Aviation in the EU ETS

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A PDF version of this guidance is available here.

• Introduction
• Allowances
• Where Do You Fit Within the EU ETS?
• Monitoring
• Exceptions
• Verification
• Future of the EU ETS
• Glossary of Terms
• Sources of Further Information

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Introduction

Climate change is one of the biggest social, political and economic issues which affects us today. Every government in the world is trying to work out the best way to reduce their emissions without harming their economy, and the EU has chosen to approach this problem using a variety of policies, and a key mechanism - the European Union Emissions Trading Scheme (EU ETS).

Incorporating 30 European countries (27 EU states plus Norway, Liechtenstein and Iceland), the EU ETS is the largest carbon trading scheme in existence. It works on a ‘Cap and Trade’ system, whereby a limit on the total level of emissions is set for Europe (the ‘Cap’), and anyone wishing to emit carbon must surrender allowances (known as EUA’s) for having done so. Allowances can be bought and sold freely (the ‘trade’), allowing free market principals to set the price of carbon.

Aviation was initially excluded from the scheme as an international programme of control was to have been put into place after the Kyoto meeting. However it has now been included in the ETS, with 2010 being the benchmarking year and the surrender of allowances starting in 2012. The first two years (2010 & 2011) are also an opportunity for Operators to claim free allowances by monitoring their tonne-Km data and to identify any teething problems with the monitoring and reporting processes and for these to be resolved before formal trading and surrendering commences. The target is to reduce CO₂ emissions from aviation to 97% of 2004-06 levels by 2012, and 95% by 2013 with a continuing reduction over the following years.

Allowances

Anyone can buy an allowance, even non-operators. This has created a secondary market for investors to trade EUA’s like any other commodity. Allowances initially enter the market through official auctions and free allowances which are allocated directly to Operators. The free market, involving both end users and speculators, is designed to drive up the price of carbon. By putting this price on the emission of carbon, which should be factored into the cost benefit analysis of alternative technologies and strategies, there is a greater incentive for Operators to take steps to reduce emissions.

In the first year, 80% of the total allowances are to be given to Operators for free, but this percentage will be reduced as the scheme progresses, down to 30% by 2020 and no free allowances by 2027. 3% of the total available allowances will be set aside for new entrants and existing Operators whose traffic increases by over 18% (up to a maximum of 1,000,000 allowances per Operator), with the rest being auctioned off by each Member State.

The number of free allowances awarded to each Operator is based on the tonnage of payload (cargo or passengers) multiplied by the distance in kilometres travelled, with no consideration for the amount of fuel actually used to do this. The reason for this is that a finite ‘pot’ of allowances must be divided between a set number of Operators, so the t-km data is used as a proxy for scale of operations in order to divide the ‘pot’. The number of allowances which must be surrendered each reporting year, however, is based on the actual amount of CO₂ emitted.

This system is designed to benefit those who operate in more efficient ways, so more allowances are awarded to those who fly larger volumes over greater distances. This encourages higher load factors, and discourages shorter flights, where more efficient alternatives may be available. Unfortunately, this will have a particularly negative impact on business aircraft Operators, as they operate with fewer people on board.

The tonne-kilometre data is gathered during 2010, and remains the same for each Operator until the next ETS Phase in 2020, unless they can demonstrate a growth in annual tonne-km of 18% by the second calendar year of that period.

Aircraft Operators will be allowed to surrender allowances from any industry, however other industries cannot surrender aviation allowances. This increases the size of the pool from which aviation can purchase from, but decreases the number of potential buyers if an Operator has a surplus. Aviation is the only industry which has specific allowances (unofficially referred to as EUAA’s), and this will effectively create a parallel commodity, with its own value and market influences, as well as a separate auction process.

Operators are also allowed to surrender a small proportion of their requirement as Certified Emissions Reductions (CER’s) and Emission Reduction Units (ERU’s). These are credits which are created by projects which reduce the emissions in developing countries under the Kyoto Protocol’s Project Mechanisms. They tend to trade at lower values than EUA’s, but are of limited supply, and Operators can only surrender 15% of the allowances as CER’s or ERU’s. Note, these are NOT the same as Voluntary Project Offset Credits.

Allowances can be banked from one year to the next if an Operator has a surplus, or borrowed from future years if they have a deficit (unless there is a significant change in the rules between ETS Phases, in which case they are normally restricted).

The price of allowances have been very volatile since its launch, peaking at over €30, and falling to almost nothing at the end of Phase I, generally as a consequence of over-allocation by some Member States. The spot price is currently around €12-15, but it changes on a daily basis. A price of €20-25 or €100 per EUA is usually quoted as being the minimum required to drive emissions reductions; however as the current price is significantly lower than this, campaigners often cite this as a failure of the system to reduce emissions. There have been suggestions made for controls to be placed on the price, such as a price floor or the equivalent of a central bank, but such suggestions have faced stiff opposition.

