AviationGeeks.com - The European Union Emission Trading Scheme for Aviation

In 2006, the European Union issued a draft to include aviation in their emission trading scheme. The European Union Greenhouse Gas Emission Trading Scheme (EU ETS) for aviation was constructed in 2003 as a way to fight against climate change and is likely to come into force in 2008.

The European Union made the draft to include aviation in their trading scheme because they felt that the International Civil Aviation Organisation (ICAO) was not being successful in implementing their plan to reduce carbon dioxide emission. The trading scheme has met resistance from airlines, the ICAO, the United States and other countries. They feel that there are better solutions to the climate change and that any plan that is supposed to cover international flights should be approved by the ICAO.

The transportation industry contributes to large percentage of the total carbon dioxide emission in the European Union; the airlines alone contribute to about 3 percent of the total emission in the European Union. That might not seem like a large number, however, carbon dioxide emission from air traffic has increased 87 percent since 1990 (EU ETS web site). The low fare airlines have been a major factor in the increase in carbon dioxide emission in Europe. The European Union forecasts that carbon dioxide emissions from aircrafts will more than double between now and 2020 (EU ETS web site). The Federal Aviation Administration (FAA) forecasts that emissions will increase by 60 percent between now and 2025 in domestic flight in the United States.

The purpose of the draft is to reduce greenhouse emissions and reduce the effect aviation has on climate change. As in other energy heavy industries within the European Union, the draft is suppose to allow members to trade the emission allowances both in their industry and with other industries within the same emission trading scheme. The European Union decision to include aviation in the trading scheme was mainly because they felt that the International Civil Aviation Organization (ICAO) was not doing enough to reduce the carbon dioxide emission from aircrafts. Because the draft is not an international agreement, it has met resistance from The International Civil Aviation Organization (ICAO) and countries outside of the European Union such as the United States.

The draft is to include all aircraft carriers operating in the European Union as well as all operators that arrive and depart at airports within the European Union. The trading scheme will start for all aircrafts flying between two airports within the European Union on 1^st of January, 2011. The trading scheme will start for all flight arriving at, or departing from, an airport in the European Union on 1^st of January, 2012 (Woods). The original plan was to implement the trading scheme for everyone on 1^st of January, 2011, but do to criticism, the European Union decided to delay the trans-continental flights for one year to allow for easier transition for trans-continental airlines.

In the European Union Emission Trading Scheme the allowances for each member state will be based on the average greenhouse-gas emission contributed by the aviation sector in that country between 2004 and 2006. Fixed percent of the allowances will be free of charge, thereby creating scarcity to try to get the airlines to operate more efficiently. So, each airline will be allowed to release certain amount of greenhouse-gas emission into the atmosphere, free of charge. By creating scarcity, then they also create a market for the emission allowances were prices will be determined by the demand and supply of the emission allowances. If any one airline has more allowances than it needs, that airline can either sell the surplus allowances or use it at any time in the future. If airlines do not have enough allowances to cover their operation, they can go out and more allowances. The aviation industry can by allowances from any industry within the emission trading scheme. That is a big advantage because many other industries have been doing better than aviation in reducing their greenhouse-gas emission.

If any one airline uses more allowances than it has been permitted to use, the airline has to pay 100 Euros for each tonne of carbon dioxide it releases into the atmosphere above its allowances. The ultimate penalty would be that the aviation authority in the country that the airline is operating in would suspend their license. In the case that other countries introduce similar measures to reduce greenhouse-gases from aircrafts, “the EU would drop its jurisdiction covering the return leg” (Kanter). The European Union feels that by “the existence of a market in which these allowances can be traded enables operators to manage their emissions cost-effectively” (EU ETS web site).

Companies will be able to auction off the allowances that they do not wish to use. In the trading period from 2008 to 2012 companies will be able to auction off ten percent of their total allowances to other companies. After the 2008 to 2012 trading period there will be no restriction to how much allowances the companies are allowed to sell.

