Select Committee on European Union Thirty-Seventh Report


21st REPORT: INCLUDING THE AVIATION SECTOR IN THE EUROPEAN UNION EMISSIONS TRADING SCHEME

Government Response

INTRODUCTION

  The Committee's report has been published at a timely point in the development of EU policy and we welcome the Committee's input into this subject.

  Rather than respond in turn to each of the conclusions or recommendations in the House of Lords' report, we have grouped the concerns expressed by theme, and addressed them in this way.

DECISION TO INCLUDE AVIATION IN THE EU EMISSIONS TRADING SCHEME

  224.  We do not agree with the Environment Council that global aviation emissions are currently a serious problem but we agree that they will become so. The current level of aviation emissions is small as a proportion of total global, European Union or United Kingdom CO2 emissions. It is most unlikely that aviation could be included within the EU ETS (if that is the desired option) by 2008. Stavros Dimas, the European Commissioner was recently quoted as saying that aviation would be included in the ETS at the earliest opportunity but that this was unlikely to be before 2012. It is important that any legislative proposals are well thought through and sustainable in the longer term, both on environmental and economic grounds. (para 219)

  225.  Two options were considered by the Commission to be the best means to achieve effectively the policy objectives of restraining growth in aviation emissions:

    —  en-route charges or taxes on aircraft emissions and impacts;

    —  emissions trading for aviation.

  We agree that these are the main options. (para 61)

  250.  The December 2005 Environment Council Conclusions noted the Ell's position that all policy instruments should be maintained as potential options but said that the inclusion of the aviation sector in the EU ETS seems to be the best way forward and that it has greater potential for application internationally than other policy alternatives. We agree with them but there are substantial problems ahead. (para 218)

  251.  It is important that all government departments are fully involved in developing the United Kingdom analysis of any Commission proposals as the consequences of joining the ETS or of alternative policies involve industry, users of aviation services as well as the environment. The analysis and recognition of those wider consequences appear to us not yet to have been thought through with sufficient rigour. We shall scrutinise the Commission's Impact Assessment and the United Kingdom's Government Regulatory Impact Assessment with considerable care when they are published in the next few months. (para 219)

  The core theme of the Air Transport White Paper is that aviation must be sustainable. This means striking a balance between the economic, environmental and social impacts of aviation. The Government recognises the benefits that air travel has brought to people's lives and to the economy of the country. But we have to balance those benefits against the environmental impacts of air travel, in particular the growing contribution of aircraft emissions to climate change and the significant impact that airports have on those living nearby.

  Within such a framework, the Government believes that over time, the aviation should pay the external costs its activities impose on society at large.

  We would like to emphasise that there is close co-ordination between relevant Government departments on the matter of including aviation in the EU Emissions Trading Scheme (ETS). The Department for Environment, Food and Rural Affairs and the Department for Transport are working very closely with other Government departments (particularly the Department for Trade and Industry, the Treasury, the Foreign and Commonwealth Office, Cabinet Office and the Devolved Administrations) in considering these issues further.

  Our aim is to press for the inclusion of aviation in the EU ETS from 2008, or as soon as possible thereafter. In taking this commitment forward we recognise the importance of a thorough impact assessment involving all Government departments.

IMPACTS OF INCLUSION OF AVIATION IN THE SCHEME

  237.  The impact of aviation entering the ETS can be assessed in a number of ways. We consider these in Chapter 5. Witnesses addressed themselves directly to just some of these, while giving little attention to wider impacts upon economies, business or consumers. None addressed the impact upon airfreight. Most attention was paid to the impact upon aviation in general and through that upon the environment. Many witnesses addressed the knock on effect upon other industries that were in the ETS and for some witnesses this was a major issue.

