EUAA trading should not be grounded (Source: David McKelvey)

Trading in the latest type of carbon credit, EU aviation allowances (EUAAs), has begun despite remaining doubts as to the viability of the new market, which have been exacerbated by diplomatic turmoil. The requirement that all airlines, including non-EU operators, comply with the EU ETS has provoked resistance from a number of key countries. It has also raised questions as to the regulatory wisdom of creating a market in emissions allowances where liquidity and price levels remain challenging to maintain.

Regulating aviation under the EU ETS

Under the EU ETS, all airlines flying from and to airports situated in the EU will be obliged to surrender allowances corresponding to their levels of flight emissions. Crucially, this obligation extends to non-EU airlines. The move to include aviation in the EU ETS brings the sector in line with the others covered by this environmental regulatory regime, such as energy and metal production industries. The inclusion of aviation in the EU ETS will require airlines to buy and sell emissions allowances in the market in order to ensure that they hold them in sufficient numbers for the purposes of surrender.

Political opposition

The UNFCCC and the International Civil Aviation Organisation (ICAO) have long supported the regulation of aviation emissions through trading, but no global agreement has yet been reached in this respect. The EU’s decision to unilaterally regulate this sector under the EU ETS represents the first practical expression of a focused effort to accelerate the creation of a global mechanism to reduce aviation emissions.

The brave step taken by the EU has not been without controversy. Notable jurisdictions such as the US, China and India have been particularly vociferous in opposing the extension of the EU ETS to their airlines. In particular, the US brought legal action arguing that the extension contravened a number of international agreements, namely the Chicago Convention, the Open Skies Agreement and the Kyoto Protocol. The European Court of Justice (ECJ) held that the EU’s move complied with the relevant agreements and did not infringe the sovereignty of the affected states. However, the judgment did not mark the end of the dispute, since US airlines continue to oppose the trading scheme.

A new market in allowances

The first exchange trade in EUAAs took place on 27 February 2012, and was carried out by Vertis Environmental Finance, a specialised environmental commodities broker, on the ICE exchange. It is early days yet, but other firms’ interest in EUAA trading will be indicative of the levels of liquidity that can be expected in this fledgling market. ICE Futures Europe has expressed its confidence in the EUAA market by launching a form of futures contract with allowances as the underlying product. Interest has also been expressed by other trading platforms, notably the European Energy Exchange (EEX) and BlueNext.

However, uncertainty as to the degree of participation in the scheme by non-EU airlines renders it harder for financial entities to ascertain the value of becoming involved in the EUAA market. China, for instance, has announced that its airlines are banned from complying with the EU ETS. It is unclear what practical steps the EU could take in international law in order to achieve compliance; the problems of monitoring and enforcement have been highlighted in an earlier Climatico post. This situation is markedly different from the beginnings of the EU ETS and its application to EU industrial operators, which was not faced with such serious jurisdictional challenges.

Saving EUAA trading

Active participation in the market is absolutely crucial to the success of the EU ETS to reduce emissions in the aviation sector. Low levels of liquidity would equal low EUAA prices and therefore little incentive for operators to reduce their emissions as opposed to simply continuing to purchase allowances in the market.

International opposition to the application of the scheme to non-EU airlines could potentially be very damaging. Such refusal to participate could drive away financial traders and substantially shrink the market in EUAAs while it is still in its incipient phase. Until the EU can achieve some degree of international cooperation, or at least a diminution in opposition, it is difficult to see how its environmental regulation can be enforced against unwilling parties.

Grounded? (Source: David Jones)

The EU’s commitment to taking serious action on aviation emissions has been courting controversy of late due to its proposed inclusion of the international transport sector in the EU ETS. From 2012 all arriving and departing flights in the EU will have to be covered by corresponding emissions allowances (EUAs).

