Vedder Thinking | Articles European Union's Emissions Trading Scheme: The Stopped Clock Keeps Ticking for Some
As a result of recent European Union (EU) legislative activity, the EU's Emissions Trading Scheme (EU-ETS) will, through 2016, continue exempting certain flights but remain in effect as to others. Consequently, airlines and operators flying within the European Economic Area (and those financing and leasing to them) need to remain aware of, and compliant with, EU-ETS requirements. In the meantime, the aviation industry will remain focused on the efforts of the International Civil Aviation Organization (ICAO) over the next two-plus years to devise and agree upon a global market-based measure for aviation greenhouse gas emissions trading.
On April 2, 2014, the European Parliament (EP) voted by nearly a four-to-one margin to maintain though December 31, 2016 the exemption (in place since the EU Commission's November 2012 "stop the clock" decision) for flights by covered operators originating or ending outside the European Economic Area (EEA).1 If by the conclusion of its next triennial assembly in Autumn 2016, ICAO fails to deliver the framework for a global emissions trading market-based measure capable of implementation worldwide by 2020, then the original full scope of EU-ETS will return, effective January 1, 2017.2 In the meantime, flights within the EEA (even those operated by non-EEA carriers and operators) remain subject to the requirements of EU-ETS, and covered operators must report their 2013 and 2014 carbon dioxide (CO2) emissions by March 30, 2015 and surrender the requisite number of allowances by April 30, 2015 in order to remain in compliance. Those not in compliance continue to face penalties ranging from per diem monetary fines to (in extreme cases) aircraft seizures and operating bans. Lest anyone believe that EU-ETS regulatory bodies are not serious about enforcement, the German regulatory authority recently levied fines totaling €2.7 million against sixty-one operators (many of whom are not German) for non-compliance with EU-ETS reporting or trading requirements during 2012.3 It is unclear whether the penalized operators will pay these fines, or whether the EU-ETS regulatory authorities in other jurisdictions might follow suit, but any enforcement action is likely to be controversial.
The European Parliament's April 2 vote capped a rancorous six months of debates, threats, litigation and counter-proposals, both within the EU and elsewhere, in the wake of the ICAO triennial assembly in October 2013. The often contentious assembly proceedings are likely to portend what the coming months will hold as ICAO attempts to achieve a consensus among its one hundred ninety-one members in crafting a global aviation emissions trading system. The resolution ultimately reached by ICAO in October 2013 forbids the EU from imposing EU-ETS on non-EU countries without their consent until (at the earliest) the end of 2016. In the meantime, the framework for a global market-based measure for aviation emissions trading capable of worldwide implementation by 2020 is to be presented at ICAO's 2016 assembly. The defeat at ICAO of the EU's plan to impose EU-ETS globally prompted reinstatement by the EU's low-cost airline association of a lawsuit against the EU Commission alleging that the limited application of EU-ETS unfairly disadvantaged and disproportionately burdened the EU's low-cost carriers. Against a backdrop of political and legal pressure, the EU Commission was faced with the following options: (i) revert to the original "all flights" scope of EU-ETS, which would assuage dissenters at home but almost certainly renew threats of trade wars and escalate political pressure from abroad; or (ii) amend EU-ETS to apply only to intra-EEA flights; or (iii) amend EU-ETS to apply only to intra-EEA flights and that portion of intercontinental flights over EEA airspace; or (iv) abandon the inclusion of aviation in EU-ETS altogether. None of these scenarios would have placated all sides of the issue.
On October 16, 2013, notwithstanding the ICAO resolution, the EU Commission defiantly proclaimed the EU's sovereign right to control its airspace and announced a multi-pronged proposal to amend EU-ETS, effective January 1, 2014. The scheme would cover CO2 emissions from all flights within the EEA and, between 2014 and 2020 (by which time a global scheme would presumably be in place), the portion of any intercontinental flight within EEA airspace—defined as the territory between the takeoff or landing airport and the point on the flight route twelve nautical miles beyond the outermost coastline of EEA land, but excluding the airspace of non-EEA countries and sea areas between EEA countries in excess of four hundred miles. Overflights of EEA territory, as well as flights to or from non-EEA countries which are considered "not developed"4 would be exempt. A one-time change to the annual reporting and allowance surrender deadlines would be in effect, such that 2013 and 2014 emissions are to be reported by March 31, 2015 and the requisite amount of allowances surrendered by April 30, 2015. The proposed amendments, which would have accounted for only about one-third of the emissions that would have been subject to EU-ETS in its original “all flights” format, drew sharp criticism from the environmental lobby and various EU airline groups, who felt that environmental protection was being subverted to fears of political and economic reprisal. Meanwhile, non-EU countries denounced the EU for violating the spirit of the just-completed ICAO assembly proceedings. On January 30, 2014, the European Parliament's Environment Committee approved the proposed amendments, although this step in itself did not modify EU-ETS—only the plenary European Parliament vote to be held on April 2 would have binding legislative effect.