  238.  Many said that there were too many variables in the detailed design of an ETS that included aviation for authoritative figures to be produced. The Minister told us that, "The forecasting of allowance process is complex and highly uncertain". Industry bodies and airlines appeared not to have carried out their own detailed research into the impacts of including aviation in the EU ETS. We would urge them to do so as far as is practical ahead of the publication of the Commission's legislative proposal to bring aviation into the ETS which is expected to be produced in 2006. This would enable them to respond fully when the proposals are published. (para 160)

  239.  The majority of witnesses, including DEFRA, told us that the impact upon passenger air fares and hence upon demand for air travel would be very modest. Clarity is needed about present and future policy on the level of permitted carbon emissions, both in total and for the aviation industry. We have severe doubts about the view that the impact upon emissions allowances prices, airfares and air travel will be modest, except in the short term. (para 168)

  240.  The inclusion of aviation in the EU ETS will affect the EU carbon allowance price, which will have a subsequent cost to existing (non-aviation) EU ETS sectors. The Commission's feasibility study revealed that around 15% of CO2 emissions reductions post-aviation entry to the ETS are expected to come from aviation and around 85% from other industries. While precise estimates have not been forthcoming and many uncertainties exist, it seems clear that other industries and their customers will feel the main impact of including aviation within the ETS. (para 173) The magnitude and nature of this impact will depend on a wide range of design factors. DEFRA commissioned an interim study of these matters. In view of the full-hearted commitment given by the United Kingdom Government to the inclusion of aviation in the ETS from 2008, we find it surprising that a fuller assessment of these matters has not preceded that policy commitment. It is imperative that both the Commission and the United Kingdom Government now conduct a rigorous assessment of all relevant issues before further policy commitments are made. (para 174)

  241.  Some of our witnesses looked to the longer term and told us that, given the United Kingdom's target for a 60% reduction in CO2 by 2050, the consequences of continued aviation growth for other sectors would be severe. Under some assumptions, no growth in carbon emissions by other sectors would be possible after 2017. Growth in aviation emissions would only be possible if emissions by other sectors were reduced over and above any contraction in emissions required to meet EU targets by 2050. One witness suggested that if aviation is included in the ETS and the EU sticks to its emissions targets, a rise in price of emissions allowances would be likely to prevent the currently projected 2017 level of aviation activity and emissions. This presages very substantial increases in air fares and air freight charges within the next 10 years while at the same time prices of energy and other carbon intensive industries will have risen very sharply too, driven in part by the demand for aviation services. This scenario would have major consequences for the aviation industry and its customers and for other industries in the ETS albeit over a rather longer time period for adjustment. This is a very different picture from that provided by the Commission, the Minister and the airline industry. it highlights that there are substantial issues underlying EU policies on emissions targets and the inclusion of aviation within the EU ETS.

  244.  The most dramatic forecast of the Tyndall Centre is that aviation services for the EU might have to stop growing by 2017. Even if that exaggerates the position, when applied to the EU and the global economy it raises important issues of international competitiveness, economic development and of personal lifestyle choices. Within the EU itself, what would be the impact upon EU economic and social integration? Can the EU take decisions that impact more widely on other economies without consequences for its own international competitiveness and potential retaliation? Can the EU determine a policy unilaterally that will raise airfares substantially and limit growth in air travel and airfreight between the EU and for example North America, India, China and the Far East without regard to the competitive position of the EU in relation to those markets? (para 207)

  246.  It is, of course, not the inclusion of aviation within the ETS per se that would raise prices of emissions allowances, of air travel, of all industries in the ETS and curtail growth in all the sectors concerned, but the contracting emissions cap that is necessary for the ETS to achieve its ultimate purpose. The same issues and others too arise with alternative approaches to aviation emissions.

  247.  Witnesses gave evidence on a number of more detailed impacts if aviation enters the EU ETS. Low fares airlines argued that they would be affected disproportionately in various ways. Other EU airlines were concerned about the impact of the ETS on them relative to non-EU airlines that would be less dependent upon the EU market. Most of the views expressed appeared to assume relatively mild impact on airline costs and airfares. As airfares may rise more sharply than airlines acknowledged, their concerns may be increased. We agree that the design of an aviation scheme within the ETS could have differential affects upon different airlines and believe that the Commission's 2006 Impact Assessment should examine these issues. (para 190)

  The Tyndall Centre's forecasts are based on their own projections of demand and emission levels and are greater than those in the Government's Air Transport White Paper (ATWP). This is due to different underlying assumptions, notably on infrastructure constraints, and more conservative assumptions on fuel efficiency trends post 2030. However, we consider that the assumptions in the ATWP remain valid.

  The Government has a thorough Regulatory Impact Assessment (RIA) process, which requires an Initial, Partial and Final RIA. An Initial RIA accompanied the Explanatory Memorandum and this will be developed as the work progresses.