Regulating flight operators will be entrusted to individual Member States. This raises the issue of effective enforcement by countries who have a less than satisfactory track record in preventing fraud in the emissions market. Added to this is the problem of increased administration costs as levels of EUA allocations will have to be decided for a substantial number of airlines. International operators have been left feeling alienated and sceptical of the EU’s ability to direct resulting funds towards pursuing environmental goals.

Monitoring and enforcement

Each of the 27 Member States will be responsible for administering the application of the EU ETS to a number of designated operators. Once the EU Commission has decided how many EUAs will be allocated to each country, the Member States will be charged with calculating and allocating the appropriate levels of allowances to the airlines.

The number of operators within each Member State’s jurisdiction is significantly higher now that international operators are also included. While some countries have a good history of administering the allocation and trading of EUAs, in the past others have been hit by incidents of theft of EUAs from national registries and large-scale VAT fraud. The emissions market was brought to a standstill following attacks in early 2011. Competent registration and monitoring of EUAs is therefore paramount if the EU ETS is to work in its extended format.

Only time will tell if we can trust the Member States to live up to their task. The introduction of a new, centralised emissions registry at EU level from 2012 will hopefully address this concern, as managing the emissions market will no longer be within the ambit of individual Member States. However, this in turn may create its own problems of increased bureaucracy. The EU Commission could be in danger of spreading itself too thin in an attempt to regulate an overly challenging number of aviation operators.

Increased administration costs

Since Member States will have to decide on the levels of allocation to each operator, they will need to expend significant resources on analysing large amounts of unfamiliar emissions data from operators. This information is likely to be in a non-standardised format which may well differ between airlines and thus increase the administrative burden. To what extent the Member States will have the capacity to verify the accuracy of the data is also something that remains unclear.

How to achieve real results?

International operators have been complaining about the lack of transparency prevalent in the EU regarding the destination of the income raised from auctioning allowances. They are particularly worried that the revenues raised will simply be absorbed by individual Member States rather than spent on green technology R&D or emissions reductions. This is in addition to general opposition to the application of the EU ETS in a way which is perceived as illegal in its disregard for non-EU states’ sovereignty.

The combination of mistrust on the part of operators and the questionable capacity of the EU mechanisms to adequately police the extension of the EU ETS outside its territorial remit is a potentially toxic one. In reality, is it really likely that the EU will apply the ultimate sanction of excluding non-compliant operators from its airspace? Without the possibility of effective enforcement, the expansion of the EU ETS may only serve to antagonise instead of achieving environmental results.

The International Air Transport Association (IATA) has challenged governments worldwide to take four key steps to support the global aviation sector’s commitment to tackle climate change. Speaking in Hong Kong yesterday, Giovanni Bisignani, IATA’s Director General and CEO, stressed the need to:

1. 1. Adopt challenging industry targets to stabilise and eventually reduce aviation’s carbon emissions;
2. 2. Manage aviation’s carbon emissions through ICAO under a new ‘Kyoto II’ framework by treating aviation as a global industrial sector;
3. 3. Invest in efficient infrastructure, particularly air traffic management; and
4. 4. Establish fiscal and legal frameworks to promote the rapid development of biofuels for aviation.

Whilst the aviation sector represents a significant source of employment and growth, it also has an increasing contribution to global climate change.

The sector accounts for around 2% of global emissions – around 677mtCO₂ in 2008, expected to grow to 3% by 2050 (IPCC, 2007; ATAG, 2009). Whilst increasing efficiencies have reduced emissions, these have been outstripped by emissions increases due to industry growth; and the industry now consumes around 150m litres of ‘Jet A1′ fuel per year. The aviation sector has few alternative fuel options; and electric drives frequently cited as an alternative road transport option, are not likely to present a viable solution for aviation.

The industry argues that a global sectoral approach is essential to reduce aviation emissions; ensuring that airlines pay for their climate cost just once at a global level, rather than several times over within national targets; or through varying policies across numerous jurisdictions. For example, the EU Emissions Trading Scheme (ETS) passed legislation for the inclusion of aviation sector emissions in January 2009, requiring all flights from European airports to consider their carbon liabilities. This is expected to drive emissions reductions on a level playing field, promoting efficiencies and the development and commercialisation of emerging sustainable aviation fuels.

