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Vedder Thinking | Articles The Emissions Trading Scheme in European Airspace Takes Shape-Can the United States Be Far Behind?

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One of the most talked-about issues in the ongoing climate change debate is cap-and-trade regimes. Cap-and-trade is a regime designed to reduce greenhouse gas emissions by requiring covered entities to observe restrictions (in the form of allowances) on greenhouse gas emissions. The allowances limit or “cap” permitted greenhouse gas emissions and allow entities to sell or “trade” unused allowances. The United States is considering various forms of legislation, including cap-and-trade regimes, to reduce greenhouse gas emissions. The European Union, on the other hand, has enacted regulations to implement a cap-and-trade regime.

On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, entitled the Waxman-Markey American Clean Energy and Security Act. On September 30, 2009, the
Environment and Public Works Committee of the U.S. Senate introduced a comparable bill, S. 1733, entitled The Clean Energy Jobs and American Power Act. The goal of both bills is the reduction of U.S. emissions of greenhouse gases by means of a cap-and-trade scheme. Both proposed bills are complex and include provisions under which the federal government will establish a cap on greenhouse gas emissions allowed for all “covered entities” and require generally that a covered entity must hold an allowance for every ton of greenhouse gas it emits. Both bills set the cap for 2012 at 97% of the emission levels during 2005, and at 58% of 2005 levels in 2020 and at 17% of 2005 levels in 2050. The emissions allowances can be bought and sold in an open market.

The legislation is not clear as to the extent, if any, to which airlines or aircraft engines will be affected, however, as of February 23, 2010, the legislation is intended to be applicable to the airline industry.

Both proposed bills call for emissions standards for aircraft and aircraft engines, but contain few details on how the as yet un-chosen administrator of the legislation will impact the aviation industry. For example, under the House bill, the Administrator will have the authority to establish standards applicable to banking and trading of greenhouse gas emissions allowances across several classes or categories of covered entities, including aircraft and aircraft engines, to the extent that such Administrator “determines appropriate.”

Commentators have been critical of the currently proposed legislation and its future is uncertain. Politicians in Washington continue to work on a variety of alternatives with both minor and major differences to the current legislation. Given the general political atmosphere in Washington, it is impossible to predict when, or even if, any emissions control legislation will be enacted.

Europe is ahead of the United States in implementing cap-and-trade regulations. Through Directive 2003/87/EC, the European Commission created a cap-and-trade emissions trading scheme (“ETS”) within the European Community, which includes aviation activities. All operators, lenders and lessors of aircraft traveling to, from and within Europe need to understand the implications of the EU ETS requirements on such operations.

EU ETS regulations apply to all “affected aircraft operators”—operators of all flights that depart from or arrive into any airport in a EU Member State, including flights within the European Community—regardless of the operator’s nationality (subject to some exceptions not related to commercial aviation). Thus, beginning in January 2010, aircraft operators who fly to, from and within any EU member country are required to monitor and report all annualized carbon emissions and greenhouse gas emissions arising from their aircraft activities. Total emissions are calculated by multiplying an aircraft’s fuel consumption by its emission factor.

EU ETS regulations also require affected aircraft operators to calculate their free allowances based on flights to, from or within Europe (in metric tons). This calculation is important for calculating free allowances for flights regulated by the EU ETS, and because it creates a construct which purportedly regulates carbon emissions released during flight through non-EU airspace. When other regions, including the United States, implement their own regimes, the EU regime creates the possibility of double regulation (and consequently taxation), as the regions in which a flight both originates and concludes may both purport to regulate the operator and its emissions.

Each operator of aircraft within EU Member States has been assigned to one specific Member State which is responsible for the administration and regulation of such operator’s activity within the European Community. For example, American Airlines, Continental Airlines and United Airlines, three large commercial U.S. airlines, have been assigned to the United Kingdom, while Delta and US Airways have been assigned to Germany.

From January 1, 2010, affected aircraft operators must have in place monitoring and reporting systems relating to their carbon emissions for each year. The EU Member State’s appropriate authority will evaluate the operator’s monitoring plan report to determine whether or not it meets all requirements. Proper plans are necessary to avoid civil penalties for non-compliance in the future. Additionally, aircraft operators cannot apply for free allowances once cap-and-trade begins without having first submitted a monitoring plan for their operating and emissions data.

Under the 2008 Directive, affected aircraft operators will be required to reduce and account for all their annualized carbon emissions and to surrender emissions allowances to the European Union’s regulatory authority each year. Beginning January 1, 2012, the total quantity of emissions allowances for the 2012-year will be equivalent to 97% of the “historical aviation emissions” or, in other words, 97% of the annual average of greenhouse gasses released into the atmosphere by aircraft in the years 2004 through 2006. From 2013 onwards, barring any future amendments, the annual cap on these emissions will be reduced from 97% to 95%.

Although it remains unclear whether administration of and compliance with the EU ETS requirements will be consistently applied across country lines, it is necessary for all affected aircraft operators to be in compliance by 2012 to avoid civil penalties. Operators may be subject to such penalties if: (i) they exceed allowed emission caps; or (ii) they fail to provide an approved monitoring plan or required data regarding carbon emissions. Failure to comply also may lead to regulatory authorities exercising their powers of detention and sale to take possession of an aircraft or, as a last resort, the authorities could impose an operating ban on an affected aircraft operator.

In conclusion, all affected aircraft operators must ensure they meet monitoring and reporting requirements so that: (i) they are in compliance with EU ETS regulations by 2012; and (ii) they are able to “trade” when mandatory cap-and-trade begins in Europe. To do so, control systems— proper monitoring and reporting policies—must be implemented immediately to mitigate risks, such as misstatements regarding emissions, possible civil penalties and potential detention. The prudent affected aircraft operator will use both internal and outsourced procedures to review data, as well as management of all necessary competencies and responsibilities. An evaluation of an operator’s equipment is necessary as well since older model aircraft and engines will produce more emissions than their modern counterparts.

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