Synopsis

As the EU Parliament prepares to vote on the latest proposals to amend the Aviation ETS, this client alert examines the proposals in the context of the developments at the ICAO Assembly held in October 2013.

Background

The aviation sector was first included within the EU Emissions Trading System ("Aviation ETS"), albeit in relation to emissions of CO2 only, with effect from 1 January 2012 (although certain preparatory compliance obligations applied to aircraft operators from 2010).

The European Commission ("the Commission"), frustrated with what it saw as a lack of progress at the international level in tackling the growing issue of emissions from aircraft, had the sector in its sights since at least 2005. The EU saw itself as leading the world in tackling climate change impacts and hoped that its approach might become a blueprint for a wider international scheme to tackle the emissions contributed by the aviation sector.

The Aviation ETS was controversial from the outset. The legal challenges and threats of trade wars that were triggered have been widely reported and are beyond the scope of this update. Suffice it to say that by far the most controversial feature of the Aviation ETS was that it applied to all emissions from all flights taking off from or landing in the EU, even if the carrier was a non-European airline and even though (in the case of a hypothetical flight from, say, London to San Francisco) the majority of the emissions from that flight would all be emitted outside EU airspace.

"Stop the Clock"

Against a backdrop of vigorous international legal and diplomatic protest (and commercial aircraft contracts that were being held to ransom), and with the first Aviation ETS compliance deadlines looming1, the Commission, in November 2012, dramatically suspended the operation of the Aviation ETS insofar as it related to international aviation.

Our client alerts of November 2012 ( Alert 12-260 and Alert 12-262) explained the Commission's so-called "Stop the Clock" decision, which temporarily suspended (for the period of only one year) the enforcement of aircraft operators' obligations in relation to flights between the European Economic Area ("EEA") and countries outside the EEA.

However, "Stop the Clock" was only ever a temporary derogation: in the absence of a subsequent permanent amendment of the Aviation ETS, the scheme would automatically revert to its original full scope, including for 2012 emissions, with the allowance surrender obligations re-applying from April 2014 onwards.

The stated purpose of the "Stop the Clock" decision was to allow breathing space for the International Civil Aviation Organization ("ICAO") to try and broker a global agreement addressing international aviation emissions at the meeting of the ICAO Assembly in September/October 2013.2 It was therefore always inevitable that the Stop the Clock decision and the future of the EU's Aviation ETS would have to be revisited in late 2013.

Developments at ICAO

On 4 October 2013 in Montreal, the ICAO Assembly concluded two weeks of negotiations by agreeing to develop a global scheme based on market-based measures (the "global MBM") to limit CO2 emissions from international aviation. The agreement calls for appropriate measures to be finalised at the next ICAO Assembly in 2016, and to be implemented by 2020.

It is important to note that the ICAO Assembly did not make a binding commitment to develop a global scheme. Instead, it confirmed that the proposed scheme would be voted on by the ICAO Assembly at its meeting in 2016.

In addition, the ICAO Assembly rejected a proposal adopted by the ICAO Council3, that pending the development of a global scheme, regional schemes such as the Aviation ETS could cover international flights that arrived at or departed from their airports for the portion of flights that were over their airspace (i.e., the 'sovereign airspace' approach).

Instead, the ICAO Assembly resolved that when states were designing new schemes and implementing existing schemes, they should (i) engage in bilateral or multilateral negotiations with other states to reach an agreement; and (ii) grant exemptions to developing states whose total revenue tonne kilometres of international civil aviation is less than 1 per cent.

The Commission's Proposal to Further Amend the Aviation ETS

On 16 October 2013, the Commission published its proposal which takes the form of a Directive amending the Aviation ETS (the "Proposal") by adopting the 'sovereign airspace' approach, effectively disregarding the ICAO Assembly resolution that rejected this approach.

The Commission framed its reasons for the sovereign airspace approach by arguing that it was an appropriate response to the progress made at the ICAO Assembly, and that it would 'promote further momentum' toward a global scheme.

The Commission wants its Proposal to be agreed between the European Parliament and Council on an expedited basis during the first quarter of 2014, with the intention that the Directive should take effect, so as to be in place in time for the next allowance surrender deadline of 30 April 2014.

