The European Union originally unveiled its plans to extend the scope of its emissions trading scheme (EU ETS) to the aviation industry in 2005. Since then these plans have continued to progress and develop at European Union level, despite strong opposition.

On 27 June 2008, the European Parliament issued a statement noting that it had agreed with the European Council, informally, how the aviation industry should be included within the scope of the EU ETS. On 8 July, it voted in favour of the agreement formally approving the deal.

Background

The EU ETS came into existence on 1 January 2005 and, in essence, it is a "cap and trade" system. First, a cap is placed on the amount of carbon dioxide that the installations covered by the scheme can emit. Then, those installations can trade allowances to ensure that they meet the requirements of that cap.

If an installation emits more than its permitted allowances it must purchase more allowances from other installations. If an installation emits less than its permitted allowances it can sell its surplus allowances and profit accordingly. By ensuring that the total number of allowances issued to the installations is less than the amount of carbon dioxide which the installations would otherwise have emitted, the Government can ensure that the total amount of emissions will be reduced.

Flying into Phase II

Phase II of the EU ETS runs from 1 January 2008 to 13 December 2013. It has always been the European Union's intention to extend the application of the scheme to the aviation industry during this period.

Following its communication on 27 September 2005 and the comments of the European Parliament and the European Environmental Council, the European Commission published a legislative proposal on 20 December 2006. This proposal suggested that the aviation industry be brought within the scope of the EU ETS in two distinct stages.

First, all domestic and international flights between any two European Union airports should be made subject to the scheme from the start of January 2011. Secondly, all international flights from or to anywhere in the world that arrive or depart from a European Union airport should be made subject to the scheme from the start of January 2012.

It also suggested that airline operators be subject to the scheme in the same way as those installations already subject to it; that the cap on emissions should be based on the average level of carbon dioxide emissions during 2004 to 2006; and that 90% of allowances should be given to airlines without charge.

Since then, this proposal has been considered by the European Parliament and the European Council with both suggesting different variations to it. The European Parliament suggested that all flights should be included from 2011; the cap should be set at 90% of the level of 2004 to 2006 emissions; and 75% of allowances should be allocated to airlines without charge.

The European Council agreed that the two stage approach proposed by the European Commission should be rejected, but suggested that 2012 not 2011 was an appropriate date for the inclusion of all flights into or out of the European Union. It also suggested that the cap should be set at 100% of the 2004-2006 emissions levels and 90% of allowances should be allocated freely.

Where are we now?

It seems that the European Parliament and the European Council have managed to agree, in principle, on how the aviation industry should be included within the scope of the European Union's emissions trading scheme.

The main elements of this agreement are:

  • all flights into or out of the European Union will be included within the scope of the scheme from 2012;
  • the cap will be 97% of airline's average annual emissions between 2004 and 2006 (to be reduced to 95% in 2013 and subject to review thereafter); and
  • 85% of allowances will be allocated to airlines without charge (the remaining 15% to be auctioned and the revenues from this to be used to fund climate change mitigation, research and low emissions transport).

Evidently, this is agreement represents a compromise between the two bodies. The 97% cap, for example, is higher than the cap proposed previously by the European Parliament, but lower than the cap proposed previously by the European Council.

What happens now?

Despite the fact that many have been quick to criticise the agreement reached (the IATA regards it as both unaffordable and unacceptable), it is highly probable that the terms of this agreement will soon become law.

The European Parliament has voted in favour of it. Given that this agreement was reached after a period of substantial negotiation with the European Council, it is expected that the European Council will do the same when it considers it at one of its upcoming meetings. After this, member states such as the UK will have 12 months to put it into national legislation.