, the European Union Emissions Trading Scheme Prohibition Act, on October 24, 2011.  If passed by the U.S. Senate and signed into law by President Barack Obama, the bill would compel the U.S. Department of Transportation to prohibit U.S. aircraft carriers from participating in the EU ETS. The bill was received by the U.S. Senate on October 31, 2011, but no further action by the Senate has been taken so far. Analysts have doubted that the Senate will act on H.R. 2594, but have warned that if the Senate does decide to act, a passage would be likely. The U.S. administration and President Obama asked the EU over the summer 2011 to exempt U.S. airlines from the EU ETS, which was rejected by the EU. Several U.S. airlines and the Air Transport Association have challenged the EU measure in UK courts, which referred the matter to the European Court of Justice.  In a preliminary opinion released in October 2011, the European Court of Justice Advocate General declared that the EU directive requiring foreign airlines to comply with the EU ETS was compatible with international law. Although the opinion is non-binding, analysts expect the ruling of the European Court of Justice (ECJ) to follow this preliminary statement. Once the ECJ releases its decision, which is expected in early 2012, UK courts will then be tasked with interpreting it. Chinese airlines have indicated that they plan to also challenge the EU ETS directive in court.

Impact and Future Development

Airlines, the EU, the United States, and other states such as China and India continue to be at odds over the inclusion of the aviation sector in the EU ETS on January 1, 2012. The European Union Emissions Trading Scheme Prohibition Act has not been advanced in the U.S. Senate and any movement on this is highly unlikely before the end of the year. However, similar language could potentially be introduced as an amendment to a multiyear FAA reauthorization. The current short-term extension authorizing FAA operations expires on January 31, 2012 and Congress seems willing to tackle a multiyear FAA reauthorization bill. However, a short-term extension has been passed 22 times since the last FAA reauthorization bill expired in 2007; it remains to be seen if Congress can overcome the sticky points on the FAA reauthorization bill in an election year. Analysts have warned that should the U.S.  European Union Emissions Trading Scheme Prohibition Act become law, a trade war between the EU and the U.S. could become more likely. So far, airlines have complied with EU regulations and reported their CO₂ emissions. To what extent U.S. airlines would stop complying should the European Union Emissions Trading Scheme Prohibition Act become law remains to be seen. U.S. airlines have also warned that they would bypass Europe on the way to Asia and rather stop-over in the Middle East, but the transatlantic air corridor remains one of the busiest and most lucrative in the world, making an actual implementation of such warning unlikely.

Most recently the EU ETS was a topic at the EU-U.S. Summit in November 2011 in Washington, DC; however, no break-through in the apparent impasse has been reached. At the press conference following the summit, Ambassador William E. Kennard, U.S. Ambassador to the European Union, stated that the U.S. reiterated its preference for a multilateral forum to discuss the issue and remains concerned about the impending regulatory regime. Ambassador Joao Vale De Almeida, Head of the EU Delegation to the United States, said that, while the EU legislation will be implemented, it “has in-built elements of flexibility, which would allow companies from foreign countries to establish and develop and implement equivalent measures.”^[2] As the full inclusion of aviation in the EU ETS will only be completed by April 2013, it seems that 2012 could be used for negotiations on these issues between the EU and the U.S. However, as 2012 is a presidential election year in the U.S., attentions might turn elsewhere and the situation could potentially become more divided after the U.S. elections.