Scope and Impact of the Proposal

We outline below the key elements of the Commission's Proposal, if adopted:

  • Obligations under the Aviation ETS will continue to be enforced (although not immediately – see further below) in respect of 2013 emissions from flights between airports in the EEA (covering the 28 EU Member States plus Norway and Iceland), including flights to and from outermost regions (as under the original Aviation ETS scope and the "Stop the Clock" decision).
  • Emissions from flights to and from countries outside the EEA will continue to benefit from a general exemption for those emissions in 2013.
  • From 1 January 2014 and until the planned global MBM comes into force in 2020, aircraft operators operating flights to and from countries outside the EEA would not have to account for the emissions from these flights in 2013 at all, and would only have to account for the emissions from these flights within European airspace, rather than on the whole route, from 2014 to 2020.
  • For each calendar year between 2014 to 2020, aircraft operators will have the choice to surrender allowances either on the basis of (i) the proportion of the route concerned as calculated by Eurocontrol (which will be set out in an Annex to the amending Directive); or (ii) calculations by the competent authority.
  • In order to allow time to implement these new provisions, there will be an extraordinary two-year compliance cycle for aviation emissions for 2013, with data for both the 2013 and 2014 years being reported together by 30 March 2015, and allowances for these years surrendered simultaneously by 30 April 2015. Starting with 2015 emissions, an annual compliance cycle will resume. Therefore, not even emissions from intra-EU flights will need to be covered in 2014.
  • Emissions from flights to and from countries which are classed as "developing"4 for the purposes of the Proposal and whose share of total revenue tonne kilometres of international aviation activities is less than 1 per cent share, will for the first time be fully exempted.
  • A new de minimis threshold will apply. Non-commercial operators (currently undefined, but likely to be those flights which do not carry passengers, freight or mail for remuneration) that are responsible for less than 1,000 tonnes of CO2 in a calendar year will be exempt

Based on the initial response to the Proposal (discussed below), the Proposal is unlikely to be adopted in its current form. Given that the consequences of a failure to agree would result in all aircraft operators having to report their verified 2013 emissions by 31 March 2014, and then surrender allowances by 30 April 2014, some agreement or compromise on the Proposal will almost certainly be reached.

If, as again seems likely, a modified Proposal is adopted before these compliance deadlines but the Directive is not transposed into national legislation by 30 April 2014, aircraft operators would technically be left in a legally uncertain position as to their compliance obligations for 2013 emissions. In practice however, it would be extraordinary if any enforcement action were taken once the modified Proposal was adopted and national implementation was pending.

The Legislative Stages – Parliament and Council

The 'Environment Committee'5 is the 'lead committee' responsible for the Proposal, and it is scheduled to vote on the Proposal, as well as on any proposed amendments to the Proposal, on 30 January 2014.6

The report published by the rapporteur designated by the Environment Committee supported the 'sovereign airspace approach', on the basis that a simple extension of Stop the Clock could be seen as an 'unconditional surrender' by the EU. However, the report also proposed that the sovereign airspace approach should only extend until 2016 (rather than 2020 as proposed by the Commission), so that the EU can reassess its options following the next ICAO Assembly.

The report also noted that there was not much substantive difference between the General Assembly 'endorsing' the development of an international scheme in 2001, and its new commitment in 2013 to develop a scheme, which is still subject to various conditions and will need to be agreed upon in 2016. The Commission and the Environment Committee are clearly of the view that, in the absence of a stick to wave at the ICAO member states, there is limited prospect of a binding agreement in 2016. Arguably, the threat of the Aviation ETS is what has led to the limited progress at ICAO to date.

The rapporteurs for the Transport Committee and the Industry Committee have also prepared draft opinions on the Proposal. They have both argued against the Proposal and suggested continuation of Stop the Clock until at least 2016 on the grounds, respectively, that it would 'maximise the chances of reaching an international agreement' and that the Proposal would 'risk the ICAO process' and 'expose Member States and EU airlines to further retaliatory measures and trade wars'.

It is important to note that, although the Transport Committee is scheduled to have a vote on the Proposal on 21 January 2014, this vote will be non-binding and only the Environment Committee's vote will determine how the Proposal progresses through the EU Parliament.