On March 4, 2014, just a few weeks ahead of the plenary European Parliament vote, with political pressure mounting on several fronts, the EU Commission modified its proposed EU-ETS amendments. The inclusion of the portion of intercontinental flights over EEA territory was removed, leaving all intercontinental flights exempted entirely through 2016. The threshold for operators to be eligible for simplified emissions reporting procedures was raised to include all operators emitting fewer than twenty-five thousand tons of CO2 annually (previously this was only available to non-commercial operators emitting fewer than ten thousand tons of CO2 annually or operating fewer than two hundred forty-three flights in each of three consecutive four-month periods). However, there was still no express requirement that any fees or funds collected through the administration or enforcement of EU-ETS be allocated toward fighting climate change or developing greener technology, a long-standing criticism of the scheme. The exclusion of all intercontinental flights through 2016 was rejected by the European Parliament Environment Committee on March 19, 2014, but again this did not itself modify EU-ETS and was merely procedural run-up to the European Parliament's plenary vote, the outcome of which had the force of law.
In addition to extending through 2016 (and slightly expanding) the exemption from EU-ETS of flights originating or ending outside the EEA, and prescribing March 31, 2015 and April 30, 2015 as the next reporting and allowance trading deadlines (respectively) for operators still covered by EU-ETS, the European Parliament's April 2 vote also resulted in the exemption, through at least 2020, of all flights by non-commercial operators emitting fewer than one thousand tons of CO2 per year. This should ease the burden on business jet operators who fly strictly for their own personal or business purposes and do not carry passengers or cargo for compensation. However, the debate in the coming months will likely include the scope of the exemption for non-commercial operators and the threshold of the exemption for commercial operators (currently ten thousand tons of CO2 annually).
As the calendar advances toward January 1, 2017, we should expect to see advancements in engine design and technology, clean sky initiatives, biofuel development and green taxiing systems, all of which should help combat climate change and reduce aviation greenhouse gas emissions.5 While the primary focus will be on ICAO's progress toward a global market-based measure for aviation greenhouse gas emissions trading, airlines and operators flying within the EEA must continue observing EU-ETS requirements, and the lessors and lenders who finance such airlines and operators need to be vigilant of their customers' compliance. Although many questions remain at this stage as to how aggressively EU regulatory authorities will act against delinquent operators, the fact remains that the consequences of non-compliance can be quite significant and should not be overlooked.
If you have questions about this update, please contact Jordan R. Labkon at +1 (312) 609 7758.
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1 The EEA is comprised of the 28 EU member states, plus Norway, Liechtenstein and Iceland. The European Parliament's April 2 vote actually expanded the reach of the original "stop the clock" exemption. Flights between EEA territory and Switzerland, EEA microstates (e.g., Monaco and Andorra), EEA overseas territories and EEA outermost regions are now also exempt through 2016. See, e.g., "The Trilogue Compromise is Voted at the European Parliament," Verifavia.com, April 3, 2014.
2 Feisty Exchanges Over Aviation EU ETS as European Parliament Votes to Continue With 'Stop the Clock', GreenAirOnline.com, April 15, 2014.
3 "Germany Levies Fines on Aircraft Operators Over Emissions," Bloomberg.com, April 30, 2014.
4 There are approximately seventy-five such countries, whose operators emit less than one percent of the total of aviation emissions worldwide.
5 See, e.g., "Plant Power: Biofuel Development," Airline Fleet Management, April 22, 2014; "Honeywell Plans 2017 Green Taxiing System In-Service Date, Talks with COMAC," Air Transport World, May 22, 2014.