In early July, attorneys representing the interests of three U.S. carriers and the U.S. Air Transport Association flew to England to appear before the European Court of Justice. This wasn’t a house call; the attorneys were there to tell the judges that the EU’s emissions trading scheme — a cap-and-trade policy originally introduced in 2001 that will be applied to the aviation industry starting in January — is illegal when applied to airlines.
On Jan. 1, 2005, the ETS came into effect in Europe, providing guidelines for the emissions of factories and other land-based facilities. The European Commission decided three years later to apply their new rules to the aviation industry and set the 2012 start date. Carriers that fly into or out of Europe next year will have to keep track of their emissions and buy carbon allowances if the flight’s carbon footprint exceeds a pre-determined limit. Airline officials must keep track of emissions on the entire leg routing into or out of Europe.
Attorney Derrick Wyatt laid out a scenario for the European judges. Suppose, he told them, that a plane takes off from San Francisco on its way to London Heathrow. Emissions for the trip would occur in U.S. airspace (about 29 percent of the entire trip, he estimated), Canadian airspace (37 percent) and international airspace over the ocean (25 percent). He calculated that only 9 percent of emissions would occur in EU airspace, but the carrier would have to pay the EU for emissions from the entire flight.
“It is astonishing that a U.S. airline must acquire an EU license to cover its emissions at a U.S. airport or in U.S. airspace, but that is precisely what the ETS requires,” he concluded in oral arguments before the court. “This is incompatible with the exclusive jurisdiction of the United States to regulate such emissions.” Therefore, it’s illegal.
A preliminary ruling on the case is due this month. A full decision isn’t expected until next year, but foreign carriers should have a pretty good idea of the result soon.
To ease the airlines into this change in environmental guidelines, the European Commission has decided to give carriers a break next year. According to a report by Thomson Reuters Point Carbon and RDC Aviation, scheduled carriers will get anywhere from 20 percent to 100 percent all of the allowances they’d need to offset their 2012 carbon footprint as a gift from the European government. The firm found that the EU carriers will get an average of 61 percent of their needed allowances, with Lufthansa and other long-haul carriers getting an average of 81 percent of their needed allowances. The largest Asian carriers, the firm predicts, will receive an average of 63 percent of their needed allowances. The most notable U.S. carriers will receive an average of 64 percent.
“The biggest unknown now is the treatment of dedicated freight carriers — UPS, DHL and so on,” says the firm’s Andreas Arvanitakis. “The specific data needed does not exist for them, and the leasing and other commercial arrangements muddy the waters further still, but we estimate their free allocation to be on average 52 percent of what they need in 2012.”
The official government carbon calculations were to be published at the end of last month, and the firm expects the commission to issue 176 million free carbon allowances in 2012, a gift worth about €2.1 billion at the current carbon price of €12. Even with this head start, the firm projects that airlines will buy an additional 88 million allowances next year. In 2013, the costs to airlines will certainly rise.
“From 2012, airlines in the scheme will have to surrender one allowance for every tonne of CO2 they emit,” the firm found. “With this baseline, they have to buy about a third of what they will need at market prices.” Offsets built into the Kyoto Protocol — the Clean Development Mechanism and Emission Reduction Units, for example — could help reduce the cost to airlines.
WATCHING AND WAITING
This emissions plan, however forward thinking and environmentally friendly, has enraged the industry. Harsh denunciations have come from all corners of the globe. The U.S. case is being watched carefully by carriers around the world, even as officials prepare the necessary documentation to begin participation in the EU’s new policy.
“The points made by the U.S. carriers are fairly generic in nature, and it seems clear that if the court does find in favor of any of those points, they would probably apply equally to other foreign carriers,” says Andrew Herdman, president of the Association of Asian Pacific Airlines. “We view that very much as a test case, one that we will be watching carefully.”
The AAPA’s close watch over everything regarding the EU ETS isn’t anything new. Herdman and his colleagues have been in contact with the EU, both while the aviation rule was being debated and since it has been passed into law.
“Our objections to the scheme are essentially that in applying it to all foreign carriers for the entire length of the journey for both in-bound and out-bound services, the European
Union is overreaching its authority,” Herdman says. “We’ve been putting forward those views through a variety of channels.”
