Emissions trading for aviation

  Contents

1. What is the European Union Emissions Trading Scheme (EU-ETS)?

2. What does the EU-ETS mean for aviation?

3. Who is affected?

4. How does the compliance cycle work?

5. What's the timeline?

6. How does the free allocation of allowances work?

7. How will emissions monitoring work?

8. What kinds of allowances can be used?

9. What are the wider implications for operators?

10. What next?

Contact

Disclaimer

Aviation will be included in the European emissions trading scheme (ETS). This poses major challenges and risks for aircraft operators. From 2012, aircraft operators will have to surrender one allowance per tonne of CO 2 emitted on a flight to and from (and within) the EU. This covers passenger, cargo and non-commercial flights and applies no matter where an operator is based - non-EU carriers will also need to comply with the scheme. ETS for aviation is thus the first global emissions trading scheme. Non-complying aircraft operators face a penalty of € 100 per missing allowance on top of the obligation to procure and surrender missing allowances. They may even be banned from operating in the EU.

  1. What is the European Union Emissions Trading Scheme (EU-ETS)?


The European Union Emissions Trading Scheme (EU-ETS) is a cap-and-trade scheme that has been running in the EU since 2005. With one allowance representing one tonne of carbon dioxide (CO 2 ), it operates through the allocation and trading of emission allowances. The total amount of emissions from industry sectors covered by the EU-ETS is capped by EU Governments, and allowances are subsequently distributed to operators. The aim of the EU ETS scheme is to reduce emissions in a cost effective manner, allowing companies to trade emission allowances and thereby determine how and where they reduce emissions.

At the end of each year, operators are required to account for their emissions from the past year and to surrender the matching number of allowances to the competent authority. Depending on their actual emissions and their free allocation of allowances, operators have the flexibility to buy additional or sell surplus allowances.



 

  2. What does the EU-ETS mean for aviation?

In 2008 the EU passed legislation to include aviation in the EU-ETS. This means that from 2012, overall CO 2 emissions of the aviation industry are capped: initially at 97% of 2005 emissions levels, and from 2013 onwards at 95%. All operators flying to and from the EU will have to surrender one allowance for every tonne of CO 2 emitted on a flight to and from (and within) Europe.

Allocation of free allowances is based on a benchmark relating to transported persons and cargo in the base period 2010. Under current rules, 15% of allowances will be auctioned but this share may increase with the planned revision of the EU-ETS directive. Operators emitting more than their allocated amount of CO 2 will need to reduce emissions or - more likely - procure extra allowances. A special reserve of 3% of the total quantity of allowances will be allocated to new aircraft operators and operators experiencing sharp growth.

Given that the aviation sector's emissions are expected to grow to 130% by 2012 (compared with 2005 levels), only about 60 % of the allowances the sector needs will be issued for free in 2012. This shortfall equals costs for entire sector of about 3.5 billion Euros per year assuming a price level of 30 Euro per allowance. These costs are likely to be spread unevenly amongst affected operators, as specific emission levels vary widely between aircraft.

Aircraft operators flying more modern fleets may have a substantial advantage. In addition, specific emissions are often proportionally higher on short distances, so aircraft operators flying a greater number of short-haul flights may find themselves more strongly impacted. Occupancy rates especially in the baseline period will also have a substantial effect. Passenger carriers who are able to achieve higher occupancy rates and freight carriers with greater loads may have an advantage over competitors, because they will receive a greater number of free allowances.



 

  3. Who is affected?

The EU-ETS affects all aircraft operators (as defined by their ICAO designator, or if none is available, their aircraft registration numbers) regardless of where they are based, provided that they operate flights departing from and / or arriving at an aerodrome in the EU. Flights made entirely outside the EU will not be covered by the scheme. The EU-ETS affects passenger and cargo flights in aircraft with a maximum take-off weight of more than 5700kg. A set of special flights, e.g. to remote regions, training flights, military flights, etc., will be altogether exempt from the scheme.

Every aircraft operator will be administered by one EU Member State. For operators with a European operating licence this will be the Member State which granted the operating licence. Where this is not the case, operators will be assigned the Member State with the greatest estimated attributed emissions from flights in the base year. The European Commission has already published a provisional list assigning a Member State to each aircraft operator, and national competent authorities have started contacting operators.

In case of non-compliance, operators face a penalty of € 100 per missing allowance on top of the obligation to purchase (and surrender) missing allowances. Additionally, an operating ban may be imposed on the aircraft operator.



 

  4. How does the compliance cycle work?

The EU-ETS follows an annual cycle: operators will be required to monitor yearly emissions, i.e. from 1 January to 31 December, on a per-flight basis. This data must then be aggregated in an annual emissions report and verified by an independent accredited verifier. By 31 March of the following year, the verified report must be submitted to the competent authority. Following acceptance by the competent authority, the operator has to surrender the equivalent number of allowances by 30 April.

Free allowances will be allocated to aircraft operators by a separate but analogous procedure based on passenger and cargo traffic and an efficiency benchmark - see question 6 for more details. Once free allowances have been distributed, they will be issued to operators on a yearly basis before 28 February of the compliance year.

Every operator has to submit a monitoring plan outlining the processes, responsibilities and data flows for monitoring and collating data in advance of the monitoring period.

It has appeared aircraft operators need clarification on many issues. PwC is working for and with the EU Member States to develop guidance for completing Monitoring Plans which also explains the Monitoring and Reporting Guidelines. The European Commission issued templates for such plans which Member States will have to use. Both documents can be found through your Competent Authority or the European Commission's website. You may find these links useful:


5. What's the timeline?

Having been adopted by both the European Parliament and the Council, the proposed legislation must have been implemented by Member States by February 2010. The monitoring year starts as from 1 st of January 2010 and aircraft operators are required to have their internal processes ready by then to monitor their emissions and tonne km data.

