Airline emissions - what impact will the new global carbon offset and reduction scheme have on the current European Emissions Trading Scheme?

Aviation Legal Update

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An agreement to curb the impact of commercial aviation on climate change has been struck by 191 states attending the 39th International Civil Aviation Organisation (ICAO) Assembly in Montreal. The Carbon Offset and Reduction Scheme for International Aviation (CORSIA), which aims to offset emissions in an attempt to achieve carbon-neutral growth by 2020, is an industry-first for regulating emissions at an international level. This is not the first attempt to regulate airline emissions on a multijurisdictional scale; the European Union currently regulates intra-community flights through its Emissions Trading Scheme (ETS). This article gives a brief overview of the current European regime, provides a comparison with the CORSIA and discusses what impact the new scheme will have on Member States and airline operators.

The current European regime

In 2005, the European Commission introduced the ETS in a bid to reduce greenhouse emissions across Member States. Initially, the scheme did not apply to the aviation industry. When the Kyoto agreement was signed in 1997, ICAO, an agency of the United Nations, was tasked with devising a global scheme to combat aviation emissions. After difficulty in agreeing a global consensus and with no structured approach in sight at a global level, the European Commission took steps to implement its own regime. The European Commission extended the ETS in 2008 to include the aviation sector, which came into force in 2012.

The European ETS originally applied to all flights departing from or arriving in an aerodrome situated in the territory of a Member State. After widespread criticism from international carriers, including legal challenges by US airlines (albeit unsuccessfully), the European Union agreed to temporarily halt the application of the scheme to international flights that fly in and out of the European Union. The scheme currently applies to flights that operate within the European Economic Area EEA) (European Union Members States plus Iceland, Lichtenstein, Norway) only. In early February of this year, the European Commission confirmed that the temporary limited scope of the ETS scheme will be extended until the CORSIA is introduced in 2021.

How does it operate?

The ETS functions under a 'cap and trade' principle whereby a cap is set on the total amount of emissions aircraft operators can produce. The amount of an operator's carbon dioxide emissions are directly proportionate to the amount of fuel aircraft burn. Allowances are then provided to each operator for every reporting year and are based on benchmark values established by the European Commission and EEA Joint Committee. Operators are required to produce an annual emission report, which has to be verified by an independent verifier and submitted to the competent authority in their respective member state (in England, this is the Environment Agency). It follows that emissions must be carefully monitored by each operator against the cap to ensure they have enough allowances to cover their emissions at the end of each reporting year.

Operators which exceed their cap can purchase additional allowances at auction or through carbon markets i.e. by purchasing carbon offset credits. Alternatively, operators may purchase allowances from other operators with "leftover allowances" or from companies in other sectors within the ETS. Operators which do not comply face penalties and fines. However, if they manage to fall short of their cap, they can be rewarded by selling any surplus credits.

With aviation emissions forecast to triple by 2050, governments, airlines and environmentalists have recognised the need for a consistent approach. Using the momentum of the 2016 Paris Agreement, where 194 countries agreed to combat greenhouse gases internationally, ICAO have seized the opportunity to establish a global market-based measure for international aviation.

A new and common global standard

After six years of negotiations and 26 international workshops, on 6 October 2016, ICAO's 191 member states took the unprecedented step of passing a resolution to regulate emissions at an international level. This represents the most significant development in a truly global emission trading regulation in the history of aviation.

Instead of introducing a cap-based system such as the European ETS or imposing an emissions tax, from 2020, operators will be obliged to offset any emissions growth by funding carbon-reducing activities and renewable energy projects. The purpose of the CORSIA is to offset around 80% of global airline carbon dioxide emissions above 2020 levels until 2035.

The CORSIA currently provides for a phased introduction; a pilot phase between 2021-2023 where countries will have to opt in voluntarily, a first phase from 2024 - 2026 with voluntary participation and a mandatory phase from 2027. Surprisingly, over sixty-five countries (which equates to over 85% of the aviation industry), including the US and China (the world's largest emitters) and all EU member states, have committed to sign up at the outset in 2021. Even countries which would ordinarily be exempt from the scheme, such as Zambia and Guatemala have all committed to the pilot phase. The CORSIA also takes into account and alleviates concerns for developing countries and those with low levels of aviation activity as they are exempt from the scheme, however, they are encouraged to participate where possible. It is noteworthy that the President of the United States has claimed that he will "rip up the Paris Agreement". Signatories will await the US’s next steps with interest.

Impact on Member States

The European Commission stated that the agreement was a "decisive step towards the carbon neutral growth of aviation". However, it is too early to analyse how the CORSIA will sit alongside the ETS scheme and its full impact on Member States remains unclear. What is certain is that each Member State will have to assess their individual local emission measures to avoid any competitive distortions.

For operators that do not operate flights inside the EU, the CORSIA will be a significant change as they begin to start monitoring their emissions levels against regulatory standards. However, as emission levels will be calculated based on 2019-2020 averages, it allows those operators to increase their emissions levels over the next 4 years (assuming they opt into the voluntary phase). Those countries that do not opt-in have additional time to increase their emission levels and prepare for any obligations imposed before the scheme becomes mandatory in 2027. In reality, all operators will have to put sufficient plans in place to be in a position to comply with their obligations, irrespective of when they join the scheme. To do so, operators will really need to understand the implications of the CORSIA and will have to adapt to any changes imposed by the new scheme.

Operators currently operating within the European Economic Area are already conscious of their emissions levels and may therefore be in a better position to prepare for any changes that the CORSIA imposes. In addition, it must be noted that the CORSIA only applies to international flights (which accounts for only 60% of aviation emissions) and therefore leaves substantial gaps for the European Union and individual nations to provide appropriate measures for domestic flights. The European Commission is due to present a report to the European Parliament and Council shortly on the new agreement in the context of its impact on the ETS.

Unlike the ETS scheme, the CORSIA, in its current form, appears to be less onerous and transparent and therefore should make it easier for operators to adopt. Environmentalists have argued that a global ETS scheme would have been preferable as it arguably assists in reducing emissions, whereas the CORSIA merely offsets emissions. Whilst arguments can be made about a number of weaknesses of the CORSIA, the significance of an agreement of this level must be recognised. A consensus-based approach will be easier to manage on an international level rather than imposing unwanted sanctions. It must also be acknowledged that CORSIA is not the only measure ICAO are focusing on to combat aviation emissions. Other measures include operational and technological advances and alternative fuels, which will be driven by the level of engagement with the CORSIA.

ICAO will now spend over two years finalising the technical details of the CORSIA to ensure efficient and effective implementation and stringent enforcement measures are in place. By 2018, ICAO are expected to produce their standards and recommended practices to comply with the new agreement. In the interim, the European Union ETS scheme will continue in its current form for at least the next few years, but most likely until the CORSIA is introduced in 2021. However, its Member States will have to be prepared to amend the European framework and any accompanying local measures to ensure a global standard is implemented and maintained.