Allowances are issued in February of the year for which they must be surrendered. This means that new allowances are issued before the previous year’s have been surrendered; so for example, the allowances for 2010 are issued in February 2010, which is before the 2009 emissions surrender date. As a result of this, unless an Operator has sold a large quantity of their free allowances already, they are likely to be in a long position when the time comes to surrender. This makes borrowing very attractive, as this allows you to satisfy compliance without affecting cash flow.

This was a trend seen in other industries during Phase I of the scheme. As borrowing between Phases 1 and 2 was not allowed because of the significant rules changes, this left many Operators in a situation where they had to satisfy several years worth of compliance in one year. Fortunately, due to an over allocation of allowances, the price of carbon fell to about €0.01 by the time of the surrender deadline, meaning this was not a significant problem for the affected Operators.

The timing of the allowance issue also allows for Operators to use allowances as a way to generate capital, by selling them as soon as they are received. This is one of the reasons why a cap and trade system has been chosen over a straightforward tax, as it can directly provide the capital required to invest in green initiatives and alternative technologies. This, of course, carries a risk if the prices rise sharply before the allowances are re-purchased for surrender; however if the capital has been invested to reduce emissions, then an Operator will need to purchase less allowances. This summary is obviously a gross oversimplification, but covers the general principal behind why free allowances are awarded.

Where Do You Fit Within the EU ETS?

The scheme may appear to be full of clauses, caveats and exceptions, but this is because it was originally designed for fixed installations and now needs to cover all the different ways in which aircraft operate. Because of this, most people struggle to understand the scheme when they first look at it as it is easy to become blinded by trying to take it all in at once. In practice, however, if you identify what requirements the scheme places on your operation, and ignore the parts of the scheme which do not apply to you, the scheme becomes a lot simpler than it first appears. The first step to do this is to identify if you are covered by the scheme in the first place.

All flights which land or take off from an EU airport are covered by the scheme, with some exceptions. Aircraft with a MTOW under 5,700kg are exempt as are commercial Operators who fly less than 243 flights in three consecutive 4-month periods, or emit less than 10,000t of CO₂ annually. The 4-month periods must be January-April, May-August and September-December of the same calendar year, meaning the Operator cannot choose their own start and finish dates.

If exempted Operators are approaching these limits they may need to begin monitoring in case they go over the limit and are required to commence formal monitoring and surrender. Non-commercial Operators are not exempt under these rules no matter how few flights they perform; however if they are below these thresholds, they are allowed to use a simplified method to calculate their emissions. There are other specific flights which are not covered by the scheme, such as certain public service flights, and details of these can be found in the ‘Exemptions’ section  below.

At this stage, if you are an Operator who currently operates in Europe, but have not submitted your monitoring plan, you have already missed the deadline. As this is a requirement of the scheme, such Operators must contact the European Commission (here) as soon as possible. The purpose of the list of Operators produced by the Commission is to assign Operators to Member States for regulation, not to tell Operators whether or not they are in the scheme. All Operators who are not on the list are responsible for getting themselves put on it if they fly in or out of Europe – and face penalties if they fail to declare the fact and are subsequently identified by the authorities.

The list of Operators was created based on historical data, so if you are a new Operator, a current Operator who did not fall within the scope of the EU ETS but expect to in 2010; or a foreign Operator wishes to begin operating into Europe for the first time, you must contact the European Commission to be assigned to a Member State for regulation. Once you have done this, you will be placed on the prior compliance list, and you must submit an Emissions Monitoring Plan to the Competent Authority (Contact List) for that State. The process (and charges) for submitting a plan vary from country to country. You are also entitled to claim free allowances, from the 3% of allowances set aside for new entrants. To claim these, you must monitor your tonne-km data for a year, and have it independently verified. This can only be done within the first three years of a Phase (eg 2012-2014 of a Phase lasting to 2020).

The incentives for complying with the scheme are great; but the EC can impose an EU wide operating ban or seizure of an aircraft if an Operator fails to comply, also Member States have been given some freedom as to the exact penalties they can apply through the National enabling legislation. The minimum mandated across Europe, however, is a fine of €100 per Tonne of CO₂ for which allowances have not been surrendered before 30^th April following the reporting year. Paying this does not remove the requirement to surrender the allowances, which the Operator must obtain before the next surrender date.

In addition to any financial or operational penalty, any Operator who fails to comply with the scheme will have their name published, potentially leading to loss of reputation.

Monitoring

All Operators are responsible for monitoring their own emissions every year. The European Commission has published two sets of Monitoring and Reporting Guidelines (MRG) for Operators to help them meet their responsibilities under the scheme. MRG2:2007 covers all industries, and contains the general rules which every Operator must obey. MRG2:2009 is specific to aviation, but Aircraft Operators must follow the relevant sections of both of these documents.

