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Newsletter October 2011: Newsletter FLO – Aviation

 

Arthur Flieger, Attorney of Law Flieger Law Office bvba

With the cooperation of Stijn Brusseleers, Attorney of Law Flieger Law Office bvba

 

EU ETS: The war of the Titans

 

 

I.

The last months many parties worldwide are looking to the EU Commission, as well as to the European judiciary. The European Union aims to lead the world in fighting climate change, and claims it needs to put a price on carbon dioxide emission. From January 2012 airlines flying to or from Europe will have to buy permits from the EU Emission Trading Scheme for 15% of the carbon emissions the produce. On the other side of the Atlantic in the United States of America, voices can be heard claiming that the European approach is illegal. The Air Transport Association of America, the industry trade organisation for the leading US airlines, claims on his side that the legal European clean Emissions Trading Scheme is illegal and will cost the US airlines industry more than 3 billion US dollar through 2020, if the extra territorial cap and trade rade requirements are implemented as planned in 2012.

 

The US House leaders proposed a bill that declarers the application of the EU ETS to aviation

inconsistent with international law. The legislation directs the Department of Transportation to prohibit US carriers from participating in the scheme while ensuring that US airlines and aircraft operators are not penalized as a result.

 

II.

EU ETS is a very broad subject of which many issues and rules will be changed the forthcoming period, if not years.

 

The legislative background for the EU ETS is the Kyoto Protocol, which singles out international transport as candidate for sectoral regulation, and recognises authority of ICAO and IMO.

 

ICAO has done little more than proliferate committees, working groups, sub-groups etc. One will notice the achieved recommendation from the Committee on Aviation Environmental Protection (CAEP) saying that

– there should be an international system;

– emissions trading is preferable to tax;

– and this all should be voluntary.

Needless to say that there is, despite what politicians say, a clash between ICAO and the EU. As you probably know and as we will see la ter on, the European Commission is on a collision course despite the ICAO deal reached last year.

 

If we look to the Kyoto Protocol in respect of aviation I need to refer to Article 2.2 of the Kyoto Protocol where it’s said that Annex 1 parties ( i.e. developed countries), shall pursue the limitation or reduction of greenhouse gases emissions from Aviation and Maritime Bunker fuels through ICAO and IMO. There is indeed some frustration among parties which perceive a lack of initiative taken by ICAO and IMO.

 

The Chicago Convention on the other hand has its focus on non-discrimination, equal and fair opportunities, f.i. limited scope…

– Limited scope for affirmative top-down environmental policies f.i. cap-setting.

 

 

II.

ICAO did put the GHG emission on table since two decades. Since 1991 there were some discussions in ICAO on market mechanisms to limit emissions.

 

 

III.

Then we have the recent steps at ICAO

 

More recently the 37th ICAO Assembly prepared inputs for the United Nations Framework Convention on Climate Change (UNFCCC) summit in Cancun from November – December 2010 and which prepared the programme of Action on International Aviation Climate Change (PIACC)

 

Now what happened at that 37th Assembly of ICAO held in Montreal in September-October 2010 ?

 

There was a decision on Emission Trading which was adopted. The European Commission said that this decision supported the EU ETS and on the other hand the American Air Transport Association (ATA) said that this decision undermined EU ETS. As you will notice two parties are indeed giving some opposite interpretation to a same decision.

 

It will lead us too far to go into the details of the aims of the Assembly’s decision but I would like to highlight that the Assembly agreed to:

– support all of the recommendations from the High Level Safety Conference (March 2010)

– a Continuous Monitoring Approach to ICAO’s safety audit programme

– develop a new Annex (No 19) to the Chicago Convention to bring together, and develop further, safety management standards

 

In respect of environmental protection one can refer to a Resolution (A37-18) on environmental protection covering the reduction of aircraft noise and improvement of local air quality which was adopted without debate.

