October 31, 2014

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October 31, 2014

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October 29, 2014

The European Union’s Emissions Trading Scheme: A Brief Pause at the Edge of the Enforcement Cliff?

After initially refusing to budge from its April 30, 2013 deadline despite objections by governments, aircraft manufacturers and aviation industry advocacy and trade groups around the world, the Commission of the European Union (the Commission) has agreed to postpone the enforcement of European Union Emissions Trading Scheme (EU-ETS) requirements relating to flights into and out of the EU for a period of one year.1 The one year delay is intended to allow the International Civil Aviation Organization (ICAO) to continue its work toward a global aviation sector emissions reduction and trading scheme. However, it is still unclear whether autumn 2013 will bring consensus on a comprehensive global scheme to curb aircraft emissions or find the world exactly where it is now—bitterly divided on how to achieve an otherwise generally accepted goal of environmental protection.

EU Holds Fast, Then Pauses (Some) Enforcement

Despite vocal demands from around the world to defer or set aside EU-ETS in favor of a global sectoral scheme developed by ICAO, the Commission until this week stood firm in its plan to proceed on schedule with the scheme in its current form. The Commission views EU-ETS as the EU’s method of complying with its binding obligations under the Kyoto Protocol to the United Nations Framework Convention on Climate Change to address the steady increase in worldwide greenhouse gas (GHG) emissions, filling a void left to date by ICAO’s failure to devise a global scheme. All the while, the Commission has maintained that EU-ETS would be adapted to work in concert with any global scheme ultimately established through ICAO, as most recently evidenced by the decision to temporarily suspend EU-ETS enforcement in relation to international flights.2

At this point, the monitoring, reporting and allowance surrender requirements of EU-ETS will not be enforced against international flights until (at the earliest) autumn 2013, after the next meeting of the ICAO general assembly.3 However, the logistics of administering this suspension at the EU member state level have yet to be determined, and the measure must still be ratified by the EU member states and the European Parliament.4 Moreover, the scheme will remain unchanged and be enforced in its present form as to all flights originating and ending within the EU.5 In the meantime, the aviation marketplace will turn its focus to ICAO.

All Eyes on ICAO

ICAO’s task of developing a global framework for limiting aviation CO2 emissions will likely be difficult and time consuming. Reaching consensus on a methodology among ICAO’s 191 member states will be challenging in itself. Timing also will be significant; while draft plans could be under informal consideration as early as next spring, the full ICAO assembly does not meet until autumn 2013 and, absent a final agreement at that point, it could still take several months (even years) before a final scheme is agreed and implemented worldwide. It remains unclear exactly what form a global sectoral scheme would take (i.e., either a single, unified system or a collection of systems functioning simultaneously), and whether any system will be state-based or airline-based,6 though early speculation appears to favor a system of global emissions trading or offsetting.7 Meanwhile, the longer it takes or more difficult it proves to achieve consensus in ICAO, the more likely the Commission will revert to EU-ETS in its present form in autumn 2013, which would then likely reignite the political and economic tensions currently being felt around the world. In that event, renewed pressure may be brought against the Obama administration by U.S.-based aviation industry groups to initiate dispute resolution proceedings against the EU under Article 84 of the Chicago Convention, seeking a determination that EU-ETS violates the Chicago Convention.

Conclusion

The suspension of EU-ETS compliance requirements as to international flights is only temporary. It merely increases the pressure on ICAO to devise a suitable global framework, which will be no easy task for a variety of reasons. If consensus is not achieved by autumn 2013, will the EU reinstate the current EU-ETS requirements against all flights into and out of the EU? How close must ICAO be in order to avoid reversion to the current situation? How soon would all of the costly consequences of non-compliance be staring aircraft operators in the face? In the absence of a global scheme and a fully reinstated EU-ETS, what are operators to do if their own domestic laws prohibit them from participating? These are all crucial questions to be answered in the coming year.


1 Under the current format of the EU-ETS, all covered commercial and private aircraft operators worldwide would have been required, by March 30, 2013, to report carbon dioxide (CO2) emissions from all of their flights to, from and within the European Union (EU) during calendar year 2012. By April 30, 2013, covered operators would have been required to surrender allowances corresponding to the metric tonnage of their 2012 aircraft CO2 emissions to the relevant EU-based regulator. For a more detailed description of the EU-ETS regulations, please see the April 2012 edition of the Vedder Price Global Transportation Finance Newsletter.