  Our initial impact assessment analysed the pros and cons of the different options available for dealing with the problem of aviation's greenhouse gas emissions. These options were:

    —  Do nothing.

    —  Include aviation in the EU ETS.

    —  Impose a tax on aviation fuel.

    —  Introduce emissions charges

    —    Introduce a ticket or departure tax.

    —  Encourage voluntary action by the airlines.

  We are in agreement that the inclusion of aviation in the EU ETS is the best way forward. We also agree that further analysis of potential impacts and design details is required.

  The analysis we are currently undertaking on this subject will feed into the Partial RIA, on which we will have a formal consultation. This will be published following the Commission's legislative proposal. After further analysis, a final RIA, which takes into consideration the results of the consultation, will be presented alongside the legislation when it is presented to Parliament.

  We regularly meet with representatives of many different industries in order to understand their concerns regarding the impacts of including aviation in the EU ETS.

A CAP FOR AVIATION

  232.  In an ETS scheme including aviation, the adjusted level of overall allowances and the initial cap for aviation will be a key driver of the price of emissions allowances. This in turn will determine the effect on aviation and other industries in the ETS. The Minister told us "it is the crucial factor". He also told us "We need to give industry a long-term signal so that they can plan and invest". But the Minister told us that, "It is crystal ball stuff really". There is considerable lack of clarity in the detail of thinking in this area both within the Commission and within the United Kingdom government. This cannot be left as a detail to be dealt with after legislation is passed. The Commission's Impact Assessment must be more forthcoming and explicit about likely initial allowances for aviation and the principles governing future levels. (para 170)

  We recognise the importance of the initial cap for aviation from both an environmental and economic perspective. While there is not yet an agreed position across the EU on how a cap for aviation would be decided, there is widespread support for a harmonised approach to setting the cap and how it is distributed to regulated entities. This would provide more consistent treatment across the EU25 and would reflect the largely homogenous and integrated nature of the industry.

  The cap itself does not necessarily need to be specified in the legislation. In the current EU ETS, it is the process for deciding the cap not the actual level of the cap that is set out within the legislation. This means that the actual level of the cap can be defined without having to renegotiate the legislation.

  Regardless of the process and the relative roles of EU institutions, we believe that agreeing the level of the cap is dependent on having accurate projections of emissions from the aviation industry, and on having a clear understanding of the abatement costs for aviation. We are continuing to draw on existing research on both of these issues, in order to evaluate the need for further work.

  These two elements will facilitate the final decision on the level of effort required. We believe that the cap needs to be stringent and scientifically robust but that it cannot create competitive distortions and would like to reassure the Committee that all impacts will be taken into account before the final level of the cap is agreed.

INTERACTION WITH THE KYOTO MECHANISMS

  226.  If aviation enters the ETS, technological improvements in the aviation industry will become even more urgent in order to reduce emissions while maintaining growth in air travel and airfreight. Air traffic management and control improvements can help reduce aviation emissions and measures to maximise these improvements should be pursued vigorously within the EU and internationally. (para 80) A more positive development of the Clean Development Mechanism and Joint Initiative schemes should be encouraged by the EU and by the aviation industry. (para 205)

  243.  Mr Gammeltoft for the Commission told the Committee that in the shorter-term aviation within the ETS will help reduce overall emissions in other sectors by buying allocations and essentially financing efforts to reduce CO2 emissions in sectors where it is cheaper. In the longer term, he told us, the EU ETS would impact on the environmental performance of aircraft. On current evidence we believe that this takes an over-optimistic view of aviation's ability to reduce its own emissions even in the longer term and under-states the potential conflict with other industries. (para 176)

  248.  Faced by increasingly strong environmental constraints, the aviation industry will be able obtain extra emissions allowances through financing Clean Development Mechanism and Joint Implementation projects, which are Kyoto Protocol mechanisms, if this is permitted under Phase 2 of the ETS. We believe that they should be permitted. We note the view of British Airways that the schemes were currently too bureaucratic and changes were required to make them cheaper and easier to implement. We urge the Commission to ensure that these concerns are fully reviewed. (para 204)

  As international aviation is outside of the remit of Kyoto, there will not be Kyoto backed allowances for aviation emissions. This is a technical issue and we are currently looking at a range of options to resolve this.