This makes for a very tight schedule. According to the monitoring and reporting guidelines, monitoring plans have to be submitted to competent authorities by 31 August 2009. Tonne kilometres will have to be monitored in 2010 only; emissions must be monitored annually from 2010 onwards.

The risks associated with not having developed a robust monitoring system are considerable for tonne kilometre data in particular. This is because this data will be collected only in 2010, determining the number of free allowances for a period of nine years (2012-2020) - and making it worth up to several billion Euro.



 

  6. How does the free allocation of allowances work?

The free allocation is determined by the total amount of tonne kilometres transported by an aircraft operator in the base year 2010 and a benchmark factor, which will be calculated by the EU Commission.

For the purpose of free allocation tonne kilometres are defined as the product of distance and payload, where "distance" means the great circle distance between origin and destination plus an additional fixed factor of 95 km, and "payload" means the total mass of freight, mail and passengers carried. Operators can choose between the mass for passengers and checked baggage contained in its mass and balance documentation, or they can use a default value of 100 kg for each passenger including checked baggage.

To apply for free allowances, operators must first submit a monitoring plan to their competent authority by 31 August 2009. This will serve as the basis for monitoring tonne kilometre data in 2010, which must then be verified and reported to the competent authority by 31 March 2010. More details about monitoring and reporting of tonne-kilometer data have been given in the "Monitoring and Reporting Guidelines" and the related guidance .



 

  7. How will emissions monitoring work?

Emissions are to be calculated as the product of fuel consumption and emission factor separately for each flight and each fuel type. Fuel consumption also includes fuel consumed by the auxiliary power unit. The emission factors are 3.15 t CO 2 per tonne of jet kerosene and 3.10 t CO 2 per tonne of aviation or jet gasoline following the 2006 IPCC Inventory Guidelines.

Only aggregated emissions for flights to or from (and within) a member state need to be reported to the competent authorities. More details about emissions monitoring will be published in the "Monitoring and Reporting Guidelines".

The competent authorities will also provide detailed guidance on monitoring and reporting of emissions.



 

  8. What kinds of allowances can be used?

The ETS for aviation is interlinked with the existing EU-ETS for stationary installations. Aircraft operators will have the flexibility to use unlimited allowances from the existing scheme.

There will also be the possibility to use allowances from the Kyoto mechanisms. This gives operators the opportunity to invest in emissions reducing projects in developing countries (under the "clean development mechanism") or in industrialised countries ("joint implementation"). Alternatively, such allowances may be bought on carbon markets. However, it should be noted that as in the existing EU-ETS, the number of allowances from Kyoto mechanisms is limited to 15% of the allocation in 2012. This percentage will drop considerably from 2013.



 

  9. What are the wider implications for operators?

The challenges of the ETS for aircraft operators go beyond the immediate legal obligations. The costs for emission allowances will effectively introduce an additional commodity price risk into an operator's business model, which will require management and become a value driver in the marketplace. This needs to be considered both in short-term and long-term decisions.

Additional costs per passenger are estimated at € 1.50 – € 3.50 Aviation in EU ETS - an incentive for efficiency, September 2008 . Whether this can be passed through to customers depends upon the competitive position of the company compared with other operators, and on whether there are alternative modes of transport. Capital replacement cycles mean that major abatement options should be analysed over the long term (wing and fuselage profiles, next-gen engines).

Carriers also need to check if contractual relations (especially regarding leasing arrangements) are appropriate for EU-ETS consequences. Purchasing emission rights (EUA, CER, ERU) and managing carbon products with the associated specific risks requires detailed know-how of carbon markets and suitable market models. Furthermore, the approaching ETS scheme poses legal, tax and accounting problems. Finally, affected aircraft operators need to adapt their organisational structure and processes to the new obligations.

Our research indicates that operators are not yet fully prepared for the EU-ETS.



 

  10. What next?

In view of the tight timeline, operators should start to familiarise themselves with their obligations under the ETS as soon as possible. The first legal obligation - submission of monitoring plans - is before 31 August 2009.

1 Aviation in EU ETS - an incentive for efficiency, September 2008


 

Next Steps
2009
Readiness review of all organisational aspects
Perform pre-verification to ensure verifiable MPs and cost effective M&R systems
Submit monitoring plan for allocation (and CO 2 data)
Business impact assessment (based on extended model)
Identify carbon credit procurement strategies, trial trades
Adapt strategy and organisation
Implement monitoring (IT) system, build up carbon trading and market know-how
Review leasing contracts – it needs to be clear who will own the rights from transport data of 2010
2010
Get familiar with auctioning rules
Verification of allocation and CO 2 emissions data





Contact

Moritz Nill
Allocation and emissions monitoring

Phone: +49 160 97 24 79 90
Mail:
moritz.nill@de.pwc.com

Jeroen Kruijd
Independent verification

Phone: +31 6 51 15 88 80
Mail:
jeroen.kruijd@nl.pwc.com

Ian Milborrow
Compliance and hedging

Phone: + Tel: +44 (20) 7804 1304
Mail:
ian.milborrow@uk.pwc.com

PwC leverages environmental, corporate finance, tax and assurance expertise to devise global sustainability solutions that enhance shareholder value. Drawing on our deep experience in climate change issues and carbon markets, we also bring an industry perspective to support aircraft operators in meeting the challenges posed by the EU-ETS.



 

  Disclaimer


PwC has taken all reasonable steps to ensure thatinformation contained herein has been obtained from reliable sources andthat this publication is accurate and authoritative in all respects. However,it is not intended to give legal, tax, accounting or other professional advice.If such advice or other expert assistance is required, the service of acompetent professional should be sought.