 

Climate change was another story:

As expected, climate change was the most contentious issue. Negotiations on the resolution text were difficult as it became clear that the divide between developed and developing country positions created an impasse on many issues.

A Resolution (A37-19) was unexpectedly adopted on the last day.

 

The key elements of A37-19 encompass

1. Agreement to a collective global aspirational goal of carbon neutral growth from 2020

2. Agreement to explore a long term global goal

3. Recognition of the important role of market-based measures and agreement to 15 guiding principles

4. Decision that States should reach an agreement with other States prior to including their operators within a specific market based measure

5. Agreement that air carriers of countries falling below a ‘de-minimis’ threshold should qualify for exemption from the application of market-based measures (threshold set at 1% share of international aviation activity)

6. Request for further work on assistance to States, alternative fuels, development of a global market based measures framework

 

What will happen and what work is there on the table for Assembly A38 in 2013?

I can only state that 2013 is a long way off and since then I suppose that the industry will encounter many other problems. We all know member states may compile action plans and submit them until June 2012

And maybe a de-minimis threshold of 1% should be taken into account, as well as an agreement of counterparties should be reached before implementing MBMs (Market Based Measures).

 

So while securing a framework at ICAO to reduce greenhouse gas emissions from aviation there is little sign , despite the ATA case pending at the TFI (General Court of the EU), the European Commission might back down over its plan to bring aviation into its emissions trading scheme from 2012.

Under ICAO’s framework 190 states signed up to commitments including a global goal of improving fuel efficiency by 2% a year until 2050 and agreed on some principles to use in market based measures, like emissions trading schemes.

 

As mentioned, the EC says its scheme is consistent with the agreed principles adding: “Crucially ICAO has refrained from language which would make the application of the EU’s ETS to their airlines dependent on the mutual agreement of other states”

 

But IATA and the Air Transport Association of America have launched, as said , a legal challenge to the scheme through a preliminary ruling from the High Court of Justice Queen’s Bench Division (July 22, 2010).

 

Some very interesting issues , certainly for lawyers here, were submitted to the European Tribunal in respect of the application of international law and more specifically that EU ETS would be contrary to the customary international law principle that each state has complete and exclusive sovereignty over the airspace above its territory (art 1 of the Chicago Convention). Reference is also made to article 11 (air regulations) of same convention. This section is evidently a non discriminatory provision. It requires that rules which are applied by a contracting state within its airspace shall be applied to aircraft of all nationalities without discrimination, and that the aircraft within that state’s airspace shall comply with those rules. As all flights from and to EU Member States would be treated similarly under the ETS, there would be no question of any discrimination. But this same article 11 relates to laws and regulations relating to the admission and departure of aircraft and their operation and navigation within a contracting state’s territory and does not apply to environmental legislation regarding emissions trading. Nor does it state that the only regulations which can apply in relation to a contracting state’s airspace are those made by the state in question.

 

I will skip other interesting points raised such as article 12 of the Chicago Convention (rules of the air), 15 (fees, duties and other charges), 24 (customs duties – is ETS a charge or a duty?) With respect to the Open Skies Agreement, the issue is raised by the claimants that taxing the consumption of aircraft fuel, including by reference to emissions, is prohibited by the Open Skies Agreement entered between the EU and the USA in April 2007 (art. 11(2)c).

 

The final argument is that the Kyoto Protocol , which was signed, but never ratified by the USA, provides that the parties shall pursue reduction of greenhouse gas emissions from international aviation “ working through the ICAO”. So in a strange way that argument is raised by US companies as the USA did not ratify the Kyoto Protocol.

 

So far this case, but one will ascertain that if the claimants are rewarded by the European Judges there will be profound implications for the future of EU climate change policy relating to aviation. If we assume that the Chicago Convention fails, but the arguments to the Open Skies Agreement succeed, the US airlines will probably lose their case to have the ETS as a whole declared invalid, but probably the ETS will not be applied to US airlines. If such will be the case I am sure that other countries will – upon verification of their bilateral aviation agreements with the EU Member States – probably initiate same procedures.