  The Government has already allowed for use of Clean Development Mechanism (CDM) and Joint Implementation (JI) credits in the EU ETS through transposition of the EU's "Linking Directive". Use is allowed under Phase 1 of the ETS and will continue to be allowed under Phase 2. The Government, in line with the requirements of the Directive, is currently considering the limit on use of project credits in drawing up its Phase 2 national allocation plan. As CDM and JI credits can already be used in the EU ETS, the aviation industry could take advantage of those credits when it is included in the scheme.

  It is not currently possible to undertake CDM or JI projects directly in the aviation sector. Such adjustment to the CDM and JI regimes would be subject to international agreement on treatment of these emissions more widely.

  The CDM in particular has come under a lot of criticism for its bureaucracy and the UK Government has played a pivotal part, leading the EU, in arguing for and securing reform of the mechanism. At the First meeting of the Parties to the Kyoto Protocol (COP/MOP1) in Montreal in December 2005, we negotiated a decision which introduced a number of concrete measures to focus the CDM Executive Board more on its oversight role and provide for strengthened support to the Board from the UN Secretariat. We also negotiated a decision on JI, setting in place necessary measures to facilitate prompt and efficient implementation of the mechanism. This provided for the possibility of drawing on experience under the CDM, where appropriate, to ensure greater efficiency.

  As outlined in the Future of Air Transport White Paper, we are also pressing for a range of other measures including: adoption by airports, airlines and air traffic controllers of working practices that minimise the impact of their activities on climate change; research and development by aerospace manufacturers of new technologies to reduce the climate change impact of future fleets; and voluntary action by airlines, airports and aerospace companies to control greenhouse gas emissions and develop sustainability strategies.

NON-CO2 EMISSIONS

  223.  All commentators agree that, in the absence of public policy changes, passenger air travel and air freight will continue to increase and with it a significant growth in CO2 emissions. in addition to CO2 emissions, aviation causes other emissions that appear likely to contribute to global warming. We agree that action will be needed to address this environmental issue.

  229.  The European Union Emissions Trading Scheme monitors and aims to reduce CO2 emissions but currently does not monitor or seek to address the other climate change impacts of aviation, which include emission of nitrous oxides and water vapour (which is a greenhouse gas), formation of condensation trails and emissions of sulphate and soot aerosols. The Environment Council says that both the CO2 and non-CO2 impacts of aviation should be included in a future scheme to the extent possible. We urge the United Kingdom Government and the European Commission to fund further research into understanding and addressing the non-CO2 climate change impacts of aviation, and to seek wider international agreement on this issue as the basis for future policy. (para 102)

  We recognise the concerns surrounding the unique climate impacts of aviation, due to the range of emissions released and their effects at altitude. The Environment Council agreed that one of its guiding principles would be that both the CO2 and non-CO2 impacts of aviation should be addressed to the extent possible, recognising that a pragmatic approach should be taken in light of the scientific uncertainties. It has been estimated that climate impacts of aviation are two to four times that of its CO2 emissions alone. While further research is needed, the broad conclusions that emissions are significantly more damaging at altitude is clear.

  QUANTIFY (Quantifying the Climate Impact of Global and European Transport Systems) is the main EU research programme dealing with the climate impacts of transport. It is funded until 2010 by the European Commission within the 6th European framework programme. Also, the Commission has entered into contract negotiations for a Specific Supporting Action (SSA) to provide an updated assessment of transport emissions on climate. This consists of four assessment activities: aviation, shipping, road transport and metrics. DfT is providing funding support for the launch conference in June 2006 (as announced in the Budget).

  The UK Government has also funded research into the effects of non-CO2 emissions of aviation. An early assessment, The effects of aviation contrails on global climate, was funded by the DETR in 2000. Since then, the Department for Transport (DfT) has funded work at Manchester Metropolitan University (MMU) and Reading University to further understand the uncertainties surrounding contrails. It has also funded QinetiQ and MMU to undertake measurements of stable Carbon isotope ratios of aviation particles with the aim of identifying discreet source markers that would help in targeting policy measures. There are also a number of Natural Environment Research Council (NERC)-related programmes, which have been largely completed and address some of the issues related to the effects in the Upper Troposphere/Lower Stratosphere.

