EU ETS Puts International Flights on Hold

International Flights Obtain Legal Reprieves From Applicability of European Emissions Trading System

On November 11, the European Commission (Commission) announced its intention to “stop the clock” on enforcement of the European Union Emissions Trading System (ETS) requirements for airline traffic to and from the Europe. As explained by EU Commissioner Connie Hedegaard, the Commission will suspend the requirement for airlines to purchase allowances covering greenhouse gas (GHG) emissions for one year, until after the International Civil Aviation Organization (ICAO) General Assembly in fall 2013.

In a related action, in November the United States Congress completed passage of Senate Bill 1956, which, if signed by President Obama, will grant the Secretary of Transportation authority to prohibit operators of civil aircraft of the United States from participating in the ETS.

Background

As explained in our June 21 alert and our August 6 alert, the European Union (EU) has faced extreme challenges affecting carbon trading this year. In addition to seeking solutions to anemic prices of ETS credits and a stagnant trading market, the Commission has contended with severe international opposition to its 2009 legislation that extended ETS compliance requirements to international airlines serving European airports.

Representatives from airline industry groups as well as several nations whose airline industry would be affected by the inclusion have challenged the legality of the measure. In recent weeks, the issue has come before the ICAO, a United Nations Specialized Agency. Twenty-six of ICAO’s member states — including Russia, China, India and the United States — have publicly opposed the inclusion of international air flights in the ETS compliance system. Many of these nations have prohibited their airlines from participating in the ETS program or have threatened trade retaliation against the EU if it enforces the rule against international air carriers.

The Commission’s Announcement

During a teleconference among the EU member states on November 11, Commissioner Hedegaard announced that the EU was prepared to temporarily suspend enforcement of ETS obligations on non-European airline carriers. In her public statement on the issue available here, the Commissioner cited progress being made in negotiations on a global emissions deal as a primary reason for the suspension.

Passage of Senate Bill 1956

The United States may become the latest nation to take a stand against the EU’s inclusion of international flights in its ETS if S. 1956 is signed into law. The bill, which passed in the House of Representatives on November 13 and in the Senate on September 22, empowers the Secretary of Transportation to prohibit an operator of a civil aircraft of the United States from participating in the ETS in any case in which the Secretary determines the prohibition to be in the public interest. Multiple airline industry groups have lauded the passage of the bill, criticizing the unilateral aspect of the ETS and articulating a preference for the ICAO to negotiate an international agreement addressing climate change impacts from international aviation. These industry groups also cite the need to shield U.S.-based carriers from significant allowance and other compliance costs associated with mandatory participation in the ETS. Text of S. 1956 is available here.

Reactions and Outlook

While it is notable that the EU Commission has retreated from the position of including international airlines in the program, the full impact of the announcement remains to be seen. If the ICAO Assembly fails to make meaningful progress by fall 2013, the Commission’s recent action may only serve to postpone the dilemma for a year.

In the meantime, the Association of European Airlines (AEA) has “cautiously welcomed” the move, but the reaction from some of the EU Member States and the EU Parliament may prove to be negative, as many of the relevant leaders have lobbied for the inclusion of the airline industry as an important contribution to reaching the EU’s ambitious climate goals (it is estimated that the airline industry accounts for roughly 3 percent of global GHG emissions). Perhaps not surprisingly, two airline companies — Lufthansa and Air France — reacted immediately to the Commissioner’s announcement. Because these airlines operate numerous inner–EU flights, to which the enforcement suspension does not extend, they have argued that the new approach will cause them to suffer a competitive disadvantage as compared to airlines that have a majority of their flights either originating or terminating outside the EU. Consequently, there is at least some chance that European airlines may challenge the inconsistent enforcement of the ETS rules, which could create further uncertainty in the already unstable ETS market.

S. 1956, if signed by President Obama, could give U.S. airlines critical federal support in opposing the ETS, further increasing pressure on the EU to scale back the ETS’s applicability to international operators and to seek alternative multi-lateral solutions through the ICAO.

Contacts

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