EU Council Position

The UK, France and Germany have also expressed concerns about the Proposal on the grounds that the 'sovereign airspace approach' is not in line with the ICAO Assembly resolution, and will hinder progress towards a global deal by 2016.

It is not clear at this stage what position other EU member states have on the Proposal.

Other Reaction to the Proposal

The international reaction to the Proposal has been almost unanimously negative. In the United States, members of the House of Representatives Committee on Transportation and Infrastructure have written to the U.S. Secretary of Transportation, arguing that the Commission's Proposal 'violates the spirit and the letter of the ICAO Agreement'. Furthermore, they have encouraged the Secretary of Transportation to use his powers under legislation passed in January 2012, authorizing him to prohibit U.S. airlines from participating in the EU ETS.

Concerns about the Proposal have also been raised by, among others, the International Air Transport Association7, the Association of Asia Pacific Airlines8, and the Arab Air Carriers Organization, whose Secretary-General has said that if the Proposal goes through then 'we will be back to trade wars'.9

The Commission's main argument is that its sovereign airspace approach will give equal treatment to flights over the regional European area whether they come from an airport inside or outside of the EEA, thereby eliminating the risks of competitive distortion. However, it is likely that a higher share of the flights of smaller European airlines will face the burden of Aviation ETS compliance costs than those of larger competitors that operate intercontinentally. Indeed, it was just this argument that, at least in part, led the EU to originally include all emissions from international flights. It was therefore not a surprise when the European Low Fares Airline Association (whose members include easyJet and Ryan Air), argued that by excluding aviation emissions outside EU airspace, the Proposal is discriminatory and therefore violates EU law.10 In addition, they have said that they do not believe that real progress was made towards a global deal at ICAO, and so the criteria for continuing Stop the Clock in its original or amended form has not been met.

Conclusion

While it is difficult to predict the final outcome of the Proposal, it seems that a compromise agreement will have to be reached as there appears to be no appetite for the default position, i.e., Stop the Clock expiring and the original Aviation ETS coming back into full force.

At the same time, the stated aim of all parties is for an agreement to be reached for a global scheme at ICAO level. In order to achieve this by 2016, the coming years will need to see substantive progress at a technical level as regards the design of a global scheme which can gain global support at the next ICAO Assembly. If that happens as planned, then by 2020 the aviation sector – which has spent the past several years getting to grips with and preparing to comply with the Aviation ETS – could find itself governed by a completely new emissions control regime. The reality is that the outcome of the ICAO Assembly in 2016 is more dependent on the success of an international agreement on climate change under the UNFCCC framework to be determined in Paris, than on any position the EU takes on Stop the Clock by April 2014. The EU is likely, however, to wish to retain some leverage in its Aviation ETS negotiations with the international community, rather than to extend Stop the Clock until 2016 on a blanket basis.

Footnotes

1. The compliance deadline for the 2012 calendar year was 30 April 2013.
2. The ICAO Assembly is the meeting of all member states of ICAO held not less than once every three years. It is the forum where member states agree to important strategic decisions, such as the implementation of a global aviation emissions plan.
3. The ICAO Council is a permanent body composed of 36 member states and has several functions, including carrying out the directions of the ICAO Assembly.
4. Countries considered to be developing for the purposes of the Proposal are those which benefit at the time of adoption of the Proposal from preferential access to the Union market in accordance with Regulation (EU) No 978/2012, that is those which are not classified in 2013 by the World Bank as a high-income or upper-middle-income country, or are a least-developed country.
5. Committee on the Environment, Public Health and Food Safety.
6. For more information on the EU legislative process, please see our client alert from last year: "The making of the emissions trading laws – understanding the EU legislative process."
Formatting team, are relevant news article usually linked to, included as footnotes, or linked to with a footnote referencing the name of the article and author? Please amend as is appropriate.
7. http://uk.reuters.com/article/2013/10/16/uk-eu-airlines-idUKBRE99F1B720131016  
8. http://www.aapairlines.org/resource_centre/AAPA_PR_Issue16_EU_ETS_17Oct13.pdf  
9. http://www.reuters.com/article/2013/10/16/us-eu-airlines-idUSBRE99F0A220131016  
10. http://www.elfaa.com/131202_ELFAA_PressRelease_ETS.pdf  

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