Emissions are measured using fuel burn rates, with an emissions factor applied to convert fuel use into the amount of carbon actually released into the atmosphere. The current emissions factor is 3.15 for Jet A-1, and 3.10 for Avgas; fuel specific factors need to be determined for non-standard fuels such as blends and bio-fuels.

To calculate the amount of CO₂ emitted, all an Operator has to do is multiply the amount of fuel burnt on a flight (determined to the specified degree of accuracy) by the relevant emissions factor. Fuel used in the APU must also be included. The Aviation MRG allows two ways to determine the amount of fuel used on each flight:

The fuel figures cannot be rounded as they are being recorded, even if this is the existing standard practice as it does not provide the required accuracy to meet legal compliance; so as the pilot notes down the actual fuel levels, they must be as precise as possible, including significant decimal places. Emissions related figures are not rounded up until the final aggregated tonnes of CO2 are determined for the Operator.

Larger emitters are held to higher levels of accuracy. So if an Operator emits ≥ 50 kilotonnes of CO₂ (the equivalent of burning roughly 15,870 tonnes of fuel), it is expected to have inherent design uncertainty levels on its measurement systems of ±2.5%, whereas those who emit less are allowed to work with ±5.0% inherent uncertainty.

The simplified method, which smaller non-commercial Operators are allowed to use, can be any system approved by the European Commission, but currently the only approved method is the Small Emitter's Tool. This is an excel based tool which uses known fuel burn rates for generic aircraft types to estimate the fuel burn for individual flights. Operators using this tool are required to monitoring the distance of each flight, and have to manually input this information into the tool to produce emissions data.

This is not the same system as the ETS Support Facility (previously known as PAGODA), which is a more automated system, requiring little or no input by the Operator and is still awaiting approval.

The simplified method cannot be used to monitor tonne-km data.

In order to claim free allowances, an Operator must monitor their tonne-km data for one calendar year. This involves recording the payload of every flight (in the case of passengers, a standard 100 kg, including luggage may be used, but actual weight will be more accurate and may be used if the Operator wishes). This weight is multiplied by the distance flown. The distance is always calculated using the great circle distance between the airports, plus 95km, irrespective of the actual route taken. Operators should be careful not to multiply the total tonnage for the year by the total distance, as this produces a different result compared to a flight by flight basis and totalling the results.

Once the data has been collected, it must be verified by an independent accredited verification body and submitted to the Competent Authority before March 31^st of the following year.

Exceptions

Under the regulations, certain types of flights are exempt from the scheme, these are where the flight activity is :

(a) flights performed exclusively for the transport, on official mission, of a reigning Monarch and his immediate family, Heads of State, Heads of Government and Government Ministers, of a country other than a Member State, where this is substantiated by an appropriate status indicator in the flight plan;

(b) military flights performed by military aircraft and customs and police flights;

(c) flights related to search and rescue, firefighting flights, humanitarian flights and emergency medical service flights authorised by the appropriate competent authority;

(d) any flights performed exclusively under visual flight rules as defined in Annex 2 to the Chicago Convention;

(e) flights terminating at the aerodrome from which the aircraft has taken off and during which no intermediate landing has been made;

(f) training flights performed exclusively for the purpose of obtaining a licence, or a rating in the case of cockpit flight crew where this is substantiated by an appropriate remark in the flight plan provided that the flight does not serve for the transport of passengers and/or cargo or for the positioning or ferrying of the aircraft;

(g) flights performed exclusively for the purpose of scientific research or for the purpose of checking, testing or certifying aircraft or equipment whether airborne or ground-based;

(h) flights performed by aircraft with a certified maximum take-off mass of less than 5 700 kg;

(i) flights performed in the framework of public service obligations imposed in accordance with Regulation (EEC) No 2408/92 on routes within outermost regions, as specified in Article 299(2) of the Treaty, or on routes where the capacity offered does not exceed 30 000 seats per year; and

(j) flights which, but for this point, would fall within this activity, performed by a commercial air transport operator operating either:

• fewer than 243 flights per period for three consecutive four-month periods, or
• flights with total annual emissions lower than 10 000 tonnes per year.

Flights performed exclusively for the transport, on official mission, of a reigning Monarch and his immediate family, Heads of State, Heads of Government and Government Ministers, of a Member State may not be excluded under this point.

From Annex I of 2008/101/EC

Additional information and detailed definitions for the exemptions are available in Decision 2009/450/ec

Verification

As the intention of the scheme is to motivate Operators to reduce emissions through the direct cost of purchasing allowances, rather than the indirect costs of compliance, ensuring the administration runs as smoothly as possible is in everyone’s best interests. Therefore, all data and the processes which generate it must be verified by an independent body before it is submitted to the Competent Authority.