 

On a sidenote one will recall that the director general of IATA, Giovanni Bisignani, believes opposition to the imposition of the EU ETS during the ICAO assembly strengthens the case against the stand alone scheme. There are indeed 120 countries that formally made their opposition to the EU ETS. As ICAO secretary general Raymond Benjamin says, it is too early to know what impact the resolution might have on the European plans, but he adds: “ if you had not had a global agreement in ICAO, nobody would have thought of the ETS not being applied. Today it is a possibility.”

 

IATA, ACI and groups representing aerospace manufactures and air navigation services providers had presented in 2010 a proposal calling for a 1.5% annual improvement in fuel efficiency through 2020, carbon neutral growth between 2020 and 2050 and a 50% net reduction in aviation green house gases by 2050 compared to 2005 levels.

 

 

Since ICAO looks for a global solution, the EU ETS is merely a regional solution . The question raised is what could go in a national action plan:

 

– European Union as I said the Emission Trade System: non EU carriers included. The airlines are the point of regulation

– Germany and the United Kingdom are looking for an air passenger duty; As far I understood the UK Chancellor of the Exchequer announced on March 23,2011 not to increase the Air Passenger duty;

– India would like to proceed with the Air Passenger duty;

– Australia, New Zeeland ETS: will they only consider domestic flights;

– And China is considering an air passenger duty, and is also examining sanctions and preferential treatment for landing slots.

 

This said, I would like to return to the main issue for Europe the more that in my view it will take some time until we will hear something from the European judges in respect of the ATA case, and therefore one will have to abide to the EU ETS rules:

 

From January 2012 Airlines have their CO2 emissions regulated:

– Any (leg of a) flight landing or taking off in the EU is covered, irrespective of ‘nationality’

Some exceptions – military, State etc.

– At the end of each year, the airline must submit to its competent authority one allowance or eligible offset for every tonne of CO2 emitted.

– Some aviation allowances are given out for free directly to airlines, but not enough to avoid cost

– As well as aviation allowances, airlines can use ‘normal’ allowances from the existing scheme, or other eligible offsets

– There is no limit to how much an airline can emit, they just need to buy enough aviation allowances, normal allowances, or other eligible offsets.

 

Key features

– Legislation covers all flights to and from EU airports

– Airlines are regulated already from 2010 and will be fully included in the scheme from 2012

– Emissions cap based on historic average annual emissions between 2004 and 2006

– 2012 cap set at 97% of historic emissions

– 2013 – 2020 set at 95% of historic emissions

– 15 % of allowances to be auctioned in 2012

– 3% of allowances reserved for new or fast-growing operators

– 2010 tonne-kilometre monitoring needed to apply for free allowances

 

Timeline for implementation

– 31 December 2009: Monitoring plans approved by competent authority

– 1 January 2010: Monitoring starts

– 31 March 2011: Submission of first verified reports to competent authorities

– Submission of first verified emission reports

– Aircraft operators apply to competent authority for free allocation of allowance

– 30 September 2011: Commission calculates allocation benchmark

– 31 December 2011: Commission publishes allocation of free allowances

– 1 January 2012: first trading period

 

 

One issue I also would like to stress is that despite the fact EU ETS and more generally the carbon trade is quite young, crime already emerged. According to Europol 90% market volume of emissions traded in some countries could be result of tax fraud, costing governments more than 5 billion euro. Cyber fraudsters have also attacked EU ETS with a phishing scam with high damages for companies. The EU has in the meantime revised the ETS rules to combat crime. I also believe that the rules in respect of offset from Joint Implementation (i.e. mechanism with emerging economies) and CDM (Clean Development Mechanism – projects in developing countries) will be revised. The EU ETS allows the use of offset from JI and CDM projects. The main advantage of allowing free trading of credits is that it allows mitigation to be done at least cost. This is because the marginal costs of abatement differs among countries. It has indeed been argued that the volume of CDM/JI credits, if carried over from phase II (2008 – 2012) to phase III (2013 – 2020) in the EU ETS will undermine its environmental effectiveness, despite the requirement of supplementarity in the Kyoto Protocol.

