European Union Emissions Trading Scheme (EU-ETS)

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As New Year Begins, Industry Confronts EU-ETS

January 11, 2012

The implementation of the European Union’s Emissions Trading Scheme (EU-ETS) on air travel to, from and within its collective borders earlier this month came with not a loud protest, but with concerns being raised among operators in several corners worldwide, along with more threats of retaliation from several countries.

There is still no consensus in Washington about the nature of possible retaliation against the EU for imposing a tax on carbon output from commercial and general aviation flights, but there is increased chatter among government agencies.

NBAA continues to emphasize that operators should continue complying with EU-ETS-related monitoring, reporting and verification requirements, and a number of business operators are monitoring the carbon emissions on their total number of miles flown to, from and within EU airspace. That said, there remains the possibility that U.S. operators will be prohibited by law from complying with EU-ETS.

“We are contemplating a wide range of possible steps that we could take, or actions that we might take,” Reuters quoted a senior Obama administration official as saying in early January.

The European Union Emissions Trading Scheme Prohibition Act of 2011 was overwhelmingly passed by the House of Representatives last year. Similar legislation, introduced in the Senate in December, awaits action this year. Both proposals would ban U.S. flight operators from complying with EU-ETS and urge the administration to do everything possible to reach a settlement on the issue.

As threats of non-compliance have been issued from Washington, commercial carriers like Delta, American and U.S. Airways recently moved to charge passengers a $3.00 fee in order to pay for compliance. The carriers’ lobby in Washington, Airlines for America, is reportedly considering its legal options.

Meanwhile, other countries are taking actions of their own. Chinese operators have said flat-out they will not pay the EU-ETS tax. China Air Transport Association Deputy Secretary-General Cal Haibo was quoted as saying “China will not cooperate with the European Union on the ETS, so Chinese airlines will not impose surcharges on customers relating to the emissions tax.”

Beijing’s determination to simply leave EU carbon tax bills unpaid raises the stakes in what could erupt into an open trade war between Europe and the rest of the world.

The EU promises to charge €100 for every ton of carbon dioxide emitted by non-complying operators who cross its airspace – a fine that would certainly exceed the cost of compliance. If operators continue to defy EU-ETS, the European Union could ban them from flying to the continent altogether.

India is reportedly adopting a tiered approach to EU-ETS that includes teaming up with other nations like the U.S. and Canada to protest implementation. Indian media report one avenue could be initiating a complaint to the World Trade Organization, on the grounds that EU-ETS violates WTO National Treatment Norms. Such a complaint would center on the fact that the EU charges its carbon emissions tax on the entire duration of flights through its airspace, from take-off to landing, no matter where those flights begin and end.

Governments in several nations have indicated their intent to challenge EU-ETS at the UN Framework Convention on Climate Change, to be held in Qatar later this year. Several protests are expected to be filed with the International Civil Aviation Organization (ICAO) this year as well. But as NBAA’s Business Aviation Insider recently reported, there is little assurance that ICAO will act before 2014.

Amid the increasing volume of international protest against ETS, EU Climate Commissioner Connie Hedegaard has indicated her willingness to at least talk about compromise. The EU will review ETS in the first quarter of 2013.

There are also provisions within the rules to exempt those countries that take their own equivalent steps to reduce carbon emissions. Observers said there appeared to be room for interpretation under these clauses, which seem to have been written in such a general way to allow for precisely that. But Hedegaard has also indicated the EU will not abandon ETS under any circumstance.

The likely costs for compliance with EU-ETS already appear to be daunting, for business operators in Europe, and the European Business Aviation Association (EBAA) points out there are several inequities in the program.

Under EU rules, airlines receive exemptions that cover 85-percent of their CO2 emissions, leaving them to acquire permits for only 15-percent. Business operators, however must pay for permits covering 96-percent of their assessed carbon output.

The cost of reporting and verifying emissions is, according to EBAA, also inequitable.

“In many cases, for smaller emitters the costs for Monitoring and Reporting, and particularly Verification, far outweigh the costs linked to acquiring CO2 permits,” stated EBAA President Brian Humphries. “As such, the MRV procedure threatens to weaken the competitiveness of European business aircraft operators vis-à-vis non-EU competitors and other modes of transport, such as the airlines.”

Humphries also pointed out what EBAA sees as looming inequities in enforcement should operators from the U.S. and other countries become exempt from EU-ETS or simply refuse to pay, as they’ve threatened to do. That, he suggested, would create an unlevel playing field, giving non-European operators a distinct economic advantage.

Europeans widely applauded the application of EU-ETS to aviation operators back in 2008. In the four years since, the world’s attention has often been riveted elsewhere. Still, the feeling in Europe is that talk of retaliation is no more than that – talk.

“It’s true that there’s been a lot said about retaliatory measures,” observed EBAA CEO Fabio Gamba, whose knowledge of EU regulatory workings has been widely acclaimed. “But it’s true as well that the directive is more than three years old. Voices have been raised only lately. The commission believes such threats are a bluff.”

Whether that proves to be a wise gamble on the part of EU countries remains to be seen as the global controversy over EU-ETS continues to unfold.