The European Union (EU) adopted a regulation in April 2014 that continued the application of the European Union Emission Trading Scheme (ETS) as to flights operated inside the European Economic Area (EEA). But implementation of the international aspects of the ETS continues to be a work in progress based, at least in part, on objections to the implementation of regional emissions schemes. These objections have stemmed from several countries, including the U.S., China and India. Parties who presently have or intend to have interests in aircraft using EEA airports, such as operators, secured parties, lessors and lessees, should continue to carefully monitor developments and consider potential implications, including rights and obligations under leasing agreements.

EU Continues to Implement ETS Within the EEA While Delaying International Implementation

The European Union's Emissions Trading Scheme (ETS) Directive 2003/87/EC (Oct. 13, 2003) is a carbon cap-and-trade program wherein the EU sets an overall cap on emissions and allocates emissions allowances that may be used, banked for future use, or sold on the open market. Since Jan. 1, 2012, the broad reach of the ETS purported to touch any commercial and non-commercial aircraft operator (including operators based outside of the EU) using an airport located within the EEA,1 with certain de minimis exceptions under the Aviation Directive 2008/101/EC (Nov. 19, 2008).2 The following are exempt as de minimis under the ETS:

  • flights performed by aircraft with a certified maximum take-off weight of less than 5,700 kg (approximately 12,500 lbs)
  • aircraft operators operating (a) fewer than 243 flights touching the EEA airports for three consecutive four-month periods, or (b) flights touching the EEA airports with total annual emissions less than 10,000 metric tons

Total Flight Emissions Considered – Not Just European Airspace Emissions

As originally enacted, ETS aircraft operators were required to obtain allowances for carbon dioxide emitted during the full length of any flight that departs from or arrives at an EEA airport. Thus, a flight to London from Los Angeles would require more allowances than a flight from New York even though the planes flew over the same amount of European airspace. Aircraft operators are required to submit allowances equal to their flight emissions by April 30 of the following calendar year. Each aircraft operator is assigned to a member state for the purposes of reporting and submitting allowances. Penalties for failing to submit allowances range from a fine of €100 per metric ton of carbon dioxide in addition to the cost of purchasing requisite allowances on the open market to an operating ban for continued noncompliance.

Before the submission deadline for the 2012 allowances, the European Commission proposed a delay on implementation of the international aspects of the ETS to encourage negotiations for the creation of a global emissions scheme at the United Nations International Civil Aviation Organization (ICAO) Assembly in September and October 2013. On April 24, 2013, the European Parliament and European Council considered the European Commission's proposal and decided that the EU would not enforce monitoring, reporting and verification requirements for flights between EEA airports and non-EEA airports for calendar years 2010-2012.3 However, "intra-flights"– flights between EEA airports – had to be fully compliant with ETS requirements. This decision is sometimes referred to as the "Stop the Clock" Decision.

On Oct. 4, 2013, the ICAO Assembly created a roadmap for the development of a global emissions scheme to be voted upon by the ICAO Assembly in 2016 with implementation by 2020.4 The ICAO Assembly also passed a resolution that countries or groups of countries designing or implementing their own emissions scheme for international aviation should engage in consultations and negotiations with other states.5 The EU voted against this resolution and later submitted a reservation noting that there is no legal requirement for a mutual agreement to implement its own emissions scheme.6

Notwithstanding its opposition to the ICAO's resolution, the EU has taken additional steps to delay implementation of the international aspects of the ETS. On Oct.16, 2013, the European Commission proposed a two-prong amendment to enforcement of the ETS.

  • First, the "Stop the Clock" Decision applicable to 2010-2012 would be extended to cover calendar year 2013.
  • Second, the proposed amendment called for enforcement of the ETS during calendar years 2014-2020 on (i) all flights between EEA airports; and (ii) portions of flights that take place in European regional airspace for flights between EEA airports and non-EEA airports.

In April 2014, the EU implemented Regulation No. 421/2014, which extends the "Stop the Clock" Decision to calendar years 2013-2016.7 The regulation also excludes certain flights between "outermost regions" of the EEA for calendar years 2013-2016.8 Further, in addition to the existing de minimis exception, there is an ETS exemption for non-commercial aircraft operators with a total of less than 1,000 tonnes CO2 per year from calendar years 2013-2020. Compliance dates for reporting emissions and surrendering allowances for calendar year 2013 emissions were extended to March and April 2015 to coincide with existing deadlines for calendar year 2014. Importantly, the regulation did not extend the ETS to portions of flights that take place in European regional airspace for flights between EEA airports and non-EEA airports

Potential International Implementation Warrants Attention

Several countries have voiced strong objections to the ETS. In the U.S., the European Union Emissions Trading Scheme Prohibition Act (the "ETS Prohibition Act") became law on Nov. 27, 2012.9 The ETS Prohibition Act applies to all "civil aircraft of the United States" registered under 49 U.S.C. 44101 et seq. (i.e., operators of N-registered aircraft) and authorizes the Secretary of the U.S. Department of Transportation to conduct international negotiations to pursue a "worldwide approach to address aircraft emissions."

Further, the ETS Prohibition Act empowers the U.S. Secretary of Transportation to prohibit an operator of a U.S. civil aircraft from participating in the ETS at a later date. Section 2(a) of the ETS Prohibition Act requires the Secretary to make a determination that the prohibition would be "in the public interest" after taking into account the impact on:

  • U.S. consumers, U.S. carriers and U.S. operators
  • U.S. economic, energy and environmental security
  • U.S. foreign relations, including existing international commitments

Following the European Commission's proposed amendments in October 2013, members of Congress and industry groups asked the U.S. Secretary of Transportation to use its powers under the ETS Prohibition Act to oppose application of the ETS to U.S. aircraft operators. To date, the Secretary of Transportation has not exercised its authority to prohibit U.S. aircraft operators from participating in the ETS.

Compliance With ETS Raises Many Considerations

In looking ahead, one of many potential areas of consideration are the rights and obligations under existing aircraft leasing and financing agreements. The aircraft operator at the time the aircraft arrives or departs from an EEA airport is the party responsible for compliance with ETS. Thus, responsibility for ETS compliance would likely arise from the nature of the leasing agreement. Under a "wet lease," the lessor retains operational control of the aircraft. Conversely, under a "dry lease," the lessee obtains possession of the aircraft and thus operational control. Based on their respective positions, the parties to a leasing agreement should further evaluate their insurance and indemnification rights – especially because failure to comply with the ETS could result in liens, detention, or operational limitations that have a direct impact on the contracted rights and obligations. As the ETS is implemented into national law by each member state, the specific rules regarding seizure and sale or other penalties differ from member state to member state.

Such rights and obligations of parties to a leasing agreement may be implicated if, for instance, the U.S. Secretary of Transportation exercises its power to prohibit a U.S. civil aircraft from participating in ETS. In such an instance, an operator may be unable to simultaneously comply with the ETS and the ETS Prohibition Act. Where a lease permits a lessor to declare a default in the event of a material risk of detention resulting from fees owed in respect of the aircraft, it is conceivable that compliance with the ETS Prohibition may result in a lessor's exercise of remedies.

Current Scope of the ETS

At the current time, the scope of the ETS remains limited to flights within the EU. The discussion in this alert identifies only a small sampling of what are likely to be a plethora of issues and challenges that may arise from the lack of international consensus on emissions regulations. Although these issues may not appear to have immediate significance, they nonetheless deserve the consideration of parties who ultimately may be impacted by a broader ETS implementation.