 

 

A last word about the problems the EU will encounter shortly, and which confirm our point of view that a global ETS solution is preferable to any regional system. A group representing China’s largest airlines sent a formal notice to the EU expressing strong opposition to non-member-state airlines’ inclusion in the EU’s Emissions Trading Scheme from 2012.

The China Air Transport Assn., representing Air China, China Southern Airlines, China Eastern Airlines, Hainan Airlines, Xiamen Airlines, Shenzhen Airlines and Sichuan Airlines, estimated that Chinese carriers will be forced to pay millions of yuan annually to comply with the ETS (the figure could keep rising with the increasing of flights between China and Europe planned by Chinese airlines).

 

The organization said in its statement to the EU that the inclusion of carriers from developing countries in the ETS is illegal and violates the “common but differentiated responsibility” principle. It called for a global solution to deal with air transport-related carbon dioxide emissions.

“But if the EU insists on imposing its ETS on our carriers, we would urge the Chinese government to take corresponding measures to protect Chinese airlines’ interests in the global air transport industry,” the group of carriers warned. The EU noted it would maintain communication with Chinese airlines on the issue. Which is indeed a very diplomatic answer. This is only one voice, the more that Russia, India and other countries are considering measures or retaliation

Said this all I think that a global solution for ETS is preferable, and that the politicians worldwide will still have their saying.

 

Soon in October 2011, the General Court will pronounce itself about the issue.

 

 

 

………..

 

Aviation in the ETS

C02 demand is estimated to be 23 million metric tons (mt) of CO2 in 2012, rising to 122 mt by 2020. The Commission is concerned that this increasing demand will negate the impact of emissions reductions elsewhere in the EU, which is why it included aviation within the ETS. Effective 2012, the ETS will apply to every operator of an aircraft that lands at or takes off from an airport in the EU, Norway, Iceland, and Liechtenstein. If an aircraft holds an operating license from an EU country, it will be administered by that country, whereas non-EU carriers have been assigned to an administering Member State based on their primary EU routes. The number of allowances issued to the aviation sector will be expressed as a percentage of the sector’s mean average annual emissions from 2004 to 2006. In 2012, this percentage will be 97 percent (the actual amount of the cap for 2012 will be determined by September 30, 2011). The number of allowances to be allocated to an airline for the year 2012 will be the airline’s share of the total attributed aviation emissions in 2010, and will be allocated by December 30,2012. In 2012, 85 percent of allowances will be issued for free. Unless an aircraft operator is successful in reducing its emissions, it will need to secure surplus allowances covering 17,55 percent of its emissions (or 100 – (0,85 x 0,97).

 

 

Relevant EU legislation

The ETS was established pursuant to directive 2003/87. On November 19, 2008 the European Parliament and council adopted Directive 2008/101 (the Directive), which amends Directive 2003/87 to include aviation in the scheme for greenhouse gas emission allowance trading within the EU. Member States are required to implement the Directive. The U.K. government elected to implement the Directive by a two-stage legislative process. First, the Secretary of State for Energy and Climate Change issued the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2009 (the Regulations), which entered into force on September 17, 2009, and implemented certain provisions of the Directive. Following a lengthy consultation process with regard to the second stage, the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2010 came into force in August 2010, many months after the ATA case had commenced.

 

For further information and comment, please contact Arthur Flieger at Flieger@fliegerlaw.com, Website: www.fliegerlaw.com, telephone: +32 3 238 77 66 – Fax: +32 3 216 18 44

 

 

 

Copyright A. Flieger

 

 

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