Environmental Law Advisory - Aviation and the EU Emission Trading Scheme

July 17, 2009

Introduction

The EU Emission Trading Scheme (EU ETS) establishes a cap-and-trade system for greenhouse gas emission allowance within the EU.^[1] With one allowance representing one tonne of carbon dioxide (CO2) it operates through the allocation and trading of emission allowances. The total amount of emissions from industry sectors covered by the EU ETS is capped. The aim of the EU ETS scheme is to reduce emissions in a cost-effective manner, allowing companies to trade emission allowances and thereby determine how and where they reduce emissions.

On 19 November 2008, the EU adopted legislation to include aviation into the EU ETS.^[2]As of 1 January 2012, all aircraft operators flying into or out of any EU airport will be required to participate in the EU ETS. Aircraft operators will have to surrender one allowance per tonne of CO2 emitted on a flight to and from (and within) the EU. The EU ETS provides for some limited exemptions.^[3]Flights made entirely outside the EU will not be affected by the EU ETS. Aircraft operators not complying with the EU ETS will face penalties of EUR 100 per missing allowance on top of the obligation to procure and surrender missing allowances. They may even be banned from operating in the EU.

Responsibility of EU Member States for each aircraft operator

Every aircraft operator will be administered by one EU Member State. For operators with a European operating licence this will be the Member State which granted the operating licence. Where this is not the case, operators will be assigned the Member State with the greatest estimated attributed emissions from flights. The Commission has published a preliminary list of aircraft operators that have undertaken a relevant aviation activity on or after 1 January 2006, specifying the administering Member State for each aircraft operator.^[4]

Capping the total quantity of allowances for the aviation sector

The total quantity of allowances to be allocated to aircraft operators for 2012 will be capped at 97% of their average annual emissions levels in 2004-2006. From 2013 onwards the total quantity of allowances to be allocated to operators will be capped at 95% of their average annual emissions levels in 2004-2006.

Overall allocation of allowances

Out of the total quantity of allowances determined, 15% of the allowances will be auctioned.

A special reserve of 3% of the total quantity of allowances will be allocated to new aircraft operators and operators experiencing sharp growth. An aircraft operator who qualifies under these conditions may apply for a free allocation of allowances from the special reserve by making an application to the competent authority of its administering Member State.

The remaining quantity of allowances will be allocated for free to aircraft operators. Operators emitting more than their allocated amount of CO2 will need to reduce emissions or procure^[5] extra allowances.

Application requirements for allowances

The free allocation is determined by the total amount of tonne kilometres transported by an aircraft operator in the base year 2010 and a benchmark factor, which will be calculated by the Commission.

To apply for free allowances, operators must first submit a monitoring plan to the competent authority in their administering Member State by 31 August 2009. This will serve as the basis for monitoring tonne kilometre data in 2010, which must then be verified and reported to the competent authority in the administering Member State by 31 March 2011.

Monitoring Plan

On 16 April 2009, the Commission adopted monitoring and reporting guidelines for emissions and tonne-kilometre data from aviation activities (the 2009 Decision).^[6] Information to be included in the monitoring plan includes for example:

Identification and contact details of the aircraft operator.
An initial list of aircraft types in its fleet operated at the time of submission of the monitoring plan, and the number of aircrafts per type, as well as the fuel types associated with each aircraft type.
A description of procedures and systems adopted to track the completeness of the list of aircrafts operating during the reporting year.
A description of data acquisition and handling and control activities, quality control and assurance activities, including maintenance and calibration of measurements equipment.
A description of the chosen methodology for determining tonne-kilometre data.
A description of the chosen methodology for monitoring and calculating fuel consumption for the aircrafts on the list.
The procedure for measurement of fuel uplifts, and emission factors used for each fuel type.
The procedure and controls on tonne-kilometre data monitoring and reporting.

Compliance and Timing

The aviation amendments to the EU ETS have to be implemented by Member States before 2 February 2010. However, according to the 2009 Decision, monitoring plans have to be submitted to competent authorities in the administering Member State already by 31 August 2009.

The monitoring year starts as of 1 January 2010 and aircraft operators are required to have their internal processes ready by then to monitor their emissions and tonne km data. The risks of not having developed a robust monitoring system are considerable for tonne kilometre data in particular. This is because this data will be collected only in 2010, determining the number of free allowances for a period of nine years (2012 to 2020). Thereafter, emissions must be monitored annually from 2010 onwards.

Annual Report

Once free allowances have been distributed, they will be issued to operators on a yearly basis by 28 February of the compliance year. Aircraft operators will be required to monitor yearly emissions on a per-flight basis. This data must be aggregated in an annual emissions report and verified by an independent accredited verifier. By 31 March of the following year, the verified report must be submitted to the competent authority. Following acceptance by the competent authority, the operator has to surrender the equivalent number of allowances by 30 April. Aircraft operators will have to submit an annual emission report, accompanied by a report on tonne-kilometre data to the competent authority of the relevant Member State. Elements will for example cover:

Data identifying the aircraft operator, together with the name and address of the verifier of the report.
Reference to and version number of the relevant approved monitoring plan.
Relevant changes in the operations and deviations from the approved monitoring plan during the reporting period.
The aircraft registration numbers and types of aircraft used during the reporting period.
Chosen method for calculation of mass for passengers and checked baggage, as well as for freight and mail.
Total number of passenger kilometres and tonne-kilometres for all flights during the reporting year.
Annual emissions and annual number of flights.

Conclusion

The EU proclaims that the EU ETS serves as a model for other countries considering similar national or regional schemes and to link these to the EU ETS over time. Time will show whether the EU ETS can form the basis for wider or even global action.

Despite the economic downturn, only a part of the allowances the sector requires will be issued for free in 2012. This shortfall equals additional costs for the entire sector.

The EU ETS imposes a tight compliance schedule on all participants. It is high time for aircraft operators to familiarise themselves with their obligations under the EU ETS. The first legal obligation is the submission of monitoring plans by 31 August 2009. The monitoring base year 2010 will be crucial in determining the number of free allowances for the period from 2012 to 2020.

Aircraft operators want to make sure that the allowance allocation process was correctly conducted and that competitors will not receive undue advantages.

If you would like to discuss the application of the EU ETS to the aviation sector, please contact Michael Sánchez Rydelski (msanchez@steptoe.com; +32 2 626 0543) or James Searles (jsearles@steptoe.com; +32 2 626 0500) in Steptoe’s Brussels office, or Seth Goldberg (sgoldberg@steptoe.com; +1 202 429 6213) or William Karas (wkaras@steptoe.com; +1 202 429 6223) in Steptoe’s Washington office.

[1] Directive 2003/87/EC of the European Parliament and the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community, OJ 2003 L 275, p. 32.

[2] Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community, OJ 2009 L 8, p. 3.

[3] For example, commercial air transport operators operating, for three consecutive four-month periods, fewer than 243 flights per period will be exempt from the EU ETS.

[4] The draft list is available at: http://ec.europa.eu/environment/climat/pdf/aviation/alloc_operators_110209.pdf

[5] The ETS for aviation is interlinked with the existing EU ETS for stationary installations. Aircraft operators will have the flexibility to use unlimited allowances from the existing scheme. There will also be the possibility to use credits from the Kyoto flexible mechanisms. This gives operators the opportunity to invest in emissions reducing projects in developing countries (under the “clean development mechanism”) or in industrialised countries (“joint implementation”).

[6] Commission Decision of 16 April 2009 amending Decision 2007/589/EC as regards the inclusion of monitoring and reporting guidelines for emissions and tonne-kilometre data from aviation activities, OJ 2009 L 103, p. 10.