  We will continue to improve our understanding of the non-CO2 effects of aviation and will continue to consider areas for further research and development, building on industry's commitment in the Sustainable Aviation strategy to provide data and expertise to enhance understanding and support improvements in metrics for quantifying and reporting effects.

GEOGRAPHIC SCOPE

  230.  An ETS scheme with aviation should include all flights departing EU airports. This would cover all the EU's contribution to aviation's CO2 emissions, some 40% of which arise from intra-EU flights and some 60% from departing flights to third countries. We agree that this is a desirable goal but we identified doubt whether the EU can unilaterally impose a scheme upon non-EU airlines. It is important that this legal uncertainty is resolved speedily. Otherwise, the EU may be forced to introduce a scheme based on intra-EU flights only and even then there may be challenge on the inclusion of non-EU airlines. (para 128)

  231.  We do not believe that a wider scheme to include in the ETS all flights arriving as well as departing EU airports is desirable or practical. Such a scheme would go well beyond dealing with the CO2 emissions for which the EU could reasonably take responsibility. (para 129) Any doubts as to the legality of imposing an EU scheme on non-EU countries referred to in paragraph 121 above would apply more strongly in this case.

  The commitment in the Air Transport White Paper was to press for the inclusion of intra-EU air services in the EU ETS. However, we recognise the advantages in environmental terms of a scheme that covers all departing flights. Any scheme will need to comply with the current legal framework for international aviation and be able to stand up to challenge. The feasibility study conducted by CE Delft for the Commission concluded that there were no legal obstacles to covering international aviation in the EU ETS, including the flights of non-EU carriers and flights departing the EU. Nonetheless, we recognise the Committee's concerns about the legal uncertainties and work is ongoing to examine the details of the different options.

Trading Entity

  233.  During the design of any ETS system, it will be necessary to address the issue of which entities would receive emissions allowances and be required to surrender allowances. Our witnesses appeared to assume that the aircraft operators would be the trading entities and we agree with them. (para 136)

  We have considered the different options for trading entities in the scheme. We have concluded that the entity best suited for surrendering allowances for emissions generated is the airline operator.

ALLOCATION OF ALLOWANCES

  234.  The method of distributing the total level of CO2 allowances for aviation raised disagreement. The British Air Transport Association told us that, "...other industries currently in the scheme account for about 50% of total EU carbon emissions and we are just 2%..., so we do not see that we should be treated any differently from the other industry sectors" (Q 13). We agree that this is a strong argument against auctioning for initial aviation CO2 emissions allowances, unless basic CO2 allowances for all industries were put up for auction in Phase 2 of the EU ETS. (para 147)

  235.  Some airlines argued against auctioning permits because, "it takes resources away from the airlines which they really need—and we are not a particularly financially successful industry—to make the investment in the technology and in the emissions reduction". Economic analysis suggests, however, that even if initial emissions allowances are distributed free of charge, airlines might still raise airfares in the medium term to cover the opportunity cost of those allowances. In that event, airlines would make windfall profits equal to the value in the market place of their free CO2 allowances. This would strengthen the case for auctioning. Airlines, air fares and air-freight charges should come under close scrutiny for evidence of windfall profit taking in the event that allowances are issued free of charge. (para 148)

  236.  If initial carbon allowances to aviation are allocated free of charge, there are compelling arguments in favour of a benchmarking basis for allocation between airlines. It is more consistent with the "polluter pays" principle and ensures that the significant investments made by airlines in the recent past to cut their emissions are rewarded. We conclude that any permits which are allocated free of charge should be allocated based on a benchmarking system. (para 156)

  We are taking into consideration lessons learnt in Phase I of the EU ETS and are still assessing which methodology is the most appropriate for aviation. We acknowledge the pros and cons of auctioning as highlighted by the Committee and recognise that existing EU ETS sectors favour benchmarking as the most appropriate approach to free allocation, as it delivers the right messages for emissions reductions and recognises early action. Any benchmarking methodology would need to be developed in collaboration with industry and we think this is an area where further dialogue would be helpful.

