Pushing the boundaries of the aviation spat

While the EU ETS in effect has a small impact on the aviation sector, it's political impact has been far reaching – and a solution to the conflict appears to be a way off.

Jos Delbeke, the EU director-general for climate, defended the decision to include international airlines in the bloc’s emissions trading system during a US Senate hearing last week, while officials in Brussels awaited carbon-emissions data from some Chinese and Indian air carriers.

The measure is part of a shared commitment with the US to reduce aviation’s climate impacts, said Delbeke in prepared testimony at a Senate commerce hearing on June 6 in Washington DC.

“There is no prospect of simply suspending the EU legislation, but the EU is open to modify[ing] it,” he said on the plan, which would force US airlines to pay for some of the emissions from flights to and from EU airports.

The 27-nation bloc agreed in 2008 to include flights touching down or taking off within its borders as part of its cap-and-trade program after aircraft emissions in the region doubled in two decades.

US airlines, including United Continental Holdings, have argued that the bloc’s inclusion of carriers in the emissions trading system exceeds its jurisdiction and amounts to an improper tax or charge. Republicans and Democrats have joined in the protest, providing a rare moment of solidarity in an otherwise bitterly divided body politic.

“We are in agreement on the main point, which is that the European Union, with this emissions trading scheme, is acting outside of their prerogative and most certainly will…have a negative effect on our aviation community,” said Senator Kay Bailey Hutchison, a Republican from Texas, at last week’s hearing.

Nancy Young, vice-president of environmental affairs for the Air Transport Association of America, testified that the EU ETS would cost US airlines a collective $3.1 billion between the beginning of 2012, when it went into effect, and year-end 2020.

“That means that US airlines will have less money to spend on new equipage [and] sustainable alternative fuels,” she said.

Delbeke argued that cap-and-trade is not a tax, and cost calculations provided by opponents are “wildly exaggerated” because they do not consider that airlines will receive free allowances to cover a majority of their emissions. “According to our calculations,” he said. “We are talking about two, three dollars per trans-Atlantic flight, in terms of potential cost increase [per passenger].”

Senator Maria Cantwell, a Democrat from Washington, suggested that the United Nations’ International Civil Aviation Organization (ICAO) should come up with a better alternative to the ETS. In October 2010, ICAO adopted “aspirational” goals for the international aviation sector including annual fuel efficiency improvements of 2 per cent and stabilisation of global CO2 emissions at 2020 levels. Cantwell said these goals were not enough, and that she would like to see a plan that emphasises fuel-saving technology, pointing to examples like satellite-navigation aids, which can enable aircraft to fly more efficient landing patterns.

ICAO has been working to resolve the quarrel between international airlines and the EU. Its governing body is expected to consider proposals, including market-based measures, this November.

The expansion of Europe’s cap-and-trade program into aviation has also triggered opposition from countries such as China and India. Last month, the European Commission said some airlines from these countries failed to meet an EU deadline to submit emissions data for 2011. The deadline for the air carriers was extended to 15 June. The eight Chinese and two Indian carriers are expected to ignore the deadline despite warnings from European authorities that they could face penalties if they fail to submit the data.

Nevertheless, the 10 non-reporting airlines form only about 3 per cent of total aviation emissions, indicating that the problem of non-compliance is perhaps less substantial than previously thought.

EU carbon on the rise

European carbon allowances, or EUAs, for December 2012 delivery rose 3.4 per cent last week, closing at €6.69/tonne, compared with €6.47/tonne the week before. December EUAs hit a weekly high of €6.73/tonne in intraday trading on Friday, as European coal for delivery next year declined to end the week 2.6 per cent down at $96/tonne. Demand for EUAs may increase when coal prices are low, as utilities need about twice the number of allowances to cover emissions from coal power generation, compared to natural gas. Carbon prices were also buoyed last week by continued speculation about possible policy fixes to the oversupplied EUA market. United Nations Certified Emission Reduction credits, or CERs, for December 2012 gained 1.2 per cent last week to close at €3.42/tonne, up from €3.38/tonne at the end of the previous week.

This article was originally published by Bloomberg New Energy Finance.