Managing Business in Europe

Contents

1 Introduction

2 The EU and the Climate

3 The EU Emissions Trade System (EUETS)

4 Aviation in the EU ETS

5 The Necessity to include aviation

6 Demand for air travel

7 Cost to the industry

8 Strategic implications

9 Political Implications

10 Conclusion

11 References

1 Introduction

The EU ETS is an ambitious project to meet the EU’s commitment to the Kyoto Protocol to reduce its greenhouse gas emissions. The aviation industry is set to enter the ETS regime on the 1st of January 2012. It is necessary to include this industry, so other industries don’t have to shoulder the entire Kyoto burden. The projected cost is significant but not disproportional. Airlines operating modern fuel efficient fleets are advantaged. The international nature of aviation and the apparent disadvantage of international carriers have provoked debates on the legality of the scheme. The short and long term impact on the strategic goals affects mainly investment in fuel efficient technologies and investment in the Clean Development Mechanism. Overall the industry is expected to notice minor demand fluctuations and invest more in emission abatement technologies.

2 The EU and the Climate

Climate change has become in recent years a subject of heated political debate. At the G8 summits of 2007 and 2009 and the G20, 2009, climate change was a top priority (European Commission, 2003 , Massai, 2011). In all instances the participants were unable to agree on a common agenda, let alone sensible emission cuts. One could even say that no major political encounter takes place without discussing climate policy (Faure and Peeters, 2008).

Regardless of the setbacks in the geopolitical arena, the EU has been a leader in climate change policies since the 90’s. The EU voiced vociferously its concern over the destruction of the ozone layer (Hansjürgens, 2005), negotiated the Climate Change Convention in 1991 (Massai, 2011) and played a key role in the enactment of the Kyoto-Protocol, 1997 (Massai, 2011). Further evidence of the EU’s commitment to prevent climate change is the pledge to the Kyoto Protocol to reduce its greenhouse gas emission (GHG) by 20% by 2020, compared with 1990 levels (Massai, 2011).

These achievements are impressive, considering that the EU is not a sovereign state, but a bloc of diverse countries. As a result the EU has arguably become the global champion for climate policy. To be credible however, it needs to prove its integrity and lead by example. A Project that aims to do just that is the EUETS. It is a unique large scale pilot project, which its proponents hope, will become the basis for international emissions trade, thus bringing the Kyoto emissions allowance system to the next level (Tuerk, 2009).

3 The EU Emissions Trade System (EUETS)

In order to meet this ambitious target the emissions trade system (ETS) has been devised as a way to gradually and effectively reduce the EU’s carbon footprint and change the economy through its incentive system (European Commission, 2003).

The EUETS is a so called “cap and trade” model where a cap is set on the maximal output of emissions which cause negative externalities, as opposed to “command and control” where either a fixed allowance is granted or emissions are taxed at source. Early research on cost benefit by Tietenberg (1985), suggests a 90% reduction in administration costs using ETS and a study commissioned by the EU commission, certifies 30% (Hansjürgens, 2005).

Under the ETS framework these rights to emit are traded as certificates on a specialised market (i.e. initially allocated, in the future auctioned). At the end of the year a company must hold enough certificates to cover its emission over the year; otherwise the company is fined and required to buy the missing certificates (Faure and Peeters, 2008). The hope is that market forces will allocate these rights efficiently and that the economy as a whole will benefit. More precisely industries with a high marginal cost of emissions reduction (compared with the market value of certificates), will purchase certificates on the market, conversely industries with lower marginal emissions reduction costs will reduce emissions and sell their certificates on the market (Hansjürgens, 2005).

An emission trade system on a supranational level such as the EUETS has never been tested. Administration, enforcement and viability of the system have yet to be established. The gradual implementation however seems sensible, since the EU itself was created one step at a time.

The system is implemented in three phases: 2005-2007, is the pilot period and intended to develop the necessary structures and gain experience. In this period only CO2 certificates for selected industries are traded (11,000 installations and 30% of EU CO2 Emissions) (Perdan and Azapagic, 2011). From 2008 onwards nitrous oxide certificates will be capped. In the final stage from 2013 to 2020 more greenhouse gases will be capped and more industries are required to purchase certificates. Among the most prominent and visible industries is the aviation industry.

4 Aviation in the EU ETS

In accordance with the EU ETS directives, starting from 2012 the aviation industry will need to purchase CO2 certificates to cover its emissions. Lobbying, persuasion and lawsuits have not changed the EU’s intentions (The Economist, 2011b , The Economist, 2011a). This will affect the industry’s competitiveness, customer relations, strategic targets and economic development (Scheelhaase and Grimme, 2007).

Frequently asked questions

What is the main topic of this text?

This text provides a language preview discussing the EU Emissions Trade System (EU ETS) and its impact on the aviation industry. It covers the EU's climate policies, the mechanics of the EU ETS, the inclusion of aviation in the system, and the strategic and political implications.

What is the EU Emissions Trade System (EUETS)?

The EU ETS is a "cap and trade" system designed to reduce the EU's carbon footprint. It sets a limit on emissions, and companies can trade emission allowances (certificates) on a market. Those who emit less can sell their allowances, while those who emit more need to buy them.

Why is the aviation industry being included in the EU ETS?

Including the aviation industry is deemed necessary to ensure that other industries don't have to bear the entire burden of meeting the EU's Kyoto Protocol commitments to reduce greenhouse gas emissions. It aims to incentivize the aviation industry to reduce its environmental impact.

When did the aviation industry enter the EU ETS regime?

The aviation industry entered the EU ETS regime on the 1st of January 2012.

How does the EU ETS affect airlines operating in the EU?

All airlines, both European and international, landing and departing from EU airports are required to surrender CO2 certificates for their emissions. Failure to do so can result in denial of landing or take-off, or even impounding of aircraft.

What are the strategic implications of the EU ETS for the aviation industry?

The EU ETS affects investment in fuel-efficient technologies and the Clean Development Mechanism. The industry is expected to invest more in emission abatement technologies to comply with the regulations and minimize costs.

What are the different phases of the EU ETS implementation?

The EU ETS has three phases: 2005-2007 (pilot period), from 2008 onwards (nitrous oxide certificates capped), and from 2013 to 2020 (more greenhouse gases capped and more industries required to purchase certificates, including aviation).

What are the political implications of the EU ETS?

The international nature of aviation and the perceived disadvantage to international carriers have led to debates on the legality of the scheme. Climate change has become a major point of political debate at international summits like the G8 and G20.

What is the EU's commitment to the Kyoto Protocol?

The EU pledged to reduce its greenhouse gas emissions (GHG) by 20% by 2020 compared with 1990 levels, as part of its commitment to the Kyoto Protocol.

What is the EU's role in climate change policies?

The EU has been a leader in climate change policies since the 1990s, negotiating the Climate Change Convention in 1991 and playing a key role in the Kyoto Protocol in 1997. The EU ETS is a large-scale pilot project intended to set an example and become the basis for international emissions trade.