“Aviation is unique among industries. When it comes to environment, no other global industry is as united, ambitious or determined. Our track record clearly shows that aviation is unique in its ability to drive major global changes. For example, IATA rolled-out e-ticketing to every corner of the planet in just 48 months,” said Bisignani.

IATA’s four-pillar strategy to address climate change with modern technology, effective operations, efficient infrastructure and positive economic measures is another example. “Implementing the four-pillar strategy, IATA has already saved over 68 million tonnes of CO₂. This year we expect aviation’s carbon emissions to fall by 7% – some 5% from the recession and 2% as a direct result of our work,” said Bisignani.

Government commitment will be critical for the aviation sector to reduce its emissions, and IATA calls for strong leadership at the Copenhagen summit to reject uncoordinated and opportunistic taxation which ‘does nothing for the environment’ and focus instead on positive emissions reduction activity – such as the air traffic management projects (US NextGen for example).

An industry-wide commitment, formalised in a working paper to be presented to the International Civil Aviation Authority (ICAO) today, will pledge the following targets:

• - Improving fuel efficiency 1.5% on average per year through 2020
• - Stabalising emissions with carbon-neutral growth from 2020
• - Reducing emissions 50% by 2050, compared to 2005.

In order to support this effort, governments must also play a significant role in facilitating and accelerating commercialisation of emerging sustainable feedstocks for large-scale bio-jet fuel production. Along with technological improvements in aircraft, sustainably produced biojet fuels are considered the most viable long-term alternative fuel for the aviation sector, delivering long-term GHG reduction and fuel security (ATAG, 2009). The industry is aiming for carbon neutral growth, with some airlines aiming to operate their fleet on 25% biofuels by 2025 (ATAG, 2009). Studies by Boeing (2009) suggest that microalgae-based biojet fuels provide better fuel specifications than current, traditional Jet A1 fuel, including a better heat combustion, which increases the aircraft’s fuel burn (allows the aircraft to fly for longer on less fuel), potentially by around 1%. This presents a significant financial driver for wider uptake of microalgae-based biojet fuels. Other feedstocks also being explored for biojet fuel production include camelina, jatropha and pongamia piñata, to name a few.

Bio-derived oils from the feedstock are converted into a ‘drop-in’ biojet fuel, via a patented hydrogenation procedure, which produces ‘bio-derived synthetic paraffinic kerosene’ (Bio-SPK) (Taylor, 2009; Boeing, 2009). Test flights have been undertaken using bio-SPK, most notably by Virgin Atlantic, Air New Zealand, Continental Airlines and Japan Airlines using blends of jatropha, camelina and algae (2% blends of algae were used in the latter two) (ATAG, 2009, Boeing, 2009).

Microalgae biofuels have the potential to play a significant role in the long-term sustainability of the aviation sector. However, the major challenges for microalgae-based biojet fuel production are expected to be production at a scale appropriate for aviation consumption, whilst increasing productivities and decreasing cost per hectare (ATAG, 2009). Whilst commercialisation challenges exist, microalgae as a feedstock is considered as ‘the future’ sustainable aviation transport fuel.

The second two-week round of UN-led climate talks, held in Bonn, met with some critical feedback, though there were notable highlights in the dialogue.  One such highlight was the pitch four of the world’s largest air carriers made for a worldwide emissions limit for all airlines as part of the deal to be reached in Copenhagen this December.

The Aviation Global Deal Group (AGD), which includes British Airways, Cathay Pacific, Air France/KLM and Virgin Atlantic, presented what they deem an “ambitious, equitable, and effective” regime of emission caps for all airlines.  This proposal is an effort to include the industry in a climate treaty that 192 nations aim to agree upon this December.  The UN estimates that airlines account for about 3 % of global emissions.  The airline industry has not been subject to GHG regulations up to this point.

