The opposition to the EU-ETS by third countries, following the CJEU judgment confirming the legality of the EU-ETS, has intensified in the last few months, and tensions are likely to escalate even further unless a compromise solution is found by April 2013, when airlines will be required to pay for their 2012 emissions in compliance with their obligations under the EU-ETS. See “Stop Press” box for recent developments

A formidable coalition opposing the EU-ETS scheme has been forged, that includes all major non-EU emitters. In August, representatives of 17 countries; Russia, India, China, Australia, Canada, Brazil, Chile, Singapore, UAE, Japan, Saudi Arabia, Columbia, South Korea, Mexico, South Africa, the US and Nigeria, met in Washington to reaffirm their opposition to the application of the EU-ETS to non-EU carriers, and said they remained committed to the actions to reduce international aviation emissions agreed in the ICAO Assembly Resolution A37-19 of 2010. Australia participated for the first time in this third meeting of what is being dubbed “the coalition of the unwilling”. The US Senate passed a bill in September 2012 that will prohibit US airlines from participating in the EU-ETS, and the US House of Representatives has passed a similar bill – the two chambers must now reconcile their bills when Congress reconvenes after the 6 November election before a consolidated bill can be passed in to law.

The potential for hostilities to escalate beyond a war of words, with the EU and its major trading partners imposing punitive trade sanctions against one another, once looked remote, but no longer seems so far-fetched. The Chinese and Indian authorities have already threatened a trade war with the EU, and in October, India’s aviation minster urged the aviation community in the Asia-Pacific region to oppose the EU-ETS, following its own directive to all India-based airlines operating to Europe not to comply with the EU-ETS.

Some commentators are saying that this escalation in the war of words could improve the prospects of a global agreement on the reduction of aviation emissions at ICAO level being reached, where talks have dragged on for years, but nothing concrete by way of proposals emerged. The ICAO’s Governing Council is due to discuss the issue soon, but many believe there will be no measures proposed until 2013 at the earliest, by which time the flash point of April 2013, when airlines must pay for their 2012 emissions under ETS, will have arrived.

Senior EU officials remain unmoved by the widespread international opposition to the EU-ETS and say they will not retreat from taking enforcement action against non-compliant airlines under the EU-ETS. Jos Delbeke, director general for Climate Action said “The European Commission has a constitutional obligation to enforce the law, and (we) will do so. The EU-ETS is here to stay”. Non-compliant airlines will face fines from EU member states, and examples have been given of the prospect of maximum fines in Germany of €50,000 this year, rising to €500,000 next year, while in the UK, the fines would be £1,560 rising next year to £15,600.

If the US airlines, for example, refuse to comply with the EU-ETS requirements, the European Commission will be required to impose financial penalties on them, and if that happens, as presently drafted, the US Senate bill provides for US airlines to be “held harmless” (i.e. not be financially liable), which begs the question as to who will pay the fines – that is where both the European Commission and the US administration may start looking at which tools in their trade sanctions toolbox they can bring out. At that point the spectre of a trade war between the EU and the US, as well as a trade war between the EU and other countries opposed to the EU-ETS including Russia, China and India, becomes very real.

There is however a faint glimmer of light that the political impasse may be broken.

Work has been underway within ICAO to develop Global Market- Based-Measures (Global MBM). An ad-hoc expert working group-comprising representatives from the EU, US, Canada, Australia, Singapore, Brazil, India, Korea, Japan, UAE and Nigeria with IATA and NGOs (non-governmental organisations) as observers – has been set up by ICAO to explore all the available options. The EU has signalled it is prepared to adapt its legislation in the event a Global MBM can be developed by 2013 with equivalent carbon reduction effectiveness. The big question however is whether the EU will agree to defer implementation of the EU-ETS scheme, or opt for a political fix, so as to save face, pending the development of a Global MBM.

The ICAO ad hoc working group

The working group has evaluated four possible models for a Global MBM:

  •  A straightforward carbon offsetting scheme – with 2020 being used as a baseline. Beyond 2020, if a state or an airline operator grew its carbon emissions, it would have to buy carbon credits to cover the excess. Monitoring, reporting, and verification procedures would also need to meet global standards
  •  Carbon offsetting scheme with revenue – this would be the same as the scheme above, but there would be a further cost associated with the amount of carbon credits being bought. Any money spent from the scheme would have to be subject to internationally agreed criteria – the crucial question for this model is what should the level of extra revenue be?
  •  A global ETS – cap and trade scheme – which would be very similar to the current EU-ETS scheme, but without the associated sovereignty problems. It could also include commitments on how monies raised under the scheme are to be spent
  •  An ETS baseline and credit scheme – this scheme has already been discarded by the working group.

The working group is also looking at the geographic scope of a Global MBM, and has come up with four options: departing flights or departing and arriving flights; national carriers; national airspace; or a mixed approach.