There is no surprise that most airlines in Europe are opposed to the trading scheme. According to a study that was conducted in June “by airlines and aircraft producers estimates the compliance with the EU regulation would cost airlines $60 billion-$90 billion between 2011 and 2022 and lower their profits by $55 billion in the same period” (Zwaniecki). If this proves to be the case, it will be very costly for the already struggling aviation industry. The European Commission’s reports suggest that an “associated costs per ticket are likely to be modest” (EU ETS website). The price of ticket for a return trip could rise between 1.8 and 9 Euros and tickets for longer trips are likely to increase between 8 and 40 Euros depending on the market price for the emission allowances. EU ETS suggest that the ticket price increase because of the trading scheme will be significantly less than the ticket price increase in recent years because of the increasing fuel price. The trading scheme does not regulate how the prices will affect the passengers nor does is regulate how the cost is dealt with, if it is passed on to passengers  or if the airlines take the cost increase.

The European Commission imply that the effect the trading scheme will have on the economy will be insignificant, both in term of gross domestic product growth and in terms of employment. The main effect this will have is thought to be on the demand of airline seats. EU ETS suggests that “the reduced growth in demand would vary from 0.1 to 2.1%, assuming CO2 allowance prices of €10-€30” (EU ETS web site). The demand could go down even further if the prices of the allowances increase to over 30 Euros in the auctioning scheme.

There are some alternatives to the trading scheme such as higher tax on aircraft fuels, VAT on flights, or increase of aircraft passenger duty (APD). The European Union had been studying charging airlines for the emission they release, but they feel that the current trading scheme will work more towards reducing emission than increase the cost of the airlines operations. Another alternative was to eliminate the current tax exemptions and use the money towards reducing greenhouse-gas emission, but again that would only increase the operating cost of airlines and would not reduce the emission. In one report, Ryan Air had suggested that using “fuel-efficient aircraft, flying planes fully loaded, cutting down on connecting flights, and making routes more direct - would be more effective in cutting emissions” (Reuters).There are reports that suggest that the best solution to the greenhouse-gas emission in aviation would be to improvements in the European air traffic management system. The European Union has still not made much process in “implementing the Single European Sky, a proposed “borderless” air-traffic management system that promises to produce $4.5 billion in savings and reduce emissions by 12 percent” (Zwaniecki). The European Union has had some success in implementing the European Aviation Safety Agency (EASA) across Europe, but it still has to be seen if that will have some improvements on the air traffic control management.

The emission trading scheme has met resistance from many different sources. Nations outside of the European Union along with airlines have insisted that it should be an international agreement before the E.U. set these regulations in force, especially because the E.U. will force the regulations on airlines outside Europe. Officials from the United States have said that if the E.U. forces these regulations on airlines outside the region, they could be breaking international laws. Officials from the United States have threaten legal action against the E.U. if they will do not back down, "The European States have indicated their intent to unilaterally impose such measures on the airlines from other countries, contrary to the will of every other country in the world and contrary to international law. If they persist, there will no doubt be a legal battle" (Environment News Service). Some are afraid that this will end in an international dispute, similar to when the European Union tried to impose the noise reduction regulation law. Officials from the United States have said that governments should focus more on finding alternatives and more environmental friendly fuel sources that we have today, than forcing regulations on the airlines in Europe.

One argument that airlines in Europe have used is that the E.U. is setting regulations in one region, but the problem should be tackled worldwide, not just in one region of the world. They feel that they are treated unfairly compared to airlines in other regions of the world. The airlines have also argued that this will only increase the price passengers have to pay for ticket in a market that is already facing inconveniences and delays because of terrorist threat.

Environmentalists have also criticized the trading scheme. Environmentalists have said that the trading scheme will not reduce emission from aviation; rather, it will increase the emission because airlines will be able to buy allowances from other industries. They say that while other industries are making efforts to reduce emission, airlines will off-balance that by buying the allowances from those industries. Environmentalists have also argued that the trading scheme is not enough to reduce the emission that the European Union promised in the United Nations conference in Bali, Indonesia, where governments from around the world promised to make deep cuts in emissions.

The trading scheme proves that the European Union is making an effort towards reducing greenhouse-gas emission from airlines. There is a possibility that airlines within the European Union will lose their competitive advantage towards airlines form other continents, or even from European countries outside the E.U. because the trading scheme is likely to increase their operations cost. It is imperative that other countries set up similar measures to reduce greenhouse-gas emissions so the airlines in the world will be treated equally and none will lose their competitive advantage. It is likely that the trading scheme will be the hardest on fast growing airlines that will have to purchase extra emission allowances. Airlines that are reducing their operations might be able to make money of the faster growing airlines by selling them their allowances.