SUITABILITY OF THE ETS FRAMEWORK FOR AVIATION

  227.  There are a number of important detailed design issues for an emissions trading scheme that includes aviation. We consider these in Chapter 4. They are of substantial importance in determining a number of matters. What will be the initial and future impact upon the price of carbon, upon other industries in the ETS and their customers, and upon CO2 emissions? Will the ETS be a robust framework within which to accommodate EU policies on aviation emissions and on air-passenger and air freight growth in the future? Are those policies clear and compatible? (para 95)

  242.  Commenting upon these projections, the Minister said that they give a projection at the upper end of growth in aviation and that it is very difficult to say for sure whether those figures are actually going to materialise". But, he added, "it is likely that there will be an impact upon fares" but it would be premature to say that it would be an enormous impact. Greater clarity from the Government on these matters would be helpful, as would answers to the following questions:

    —  Will inclusion of aviation within the mainstream EU ETS eventually become a major problem for other industries in the ETS? If so, over what timescale?

    —  Should that potential problem be recognised now and if so, what are the implications for the proposal to deal with aviation climate change emissions within the framework of the EU ETS?

    —  Is aviation a special case in the context of emissions-reduction policies in the sense that its ability to reduce the level or even the growth of CO2 emissions is extremely limited in the foreseeable future?

    —  Is an environmental policy driving a proposed way forward that may quite quickly lead to a serious clash with policies on aviation and economic growth? (para 185)

  As the Committee will be aware, an initial report by ICF Consulting[21] has been carried out to evaluate the impact that including aviation in the EU ETS might have on permit prices. This report concluded that over the period 2008-12, there would be no discernable impact on the allowance price, as a result of including aviation in the EU ETS. We have been presenting this report to stakeholders and are discussing with them the extent to which, further analysis will need to be undertaken.

  There are other sectors already included within the EU ETS that have high abatement costs and a limited potential to reduce their emissions. The fact that these sectors have been successfully included in the first phase of the EU ETS is confirmation that the rationale behind emissions trading (that environmental costs can be covered through a mixture of emissions reductions and purchase of reductions produced more cheaply by others) functions in practice.

  As outlined in The Future of Air Transport White Paper,[22] the Government recognises that the benefits that air transport brings to this country need to be balanced against the environmental impacts. The White Paper also promised that, as a matter of principle, action taken to tackle environmental impacts of aviation would take full account of the effects on the competitiveness of UK aviation and the impact on consumers.

INTERNATIONAL DIMENSION

  228.  Witnesses and the Commission agreed that emissions from international aviation should ideally be included in a wider international, even global agreement. We encourage the Commission to continue to press for international aviation to be included in any post-2012 climate change regime. (para 97)

  245.  The overall answer provided to the questions above may be either that there will be no problem or that every effort will be made to persuade other countries to join an ETS including aviation. The former is unlikely, the latter may be wishful thinking. We hope that the Commission's 2006 Impact Assessment will address these and many other issues with the same rigour as that applied to the environmental impacts of its proposals. (para 208)

  249.  Two principle ways have been suggested to avoid some of the problems identified earlier. The first is to place aviation in a separate ETS. The second is en route charges or taxes on aircraft emissions and impacts. We consider these in paragraphs 210 and 211. There are advantages and disadvantages of both.

  The International Civil Aviation Organisation (ICAO) has specifically endorsed the concept of an open emissions trading scheme for international aviation, demonstrating international support for emissions trading as the best means of dealing with the environmental impact of global aviation emissions.

  The advantage of open emissions trading is that it enables a specific environmental outcome to be achieved at the lowest cost across the economy. In a sector like aviation, where abatement costs are higher, participants pay for reductions in other sectors where it is cheaper to reduce emissions. This ensures that the lowest cost reductions are carried out first.

  There is little support for a dedicated ETS for aviation (a closed scheme) as the principal benefits of an ETS would be lost and such a scheme would largely similar in cost and impact to a charge or a tax.

CONCLUDING REMARKS

  We would like to thank the committee for their useful contribution, which has highlighted some very important and relevant issues.

  We fully intend to continue our close working relationship with other Government departments on this subject. We will also continue to update the House of Lords as we progress with our work in this area.





21   http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/including-aviation-icf.pdf Back

22   http://www.dft.gov.uk/stellent/groups/dft_aviation/documents/divisionhomepage/029650.hcsp Back


 
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