The national airspace option is attractive to those countries with huge tracts of airspace such as Russia, but it would be cumbersome and complex to administer. Airlines are already subject to less than direct routings over national blocs of airspace, in order to generate greater revenues, and if that did not change, it would be inappropriate for an environmental scheme to be designed so that there was a risk of it resulting in increased emissions. Of the above options, the option of using a “departing flight” is apparently gaining the most traction, where the administering state charges on departure.

Some countries are saying that the EU-ETS scheme should be suspended while the ICAO options for a Global MBM are developed. South Africa’s tourism minister Marthinus van Schalkwyk said:

“If the EU is committed to a global solution, which I believe they are, and if the rest of the world is seriously committed to providing new political momentum to negotiations under ICAO, which I believe they are, there may be very good reasons for the EU to suspend the inclusion of aviation in the EU-ETS for two years.”

The obvious problem is that if the European Commission takes the metaphorical gun away from the head of ICAO by agreeing to a suspension of EU-ETS, ICAO may simply take its foot off the gas and slow up its efforts to find a Global MBM solution. In some ways, the brinkmanship that will surround the ‘what will they do’ question, when the deadline of April 2013 approaches and opposing states consider whether or not to comply with EUETS, is a political necessity for keeping ICAO focussed on making progress towards a global solution.

The European Commission is adamant that it will not back down from implementation and taking enforcement measures under the EU-ETS Scheme, pointing out that a global ICAO-backed scheme would require the negotiation of an international treaty, which realistically could not be ratified and implemented before 2020. But, if the political pressure is maintained or intensifies any further, the European Commission may opt for a compromise rather than risk a war with its very powerful trading partners, by exempting arriving flights from non-EU countries pending finalisation of the Global MBM by ICAO.

Stop Press: EU will “stop the clock” on EU-ETS

As we go to print, the European Commission has proposed that the EU “stops the clock” for a year on ETS for flights to and from non-European countries. However, the EU-ETS scheme will continue to be enforced for all intra-EU flights. The decision follows ICAO’s Council meeting on 9 November 2012, at which ICAO agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the time of the next ICAO General Assembly in September 2013. However, the Commission has warned that EU-ETS would be reactivated “automatically” if no progress is reached towards a global deal by the time the General Assembly meets.

In its recent meeting, the ICAO Council acknowledged that Global MBMs could have a role to play in the reduction of aviation emissions, and agreed to set up a High-Level Group to make proposals on a framework for MBMs. These proposals are expected to be submitted at the June 2013 Council meeting and then formally presented to the General Assembly in September 2013.

The European Commission has welcomed this development. At a press conference on 12 November 2012, EU Commissioner for Climate Action, Connie Hedegaard, said:

“In order to create a positive atmosphere around these negotiations, I’ve just recommended in a telephone conference with the 27 Member States that the EU “stops the clock” when it comes to the enforcement of the inclusion of aviation in the EU ETS to and from non-European countries until after the ICAO General Assembly next autumn.

“But let me be very clear: if this exercise does not deliver – and I hope it does, then needless to say we are back to where we are today with the EU ETS. Automatically”.

The EU still has to work through what this proposal will mean in practice. The obligation to surrender emissions allowances from air traffic to and from the EU will be deferred for one year, which means that allowances for such flights will not have to be surrendered in April 2013, but whether this will also result in the suspension of monitoring and reporting obligations, and whether airlines will be able to trade their unused allowances, remains to be seen.

It is also important to note that the announcement to “stop the clock” on flights into and out of Europe is still a proposal at this stage, and will have to be approved by the European Council and Parliament before it has legal effect.

The reaction to this news has been varied.

IATA has welcomed the Commission’s proposal. Tony Tyler, IATA’s Director General, observed that the proposal to suspend the imposition of the EU-ETS on certain flights “represents a significant step in the right direction and creates an opportunity for the international community”. The Association of European Airlines (AEA) has also cautiously welcomed the announcement: “As international tensions over the issue have escalated, European airlines have been facing the very real prospect of discrimination and retaliation in our most important global markets. Indeed, some AEA members have already encountered operational obstacles with regard to certain countries”, being a reference to the commercial and diplomatic fall-out over the introduction of the EU-ETS.

ELFAA (the European Low Fares Airline Association) and BATA (the British Air Transport Association), however, have expressed concerns about the proposal to suspend ETS. Whilst acknowledging that a global scheme would be preferable, both associations note that compliance with EU-ETS will continue to be enforced for all intra-EU flights, resulting in different rules applying to different airlines depending on the routes they operate. These associations are concerned that this will impose an unfair burden on EU citizens flying within Europe and could result in damaging distortions of competition.

Many green NGOs, including the Aviation Environment Federation, have welcomed ICAO’s decision to speed up work on a global measure to reduce aviation emissions, and have warned the aviation community not to throw this opportunity away. However, they have expressed some concern about the lack of clarity on the way forward, noting that “there are no binding commitments on substance”.