Executive secretary of the UN’s climate-change agency, Yvo de Boer, does admit that “it’s very hard to say if aviation will be included” in a final agreement in Copenhagen.  Regardless, airlines are expected to be included in EU regulations in 2012.  The USA has also proposed future legislation on airline CO2 output.  The AGD specifically discussed capping carriers’ GHG output based on annual fuel purchases.  Companies overshooting their target would have to buy permits from those emitting less than their allocation.  Revenue from auctioned permits would go towards helping developing countries adapt to climate change and developing cleaner air travel technology.

Yet, the Bonn talks were described as yielding little true consensus. France’s climate ambassador, Brice Lalonde, said that compared to previous sessions, in Bonn “the attitudes were more constructive, but the level of ambition was lower.”  His specific criticism was that it is now commonly accepted knowledge that global emissions have to be halved by 2050 (compared with 1990 levels), implying an 80 % reduction by industrialized countries. It is also generally agreed that the emissions levels in developing countries must start falling by 2025 at the very least.   But in Lalonde’s opinion, “no one is signing up” – in which statement he is also rather critical of the EU’s involvement.

The driving issues, such as who should cut their emissions and how soon, as well as the question of technology transfer to poor countries, require specific road mapping exercises – for example the proposal by the AGD.  Just last month in a major meeting in Paris (reported in a previous Climatico article), representatives from France and Germany were ardent in their call for flexibility in the mechanisms by which climate change mitigation occurs, so long as it does indeed occur.  Perhaps it will be industry partnerships of multi-national firms that ultimately pushes – or flies—  climate change negotiations over this precarious negotiation standstill?

Transport Ministers from 21 major countries met in Tokyo last week to discuss the establishment of a global trading scheme for emissions from aviation. The ministers expressed their support for the International Civil Aviation Organisation’s (ICAO) efforts to take action on the growing contribution of the airline industry to the stock of greenhouse gases in the atmosphere.

A global agreement on airline emissions would be an attractive prospect: it fits much more comfortably with the intercontinental, international nature of air travel. National or regional approaches are open to accusations of unfairness and even illegality from the airline industry. They are also more complex to implement because they have to find a way of dealing consistently with flights that depart from or arrive in countries not covered by the scheme.

Despite the limitations of regional initiatives, the EU has moved to bring airlines into its emissions trading scheme from 2012 onwards. The legislation – a new Directive amending the Directive that originally created the EU ETS – was approved last year.

Emissions from the EU in 2006 by sector. Click to open larger version in a new window. Source: Climatico.

The chart on the right shows the EU’s CO₂ emissions by sector. Emissions from aviation are shown by the red segment on the bar showing CO₂ emissions from transport¹. At first glance, it seems that emissions from airplanes are negligible, and indeed the airline industry contributes only around 3% of all European greenhouse gas emissions today. This is much less than emissions from road transport, and a small fraction of the emissions from the energy, manufacturing and construction sectors currently included in the EU ETS.

While the size of emissions from airplanes is currently fairly small, it has attracted attention because it is growing so quickly. During the period 2006-2020, emissions from air travel are forecast to more than double . The EU will be trying to reduce its emissions by 20% or possibly even 30% during the same period, so a 3% contribution today might translate into a figure closer to 8% by 2020.

As well as seeking to curb its own contribution to climate change, the EU may also be hoping to lead the way for the rest of the world by bringing aviation into a cap-and-trade system. The ICAO’s discussions are in relatively early stages, and it is unclear if and when it will reach an agreement over global emissions from the industry. Following the ICAO’s meeting last week, it was reported that the President of the ICAO’s Council believes that the EU’s approach might form a starting point for a worldwide emissions trading scheme for airplanes.

¹ Planes contribute other greenhouse gases besides CO₂, so strictily speaking looking at CO_­2­ alone gives only a rough indication of the scale of GHG emissions from aviation.

