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Majority of aviation emission allowances could be cancelled - EU

19 Mar 2013 18:06:18 | edcm

The European Commission could take back and cancel more than two-thirds of the EU aviation allowances (EUAAs) allocated for free in 2012, as airlines will likely opt to exclude non-EU flights from their 2012 compliance with the emission trading system (ETS).

When aviation was included in the ETS at the start of last year the rules covered non-EU airlines. However, after strong opposition from countries outside the bloc - notably the US - the Commission sought to suspend the inclusion of international aviation for a year, with its so-called stop-the-clock proposal. The suspension was timed to allow the UN's International Civil Aviation Organization to devise a global market-based measure by autumn 2013 (see EDEM 12 November 2012).

The European Parliament will hold a plenary vote on the proposal next month.

Returning allowances

To take advantage of the 2012 suspension and avoid compliance obligations, airlines must return free allowances received on the basis of international flights to member states.

The Commission did not respond by the time of going to press whether it had set a return deadline yet for these allowances.

It did say, however, that if all relevant aircraft operators choose the suspension, preliminary estimates suggest operators could return over two-thirds of airline's free 2012 allocation.

Airlines can also choose to ignore the suspension and keep the allowances.

Operators had to communicate their choice by 15 February to member states' competent authorities. Again, the Commission did not respond to the question whether any airline chose to comply by the time of going to press.

A Commission-published clarification in January stated that all returned allowances must be EU aviation allowances (EUAAs). Offset credits, such as Certified Emissions Reductions and Emission Reductions Units, cannot act as substitutes. The Commission bases the number of EUAAs for return on flight activity and a formula using benchmarking data reported for 2010, but readjusted to 2012.

The UK case

On Monday, the UK Department of Energy & Climate Change (DECC) said that as of 25 February, 159 of 201 UK-registered aircraft operators had told the country's Environment Agency that they would take advantage of the suspension.

"The vast majority of commercial airlines have not removed their free allowances from their registry accounts, and thus these can be 'returned' to the Environment Agency with minimal additional administrative or regulatory burden," DECC added. Operators choosing the suspension would also save on administrative costs, such as monitoring, reporting emissions and verification costs, DECC added.

A trading source covering airlines' compliance said he expects this trend to be common across Europe.

The two UK-regulated airlines, which according to DECC had removed their free allowances from registry accounts, were an exception, he said. In such a case, operators would have to buy back a number of allowances matching their original allocation and return them to the EU, before being eligible for the suspension.

The road to compliance

The Commission's decision to suspend international airlines from the EU ETS has hurt liquidity on the carbon market to the point of putting some airlines ability to comply at risk, airline operators said last month (see EDCM 21 February 2012).

The uncertainty arising from 'Stop the Clock', and the consequent postponement of many airlines' involvement in the carbon market, has driven down liquidity for the specially created EU EUAAs. This makes compliance hard particularly for small aviation emitters, who make up a large share of airlines covered by the ETS. It also adds to the potential compliance cost of all airlines, as EUAAs trade at a discount of around to the more liquid EUAs, which have to then be purchased instead. Silvia Molteni

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