Feedback: Emissions challenge

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Europe's plan to include aviation in its emissions trading scheme raises a variety of legal issues and has the potential to distort the market, says Michael Renouf, head of law firm Berwin Leighton Paisner's Brussels office

The European Union's emissions trading scheme (ETS), the world's largest multi-country, multi-sector emissions trading system, covers about 12,000 installations in the energy, metals, minerals and paper industries. The European Commission's proposal to integrate aviation activities into the ETS will, if adopted in its present form, affect commercial flights between airports within the EU from January 2011. One year later, international flights arriving at or departing from an airport in the EU will be covered. The proposal raises a number of issues.

Firstly, total allowances will be based on "historical aviation emissions" - the average of the total annual emissions in the years 2004, 2005 and 2006. This formula could have a detrimental effect on an industry that displays differences from other sectors. The continuing rapid growth in aviation will result in fewer allowances being allocated to operators than they need. As improvements in technology and efficiency are hard to achieve and have a long lead-in time, aviation operators will be net purchasers of allowances.

Issuing free allowances to individual operators, based on their verified tonne-kilometre emission data for the calendar year ending 24 months before the start of the period to which they relate (for instance, in relation to 2011-12, operators will file applications based on 2008 data), could lead to distortions between competing companies. Moreover, new entrants in 2009 or 2010 will not be entitled to free allowances from 2011, depending instead wholly on auctioning. This may also result in market distortions. Although basic aspects of the auctioning system are found in the proposal, the EC will adopt detailed rules at a later date and all operators will have an interest in ensuring that these rules do not cause additional problems.

Quota systems must comply with EU law requirements. Quotas are often based on data for the most recent year for which figures are available.

Emissions from international flights exceed emissions from purely domestic flights by a factor of 10, but the inclusion from 2012 of flights arriving in or departing from the EU is particularly controversial. The extra costs that will result for operators based outside the EU, and concerns of EU-based operators about the impact on them, may result in this aspect being challenged.

The Chicago Convention's prohibition on charges not directly tied to the use of services or facilities, exemptions on duties, and provisions relating to operational standards of an environmental nature, could form the basis for a legal challenge. However, the Chicago Convention dates from the 1940s, long before environmental protection became a legal requirement under international, regional and national laws. Its provisions should be read alongside those of other more recent international agreements, including bilateral agreements, the UNFCCC, the Kyoto Protocol and the EC Treaty.

Effect on prices?
With market prices at very low levels, the effectiveness of the ETS is being questioned. The likely impact on passenger ticket prices (and on freight costs) is also generally estimated to be relatively low. However, integration into the ETS part way through the second phase of the scheme, with aviation operators likely to be net buyers, could be one of several events that may cause allowance market prices to rise. The real impact could turn out to be a lot higher than many commentators expect. The prospect of potentially high costs may act as a further incentive for airline and airport operators to consider the scope for influencing the EC's proposal.

A further example of how the proposal might lead to distortions between competing airlines on certain routes is that it only catches aircraft above a maximum take-off weight of 5,700kg (12,570lb). Each business should consider the impact of the detail of the proposal on its own particular operations.

The EU's institutions and member states in adopting and applying new legislation must comply with EU law. Legal arguments can be used to challenge adopted legislation, and sometimes a threat can be headed off before it materialises through reliance on carefully crafted legal argument as part of a lobbying initiative during the passage of a proposal through the legislative process.

First readings on the Commission's proposal will take place in the European Parliament and Council of Ministers later this year.