Plans for a third runway at Heathrow got the go-ahead from the transport secretary, Geoff Hoon today, despite the barrage of opposition on environmental grounds from environmentalists, scientists, MPs, celebrities and local residents.

(Credit: John Stillwell/PA Wire)

At full capacity, an expanded Heathrow (expected by 2020) would become the biggest single source of C02 emissions in the country; emitting nearly 27m tonnes of CO2 every year – equivalent to the emissions of 57 of the least polluting countries in the world combined. The new runway will add an estimated 400 flights a day, increasing annual passenger numbers through the airport from 66 million to around 82 million.

Hoon stressed that the expansion of Heathrow is justified on economic grounds and will be essential for future economic growth, and attracting international investment to the UK. However, in order to appease the growing opposition from environmental campaigners and over 50 Labour MPs, Hoon announced the a package of environmental conditions, restricting BAA from using the new runway at full capacity, which it had originally consulted for. However, environmental campaigners brandished these efforts as simple greenwash.

Proposed Environmental Safeguards

-   The third runway will operate at half its capacity when it opens in 2020, raising the total number of flights from 480,000 to 600,000, rather than the 702,000 intended

-   Aircraft using the new runway will have to meet strict GHG emission standards

-   Total carbon emissions from UK aviation must fall below 2005 levels by 2050

Hoon added that the government was satisfied environmental targets could be met, as it would put an initial cap on additional flights from the new runway of 125,000, would ensure new slots were “green slots” used by only the least polluting planes and would set a new target on aircraft emissions – that they would be lower in 2050 than in 2005.

Protests at Heathrow Airport earlier this week. Source: Dominic Rowland

“This gives us the toughest climate change regime for aviation anywhere in the world,” said Hoon. Such

 sentiments on the imminent challenge of meeting the UK’s legally binding target for 80% CO₂ emissions reduction by 2050 have been raised by many and were also echoed by Prime Minister Gordon Brown. At a recent press conference held in Berlin, he said that he wanted to “protect the economic future of the country while, at the same time, meeting the very tough environmental conditions we have set ourselves”.

However, many feel this decision reflects the government’s hypocrisy on the climate change debate, arguing that the environmental safeguards don’t go far enough. Campaigners from Friends of the Earth highlighted that the expansion will make the UK’s climate change targets virtually impossible to meet, as the airport will see a 70% increase in passengers by 2030.

In addition, plans for investments in a high speed rail network to link major UK cities to this major ‘hub’ airport were unveiled, amongst talks of opening up hard shoulders on some of the UK’s major motorways to ease congestion in the meantime.

While the PM believes that such an infrastructure project is crucial for the UK during this recession period, it is strongly opposed by the Tories. Shadow transport secretary Theresa Villiers criticized government’s environmental promises, labeling them “…not worth the paper they are written on” and said her party would cancel the project if they win the next general election.

Jonathon Porritt, chair of the government’s Sustainable Development Commission, was horrified by the decision and said, “This is very regrettable decision ignoring the fact that government does not have the data about the economic benefits and has not done a proper assessment of the impacts and on its climate change targets. It does not add up.“

Strong local concern was highlighted by London Mayor Boris Johnson and over 20 London local authorities, representing more than 2 million people. The airport will also see the demolition of Sipson village, including one school and over 700 houses, exposing further schools and houses to noise and air pollution.

Meanwhile, a host of celebrities, including Oscar winning actress Emma Thompson, and Alastair McGowan partnered with Greenpeace to sign the deeds of a peace of land ear-marked by BAA to build the third runway; in an attempt to severely delay the planning applications for this controversial development.

What remains to be seen now is whether emissions reduction targets are also ‘loosened’ by the Committee on Climate Change and Ed Milliband’s team to help the government meet the carbon reduction targets, despite the additional 27m tones (approx) of CO2 a year the expansion will add.