2 The directive establishing EU-ETS provides that flights to the EU from a country that has enacted “equivalent measures” to reduce GHG emissions may be exempt from the scheme. (Directive 2003/87/EC of the European Parliament and of The Council of 13 October 2003 (consolidated version with amendments) (Directive 2003/87/EC) (establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC). With no bright-line test to determine what constitutes an “equivalent measure,” the Commission is left to its own discretion to decide. The 2008 directive formally linking aviation to EU-ETS suggests that such a measure should aim to reduce the impact of aviation emissions on climate change to the same degree as EU-ETS and be operationally compatible (through bilateral agreement or otherwise) with EU-ETS. (Directive 2008/101/EC of the European Parliament and of The Council of 19 November 2008 (amending Directive 2003/87/EC to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community); see also Renee Martin-Nagle, “Aviation Emissions: Equitable Measures under the EU ETS,” October 15, 2012, at 13.) While countries such as Australia, New Zealand, South Korea and Mexico are at differing stages of developing industrial emissions trading schemes (some of which cover domestic aviation), and some have begun exploring linking their respective schemes with EU-ETS, none of these systems are ready at this time to link with EU-ETS for international flights. (Martin-Nagle, supra at 16-18.) China has made broad strides within the past few months on various initiatives, including a proposed tax against passengers and airlines to fund aviation emissions reduction programs (see, e.g., Yi Liu, “Outcry Over New Passenger and Airline Levy,” Run Ming Law Office, May 16, 2012, available at http://www.internationallawoffice.com/newsletters/Detail.aspx?g=74987887-448a-4e2e-8803-c5053af9db98; Brian F. Havel and John Q. Mulligan, “What Does China’s Emissions Reduction Proposal Mean for EU ETS?,” Aviation Law Prof Blog, Apr. 19, 2012, available at http://lawprofessors.typepad.com/aviation/2012/04/what-does-chinas-emissions-reduction-proposal-mean-for-eu-ets.html.), creation of city- and province-level emissions trading programs, entry into a cooperation agreement involving direct EU financial investment and technical assistance with creation of carbon-reduction programs and emissions trading schemes and, in October 2012, announcement of plans to establish a nationwide emissions trading scheme. (Martin-Nagle, supra at 17-18.) Notwithstanding recent progress by various countries, however, none of these measures have yet been formally declared “equivalent measures” by the Commission, and it remains unclear whether or when any of these measures will become effective. (Dickon Harris, “Can ICAO Deliver an Alternative?,” Airfinance Journal, Oct. 2012, at 32-33.) Certainly, these countries (along with the rest of the world) are monitoring ICAO’s work toward developing a global sectoral scheme, although the scope, mechanics and timing of such a system are all undetermined at this point. ICAO’s progress will go far in determining whether states continue pursuing equivalent measures on their own.

See, e.g., Anne Paylor, “EU Suspends Aviation Inclusion in ETS for International Flights,” ATW Online, Nov. 12, 2012, available at http://atwonline.com/international-aviation-regulation/news/eu-suspends-aviation-inclusion-ets-international-flights-1112; Ewa Krukowska, “EU To Freeze Enforcement of Carbon Curbs on Foreign Flights,” Bloomberg Business Week, Nov. 12, 2012, available at http://www.businessweek.com/news/2012-11-12/eu-to-stop-enforcement-of-carbon-curbs-on-foreign-flights.

Id.

See Paylor, supra note 3; see also Barbara Lewis, “EU Commission Freezes Airline Carbon Emissions Law,” Reuters, Nov. 12, 2012, available at http://www.reuters.com/article/2012/11/12/us-eu-airlines-ets-idUSBRE8AB0HB20121112.

6 Valerie Volcovici and Barbara Lewis, “EU Sees Progress on UN Airline Emissions Deal,” Reuters, Nov. 11, 2012, available at http://www.reuters.com/article/2012/11/11/uk-airlines-eu-us-co-idUSLNE8AA00I20121111.

7 Harris, supra note 2, at 33.

 

 

 

 

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About this Author

Jordan R. Labkon, Vedder Price Law Firm, Finance Attorney
Shareholder

Jordan R. Labkon is a Shareholder at Vedder Price and a member of the firm’s Global Transportation Finance team. He advises lenders, borrowers, lessees, equity participants and others in a variety of equipment finance matters in the transportation industry. This includes US-based and cross-border leveraged leases, tax-motivated structured financings, secured loan and mortgage financings, operating lease financings, and asset purchase and sale transactions involving commercial aircraft and rolling stock. He also has experience in corporate and private aircraft financings, leases,...

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