The AAPA isn’t the only foreign organization taking issue with the EU ETS. In a letter sent last month to Connie Hedegaard, the European commissioner for climate action, representatives from The International Air Cargo Association expressed their displeasure with the plan.
Calling the scheme illegal, officials wrote that the ETS violates international law and “encroaches upon the sovereign authority of each state over its own airspace.” TIACA executives also argued that the ETS is a catch-22: Instead of improving the environment, the scheme will actually prevent the aviation industry from investing in sustainable technologies.
To add another layer of dissent, the U.S. House of Representatives has introduced a bill that aims to “prohibit operators of civil aircraft of the United States from participating in the European Union’s emissions trading scheme.” The International Air Transport Association and other organizations have released statements commending the U.S. proceedings.
LACK OF ACTION
According to an EU spokesman for climate action, including aviation in the union’s emissions trading scheme is a direct reaction to the International Civil Aviation Organization’s lack of environmental progress. Issac Valero-Ladron says that after 15 years of seeing little movement toward a climate change directive, the EU voted to act on its own.
The aviation directive started gathering steam in 2009. While some aviation officials have suggested that the ETS can still be amended, Valero-Ladron says it’s basically set in stone. “This is not a proposal; this [is] adopted legislation,” he wrote in a document outlining the inclusion of aviation into the EU’s ETS. “We do not intend to back down or modify our legislation.”
As for the revenues generated from the scheme, EU spokesmen say it will be given over to European and third-world countries for research into environmental aviation technologies. “The EU member states will be reporting to the European Commission on how revenues have been spent,” Valero-Ladron said. “Our intention is that these reports will be made public.”
Those revenues, according to the letter sent by TIACA, could be quite significant. Officials estimated that the cost of purchasing carbon allowances will surge by $2.2 billion by 2020, rising from $1.3 billion in 2012 to $3.5 billion.
Representatives from the National Airlines Council of Canada and IATA filed written observations in the U.S. carriers’ court case. In the document, officials detail what impact the new law will have on the aviation industry. The cost of compliance seems to be a big sticking point, with money going to the EU instead of being devoted to new, environmentally conscious technology.
“The costs imposed, moreover, could actually lead to an increase in aviation emissions. By diverting revenues from the airlines, the EU ETS will, if anything, actually slow down the replenishment of their fleets with more fuel-efficient and GHG-friendly airplanes,” attorneys representing IATA and the NACC wrote.
In an added wrinkle, the attorneys brought up a few unintended consequences of the law. They wrote that carriers may simply choose to fly their most fuel-efficient planes into the EU, reserving older members of their fleet for other routes. Instead of solving the carbon-emission issue, this just pushes it off on other countries.
Finally, the attorneys believe, carriers will simply change their routes in order to be less vulnerable to the environmental changes. The ETS only applies to the last leg of the flight coming into the EU or the first leg leaving Europe, so carriers could simply add another stop to their flights. “Because airlines will only have to purchase allowances for those flights using EU airports, long flights to Europe will more frequently be routed through Middle Eastern and other nearby, non-EU hubs,” the attorneys wrote. “The EU ETS, then, actually creates perverse incentives for inefficiencies that could increase overall GHGs.”
AAPA’s Herdman agrees that there will be a few unforeseen consequences to the EU ETS. The new law could impact trade with Europe or could affect Toulouse, France-based Airbus’ business. Of course, the threats of individual carriers could be so much bellyaching, but then again, these words might have a real impact on the health of Europe moving forward. “A number of countries have indicated that they view this as a trade dispute,” he says. “That leads to retaliatory measures that may be related to the same industry, or they might be totally unrelated, but simply targeting interests from whatever state is in the crosshairs.”
Herdman concludes that if the EU ETS is enforced as it currently stands on the books, the aviation industry will owe the EU a lot of money. “It’s pretty clear that the total number of emissions will still grow for aviation even if other sectors are able to shift to non-carbon-based fuels and thereby ease their emissions,” Herdman says. “As a sector, we’re likely to be net buyers of certificates.”