The impact of the EU's emissions trading system on aviation

The EU’s Emissions Trading System is an incentive-based system for reducing, in a cost-effective manner, the level of greenhouse gases emitted by industries. It aims to encourage industries to limit their environmental impact – or else compensate for that impact by purchasing carbon reduction credits.

At the start of this year, the EU Emissions Trading System was expanded to include aviation. The regulation covers all domestic and international flights that arrive at or depart from EU airports, regardless of whether or not the airlines are based in the EU. The system operates on a “cap and trade” principle. A cap is imposed on total CO2 emissions allowed from all flights; the amount of the cap is set according to the EU’s emissions reduction targets. Each airline is given a set number of allowances covering part of the emissions from its flights each year. The airline must monitor and report its emissions levels during the year, and the figures must be verified by an independent, accredited verifier. At the end of each year, the airline is required to surrender to the authorities the number of allowances equal to its emissions. If actual emissions are lower than its allowances, the airline can sell those extra allowances to other airlines or companies. If the airline expects to exceed its emissions allowances, it can either reduce emissions or buy additional allowances from other companies.  

Aircraft operators that do not comply with the EU regulation face a penalty of 100 euros per missing allowance on top of the obligation to procure and surrender the missing allowances.

It has been a major challenge for the world’s airline operators to commit to their responsibility for greenhouse gas emissions. The EU regulation on aviation faces strong and wide opposition. In February, two dozen countries that oppose the regulation agreed to coordinate retaliatory trade measures against the EU.

The costs for emissions allowances could affect an airline’s competitiveness. Since air transportation is a global business and CO2 emission is a global problem, a sector-wide approach to emissions trading – i.e., setting a global cap for aviation instead of just the EU’s cap – would be more viable. All airlines around the world should operate within the same system. Global participation would mean compulsory sharing of environmental responsibility and competition on a level playing field, instead of leaving airlines that fly outside the EU to operate under a different system and therefore at different costs.

To be sustainable, the aviation industry has to balance the benefits and costs among environmental, social and economic factors. An emissions trading system is one of many possible strategies to create incentives to reduce greenhouse gases by putting a price on emissions. There are many other ways to reduce emissions from the aviation industry, including technical efficiency improvements such as in vehicle fuels; operational efficiency improvements such as aircraft weight reductions and weight limits on luggage; use of alternative fuels with lower CO2 emissions; energy efficiency in flight service and operation; and reduction of demand for air travel by promoting alternatives such as video conferencing. There is significant potential to improve the eco-efficiency of the airline business across all its operations, not only emissions from flying. 

A plan could be established to reduce the carbon footprint of the entire supply chain of the aviation industry. The starting point could be the airline companies themselves. Each airline could be required to set its environmental targets and approaches to reduce emissions. For example, an airline could commit to becoming carbon-neutral within a defined timeline. In order to achieve its targets, an airline would need to upgrade its technology and business operating efficiency while reducing emissions throughout its supply chain. This could result in an effective distribution of real costs as the prices of passenger air tickets would be adjusted.

It is likely that airlines will increasingly compete for passengers by using more efficient, eco-friendly strategies and informing the public about the environmental impact of their operations. This would provide long-term sustainability for continuing improvements in the industry. However, any strategy would only work if the entire sector develops a consensus on clear, simple standards and rules, and if compliance can be monitored and enforced throughout the aviation industry worldwide.

It remains to be seen whether or not the controversy over the EU emissions regulation will lead to a trade war. What positions should airlines in Thailand, Asean and elsewhere take? We may get some answers during the “Green Travel and Aviation” session at the Sasin Bangkok Forum.

 

Chanathip Pharino is an assistant professor at the Faculty of Engineering, Chulalongkorn University, Bangkok. Pongsak Hoontrakul is a senior research fellow at Sasin Graduate Institute of Business Administration, Chulalongkorn University. For more details: http://www.SasinBangkokForum.org.