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Re-inclusion in EU ETS looms for international airlines as global deal still up in the air

14 May 2013 18:59:53 | edcm


Poor progress on a global deal to cap aviation emissions is increasing chances that the EU will once again include international flights in its EU emissions trading system later this year, which could spark a scramble for allowances by the sector later this year.

Finding an agreement by the autumn deadline for a market-based mechanism to cut carbon emissions from aviation remains a "challenging" task, industry officials and analysts agreed this week. Only under such a deal would non-EU flights from or to the bloc continue to be exempt from compliance with the EU emissions trading system (ETS) beyond 2012.

Flights to and from European countries were originally due to be included in the EU ETS starting from 2012. But following strong opposition from several non-EU countries, the inclusion of international flights was postponed by one year (see EDCM 17 April 2013).

The EU justified the suspension as a way to grant the UN's International Civil Aviation Organisation (ICAO) time to agree on a market-based mechanism to cut emissions at its meeting in September 2013. If ICAO failed to cement such a deal, the EU would lift the suspension and include all aviation emissions for flights to and from Europe in the ETS.

But with only four months left before the ICAO summit, agreeing such a global deal on aviation emissions remains difficult, leaving operators of intercontinental flights in unsure about their compliance obligations for 2013.

On Monday, the industry called for support from opponents of the EU ETS inclusion. "We need the non-European states that successfully opposed Europe's unilateral plans to now be fully engaged advocates for a global solution," said Tony Tyler, director general and CEO of the International Air Transport Association (IATA) - a trade association representing some 240 airlines - at an industry event in Montreal, Canada.

Historical major opponents of the inclusion include the US, China and India (see EDCM 31 July 2012).

Paul Steele, executive director of the Air Transport Action Group (ATAG), a coalition of air transport organisations and companies focussing on sustainability, said the discussions were "challenging".

"Trying to get 192 countries to agree on anything is difficult, but when the economic stakes are high and with differences between the developed and developing world, these are tough decisions," he said.

At the moment, there are three options on the table - global mandatory offsetting, global mandatory offsetting with revenue generation and global emissions trading (see EDCM 1 February 2013).

IATA's Tyler said that airlines will try to find a common position on the issue at the group's annual general meeting in Cape Town, South Africa, on 2-4 June.

An EU-based carbon analyst voiced scepticism that a solution can be found at international level. "ICAO had the chance already earlier to come up with a solution, but it didn't and this is why airlines were included into the EU ETS," the analyst said.

The EU only moved to include aviation in the ETS after, under the auspices of ICAO, major players discussed but failed for over 15 years ways to carve out an agreement on climate change, which aims to create an international scheme for cutting emissions from the aviation industry.

While there is no global aviation emissions cap in place, current climate and environmental commitments that the sector has set itself are a 1.5% average annual improvement in fuel efficiency to 2020, carbon-neutral growth from 2020 and cutting our net emissions in half by 2050 compared to 2005.

Airlines in wait-and-see mood

Meanwhile, the indecision about the regulatory landscape is shaping airlines' behaviour on the carbon market.

"Airlines are left in uncertainty about [the re-inclusion], and it depends on their management if they believe in a common solution (by ICAO) or not," one analyst said.

It's not clear when airlines operating non-EU flights will receive their 2013 free allocation, given that their 2013 compliance obligation depends on the outcome of the September ICAO meeting. The European Commission did not reply to ICIS request for comment on the issue at the time of going to press.

"In our understanding, the EU is waiting until ICAO decision [before allocating]," a second analyst said.

If the EU lifts the suspension, airlines would still have to undergo a number of steps to receive their allocation and to comply with their ETS obligation early in 2014. It could also lead to a scramble for the now-illiquid EU aviation allowances (EUAAs) at the end of this year, which could drive up the price and thus compliance costs.

Each airline will need a registry account to both receive its free allocation and surrender allowances to cover its 2013 emissions by April's compliance deadline. Once airlines have collected the required documents, the time it takes to open an account depends on member states' individual registries. Recent experience of EU airlines this year has shown that this can be a time-consuming process, where failure to open an account in time would incur a penalty of €100/tonne of CO2 equivalent (tCO2e) (see EDCM 28 February 2012).

At the moment, however, all EU industry is still in the dark about its free allocation as the Commission is late with finalising the National Implementation Measures detailing it - which were due at the end of 2012. Silvia Molteni

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