In addition, as allowances are traded on the open market it is important that they can be trusted by investors to be “real” and not just “hot air”. Verification provides investors confidence in the scheme and the accuracy of the reported figures, which gives the allowances real value. Without this, the free allowances Operators receive are valueless.

Verification involves looking at the technical, monitoring and control processes that the Operator has in place, ensuring that they match the approved monitoring plan and that they are fit-for-purpose, and suitable to meet the required levels of accuracy. Data is also sampled and subject to detailed testing to ensure that there are no gaps and that it is correct. This reassures the Operator that their monitoring processes are correct and gives the Competent Authorities and the open market confidence that the data provided is accurate and meets legal requirements.

The first stage of verification is a Strategic and Risk Analyses, which involves assessing the Operator’s business activities, monitoring processes and operational environment to evaluate the scope of the verification and highlight any potential risks of misstatements. From these analyses, a verification plan is drawn up, which lays out what and how the verification activities will be performed, the timetable and timescales involved; and any additional competencies required to do it. Once the detailed verification is completed, the verifier comes to a conclusion which is presented in the form of a formal Verification Opinion Statement. This is submitted alongside the emissions report to the Competent Authority.

This is the service which ICM ETS Ltd offers. For more information click here.

For more detailed information about the verification process, please see our Guide for Operators Undergoing Verification (pdf format)

Future of the EU ETS

There is currently a case going through the European Court of Justice, which has been brought by American Airlines, Continental Airlines and United Airlines, backed by the Air Transport Association, who are claiming that the EU ETS cannot be applied to international flights, as most of the emissions occur outside European airspace. This dispute has been brewing since the scheme was first announced, and should it be successful, the ramifications could be far reaching.

Within the Directive which brought aviation into the EU scheme; a section was included which mandated the EC to review the inclusion of aviation no later than 1^st December 2014. The Directive lists several areas which should be considered, ranging from examining the environmental impacts to the economic and competitive effects of inclusion of aviation in the ETS, and suggests some specific areas which could be changed, such as free allocation levels and the new entrant reserve.

Whilst making no specific provisions, the legislation also makes it clear that it is possible in future for other climate change factors to be included, such as the formation of contrails and cirrus clouds and the release of nitrogen oxides, water vapour and sulphate and soot particles. Any developments in these areas will be due to the progress in the scientific understanding made by the time of the review, which will be in part funded by the revenue generated from the auctioning of allowances.

There are also non-specific references to the possibility of co-operating with other nations who implement similar schemes where possible. This is in keeping with the general philosophy of treating climate change as a global issue. This will depend on other countries developing schemes which have comparable targets and methods of achieving these aims as the EU ETS; or a comparable global scheme under the auspices of IATA etc. There are already moves for national schemes in New Zealand, Australia (although new legislation was recently defeated in their Parliament on this issue) and the US.

In Phase 3, the allocation of allowances will cease to be the responsibility of Member States, and an EU wide approach will be taken. The main impact that this will have on aviation is that it will make the auctioning process for allowances significantly more efficient. The allocation of allowances for 2012, the only year of Phase 2 in which aviation is a part of the ETS, will be handled by individual Member States, however as there are significantly less EUAA’s than EUA’s, this will lead to relatively small auctions. When an EU wide auction process is in place, it will allow for larger, more competitive auctions. This is also more suited to the more international nature of aviation.

Recently, several Member States, led by the UK and Germany, have made a successful bid to be exempted from the centralised auctions. It is unclear at this stage, what impact this will have on future auctions, and as the rules for aviation specific auctions have yet to be decided, this may have no effect at all if aviation auctions are conducted differently from the main auctions.

Glossary of Terms

Sources of Further Information

European Commission – This is the main site for aviation’s inclusion in the scheme from the European Commission.

MRG2:2007, MRG2:2009 – The monitoring, reporting and verification guidelines are available for both  the scheme in general and aviation specifically are available here.

Small Emitter's Tool – The approved system for small emitters to estimate their emissions.

2008/101/ec – The directive which introduced aviation into the EU ETS

2003/87/ec – The original directive which created the EU ETS. A version which has been consolidated with 2008/101/ec can be found here.

2009/450/ec – Further details on the exemptions

Regulation 748/2009 – The list of Operators and what state they have been assigned to. This list is not exhaustive, so if you are not on it but think you should be, you should contact the commission.

Competent Authorities – This is a list of the bodies which are responsible for regulation in each member state, and their contact details.

Guidance for EEA Countries – Norway, Liechtenstein and Iceland have been added to the scheme at a very late stage, and some special guidance is available for Operators who are affected.