The EU’s Emissions Trading Scheme

IMGXYZ3774IMGZYXThe EU’s decision to extend of its Emissions Trading Scheme (ETS) to cover non-EU flights arriving and departing in European airports has sparked international debate. Twenty-nine countries, including the United States and China, have disputed the legality of this extension, arguing that the EU does not have jurisdiction to regulate flights outside of European airspace. With aviation emissions predicted to grow 300 to 400 percent between 2005 to 2050, this outcry over the EU’s new aviation policy feeds into the larger debate between trade interests and climate change initiatives.

Carnegie’s Wang Tao hosted a roundtable discussion to evaluate the impact and legality of extending the ETS. He was joined by Heidi Hiltunen, environment counselor of the EU delegation to China; Ma Jiachang, researcher at the China University of Political Science and Law; Li Lina, policy officer at Greenovation Hub; and Hou Kan, deputy director at the International Aviation Transportation Association, North Asia Office.

Cost-Effective Solution to Climate Change

• Cost Effective: The ETS will guarantee a cost effective emissions cap, Hiltunen asserted.
   
• Flexibility: Hiltunen emphasized the flexibility of the ETS, which allows participants to decide how to use the allocated emissions rights, reduce emissions, sell and bank allowances, or increase their emissions through buying allowances.
   
• Encourages Fuel Efficiency: In addition, extending the ETS incentivizes more airlines to become fuel efficient, Hiltunen argued, adding that this will further encourage the purchase of modern and more fuel efficient aircrafts. Ma questioned how airlines and aircraft producers can ensure reduction in emissions without simply transferring the burden to the consumers. Hiltunen suggested that airlines could offset the cost of the trading scheme by transferring the costs to the passengers.

Significant Hurdles

Li stated that environmental and climate change directives should be both ambitious and equitable in order for a plan to have legitimacy and effective for long-term implementation. She argued that the EU ETS directive is too general and rough, with not enough consideration given to the needs of developing economies. Although the EU has taken positive leadership in providing a global solution for climate change, it should take an even bolder leadership initiative by cutting greenhouse emissions from 20 percent to 30 percent, compared to 1990 levels, she concluded.

The Legality Debate

• EU Court of Justice (ECJ): A number of U.S. airlines have tried to combat the EU ETS in court. The EU Court of Justice ruled in favor of the EU ETS in February, arguing that the EU can regulate polluting activities within the EU even if the pollution originates from outside the EU. Furthermore, because the measures are nondiscriminatory, they are considered legal, the court concluded.
   
• Legal Basis for the EU ETS: A participant argued the International Civil Aviation Organization (ICAO) has jurisdiction over international aviation, not the EU ETS, adding that the ETS seems to be in violation of the General Agreement on Tariffs and Trade. The United Nations Framework Convention on Climate Change  and Kyoto Protocol both state that member counties have “common but differentiated responsibilities” in tackling climate change, the participant said. Thus, it is also unfair to push developing countries to pay the same fees as developed countries. However, Hiltunen emphasized that the ETS applies to corporations whereas the Kyoto Protocol is a diplomatic agreement between states.

ETS’ Framework

Hiltunen explained how the ETS would work and the impact it was expected to have on airlines.

• The 2012 Emissions Cap: In 2012, the ETS sets an emission cap at 97 percent of annual emissions from 2004–2006. This will drop to 95 percent for 2013–2020, with 85 percent allowances given free in 2012 and 82 percent from 2013 onwards. The rest of allowances will be auctioned. Hiltunen argued that the average increase in price per customer after the free allowances will be only €1.9 (approximately 20 RMB) per person flying from China to Europe. Hou argued that the ETS’s costs are still too high, costing the airline industry an estimated 700 million euros in 2012 and negatively affecting already fragile profit margins.
   
• ETS Revenue and Climate Change Programs: The ETS will actively address climate change by directing all revenues from the aviation ETS auction toward climate change programs in the EU. Ma questioned the legality of the collection methods for ETS revenue, since the International Civil Aviation Organization forbids such surcharges.
   
• Impact on European Airlines: European airlines would be the most affected by changes. Some airlines from the small, least developed countries will be exempted. Incoming flights to EU from countries that have similar emissions reduction measures in their airline industry may also be exempted. Some panelists argue that this is unfair because European airlines are not expected to grow much after the free allowances are issued, while Chinese airlines are expected to grow dramatically over the coming decades, excluding future Chinese airlines from the free allowances. 
   
• Pressure from the United States: The U.S. House of Representatives has already passed legislation to prevent airlines from participating in the ETS, though the bill is still pending in the Senate. Both President Obama and the Federal Aviation Association are being pressured to take more active steps to resist U.S. compliance with the ETS.

The Next Step

The bold step by the EU to combat emissions from international aviation puts the EU at odds with a number of nations. However, there is no sign that the EU intends to retract the ETS extension over foreign airlines. The next step in the debate is to push for an ambitious and fair agreement under ICAO, but also to clarify how the EU will implement fair compliance measures in the absence of ICAO agreement.

Overall, the participants agreed the current EU ETS debate has been heavily politicized. Depoliticizing the debate and increasing transparency in the EU’s regulation of the ETS can promote further dialogue and enhance cooperation.