Limited Freedom above the Clouds: Aviation Becomes Part of European Emissions Trading Scheme

"Limited Freedom above the Clouds: Aviation Becomes Part of European Emissions Trading Scheme" was the topic of the 20th Climate Talk, hosted by Dr. Camilla Bausch and Benjamin Görlach of the Ecologic Institute, as well as Dr. Susanne Dröge of the German Institute for International and Security Affairs (SWP) on 21 November 2011.

Aviation currently accounts for a relatively small portion of the EU-wide greenhouse gas emissions. But its emissions are growing rapidly compared to other sectors, having doubled since 1990. Until recently, greenhouse gas emissions from aviation were not regulated: kerosene is the only fossil fuel that is exempt from any taxes. Aviation is not covered by the Kyoto Protocol; instead, the International Civil Aviation Organization was asked to develop a joint solution for aviation emissions. However, the ICAO was unable to respond to this request in ten years of negotiations. In view of this deadlock, the EU decided to include air travel to and from Europe in the EU-wide emissions trading scheme as of 2012. All flights will be included that take off from or land in the EU-regardless of the country in which the airline is registered.

The Climate Talk discussed the various administrative, legal, economic, and political issues that arise from this move by the EU. Olaf Hölzer-Schopohl (Federal Foreign Agency - FEA), Hans-Werner Polzin (Lufthansa), Larry Wright (US Embassy) and Meike Söker (Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety) set the scene for the discussion with their opening remarks.

Olaf Hölzer-Schopohl discussed how the inclusion of air travel works practically. He noted that the vast majority of air carriers has been cooperative in implementing the regulation and provided necessary forms and data. Only a few carriers have not complied with their duties, this makeup less than 1 percent of the covered emissions. The German Emissions Trading Authority (DEHSt) has calculated the free allocation to operators using an EU-wide Benchmark, and will soon transfer the corresponding emissions allowances. To a large extent, the rules of the stationary sector for aviation were included in the administration processing.

Hans-Werner Polzin from Lufthansa explained how Lufthansa has adjusted to the emissions trading scheme and which difficulties have arisen from its inclusion therein. He emphasized the considerable costs that have been incurred from its implementation. He critiqued that the complexity of the market and the speculative behavior of some actors lead to significant price movements, which impairs planning security and calls for comprehensive risk management by the regulated firms. In general, many uncertainties still exist, such as the pending EuGH decision on emissions trading or the overall political context, as well as the risk that third-party states take retaliation measures against EU air carriers.

Larry Wright from the American Embassy in Berlin assessed the inclusion of air carriers from non-EU countries as the wrong policy for the right goal. From the US' perspective, the inclusion of air travel in the EU emissions trading scheme is a unilateral measure, yet a global problem like emissions from aviation requires a global solution-the ICAO is the appropriate body to develop one such solution. He warned against the risk that the inclusion of American air carriers in the emissions trading scheme could lead to a trade war. He also touched upon the political situation in the USA: in the US House of Representatives, there was a bipartisan protest against the EU measures. A draft law currently debated in the Senate would explicitly forbid US air companies to participate in the EU emissions trading scheme. Mr. Wright added that the USA will intensify its efforts in the ICAO in order to find a global solution. Until that happens, the EU should suspend including non-European air carriers.

Meike Söker of the German Federal Ministry of the Environment, Nature Conservation and Nuclear Safety recall the motivation for these measures. Aviation, she argued, should make an adequate contribution to climate policy goals without becoming overstrained. The alternative is that other sectors would have to reduce their emissions more severely, which would be neither fair nor economically efficient. Last but not least, the aviation industry itself preferred to have a flexible instrument for the regulation of its emissions-alternative measures would presumably have caused an even larger uproar. On the question about an internationally coordinated effort, Ms. Söker explained that the inclusion of air carriers in the EU emissions trading was born of necessity. Because progress in the ICAO failed to materialize, the EU had to take action. As soon as there is a sign that the ICAO will proceed, the EU would be prepared to negotiate at any time the transfer of its model to an ICAO-wide trading scheme.

The subsequent, lively discussion focused on the significance of including aviation into the EU ETS and the difficulties associated with its implementation. Also discussed was how large the strain on the air carriers actually would be. Because carriers receive much of their allocation for free, this strain could be less than expected: how much the companies end up paying depends on the extent to which they can transfer the costs of emission permits to the ticket price. Under certain conditions, companies could even end up increasing profits ("windfall profits"). Yet, whether this is a real possibility remains controversial.

Also controversial were the competitiveness impacts on European carriers. Studies have shown that no strong impacts were to be expected since the non-European competitors are subject to the same rules as the European air carriers. Disadvantages could, however, come about for intercontinental transfers, if passengers avoided European hubs, and instead used Arab or Asian airports for transfers. One industry representative explained that German airlines could be the ones to suffer in the current situation if other countries take retaliation measures against European airlines, for instance by increasing the cost of overflight rights. Other participants questioned whether this was a serious threat, or merely political saber-rattling: ultimately, third-country airlines are cooperating for the most part, albeit under protest.

It was agreed that the measures will increase the cost of flying. But the actual additional costs per flight could remain small: for an inner-European flight, the increase might be on average about €1, whereas for long-haul flights, prices could increase up to €20-40 per ticket.

After the event, the lively discussion was continued in a relaxed atmosphere at a nearby restaurant.