A Guide to EU ETS for the Aviation Sector

The European Union Emissions Trading System (EU ETS) for the aviation sector is a market-based mechanism established by the European Union to reduce carbon emissions from airlines and private, long-range aircraft operators.

Introduced in 2012, this system requires aircraft operators within the European Economic Area to monitor, report, and verify their CO2 emissions and surrender allowances to cover those emissions. Initially covering all flights departing from or arriving at EU airports, the scope was later reduced to intra-EU flights only as a temporary measure. The EU ETS operates on the ‘cap and trade’ principle, setting a cap on total greenhouse gas emissions and allowing companies to buy or trade allowances based on their emissions.

The main goal is to incentivise industries to reduce emissions efficiently by imposing fines for exceeding emission limits. Despite recent reforms aiming to increase ambition and tighten emission caps, challenges remain in fully addressing the climate impact of aviation emissions, especially concerning flights to and from regions outside the EU.

Our guide includes:

 

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What is EU ETS?

Operational since 2005, the EU ETS is a cornerstone instrument of the EU’s climate change policy framework. It covers stationary installations, energy and industry sectors, and airlines operating within the EU, representing around 38% of the EU’s total emissions.

The system operates on the ‘cap and trade’ principle, setting a cap on total greenhouse gas emissions and allowing companies to buy or trade allowances based on their emissions. Companies regulated by the EU ETS must acquire carbon allowances to cover their emissions, which can be bought on the carbon market or through EU ETS auctions.

The EU ETS has undergone revisions over the years, with recent reforms aiming to align the system with updated climate targets, increase emission reductions, and gradually phase out free allocation in certain sectors like aviation and industries covered by new carbon border adjustments.

 
 
 
 
 

How does EU ETS work?

The EU ETS works on the ‘cap and trade’ principle, where a limit (the cap) is set on the right to emit specified pollutants over a geographic area, and companies can trade emission rights within that area.

Here is how the EU ETS operates:

  1. Cap Setting: The EU sets a cap on the total volume of greenhouse gases that can be emitted by all the companies covered by the EU ETS. This cap decreases each year to meet emissions reduction targets.
  2. Allowance Acquisition: Companies regulated by the EU ETS must acquire carbon allowances to cover their emissions. These allowances can be bought on the carbon market or obtained through EU ETS auctions. Some companies receive a certain amount of allowances for free.
  3. Union Registry: Companies hold their carbon allowances in Union Registry accounts, which function like an online banking system for carbon allowances.
  4. Compliance: Each year, companies must surrender enough carbon allowances from their Union Registry accounts to cover their greenhouse gas emissions. Failure to comply results in heavy penalties.
  5. Trading: Companies that reduce their emissions can keep spare allowances for future use or sell them to other companies. This trading creates a market price for carbon allowances.
  6. Incentives for Emissions Reduction: As the cap decreases annually, the market price for carbon allowances increases, providing economic incentives for companies to invest in emissions reduction technologies and lower their greenhouse gas emissions.

The EU ETS incentivises companies to reduce emissions efficiently by creating a market for carbon allowances, promoting investment in clean technologies, and contributing to the overall goal of combating climate change cost-effectively.

 
 
 
 
 

Who does EU ETS apply to?

EU ETS applies to various sectors, including industry, electricity, and aviation. Specifically, the EU ETS covers stationary installations in the energy and industry sectors, airlines operating within the EU, and aviation emissions. Aircraft operators operating in the European Economic Area are required to monitor, report, and verify their CO2 emissions and surrender allowances against those emissions.

The system also includes passenger and cargo flights operated by both EU and non-EU airlines that arrive at or originate from an airfield in the EU. Additionally, the EU ETS covers flights within the European Economic Area (EEA) until the end of a specified period to support the development of a global market-based measure by the International Civil Aviation Organisation (ICAO).

Certain exemptions exist for non-commercial aircraft operators with lower annual emissions and specific types of flights like training and humanitarian flights.

 
 
 
 
 

What are the benefits of EU ETS for the Aviation sector?

  1. Reduction of Carbon Emissions: The EU ETS aims to gradually reduce carbon emissions by reducing the allocation of credits on an industry basis, incentivising lower emissions and promoting sustainable practices.
  2. Market-Based Mechanism: By operating on the ‘cap and trade’ principle, the EU ETS creates a market price for carbon allowances, encouraging airlines to invest in emission reduction technologies efficiently.
  3. Financial Incentives: Airlines that are ahead in reducing emissions can benefit financially by selling their excess credits, providing an economic incentive for emission reductions.
  4. Coverage of Flights: The EU ETS covers passenger and cargo flights operated by both EU and non-EU airlines that arrive at or originate from an airfield within the EU, ensuring a comprehensive approach to emissions reduction in the aviation sector.
  5. Support for Sustainable Aviation Fuels: The recent agreement on applying the EU ETS in the aviation sector includes a new support scheme financed with EU ETS revenues to accelerate the use of sustainable aviation fuels, promoting environmentally friendly practices within the industry.

The EU ETS for the aviation sector plays a crucial role in driving emission reductions, fostering sustainability, and creating a framework for airlines to contribute to environmental goals while operating within the European Economic Area.

 
 
 
 
 
 

What are the challenges faced by the aviation sector in complying with EU ETS?

  1. Cost Increases: The proposed cap reduction and phase-out of free allowances under the EU ETS will lead to cost increases, particularly for intra-European Economic Area (EEA) air services and routings via EEA hubs, impacting the competitiveness of EU carriers.
  2. Competitive Disadvantage: There is a risk of competitive distortion between EEA and non-EEA carriers and hubs, especially on indirect routings between EEA and non-EEA airports. This may result in carbon leakage and potentially lead to job losses if passenger flows shift to non-EEA routings.
  3. Double-Taxation Concerns: Stakeholders have raised concerns about ‘double-taxation’ caused by the combination of kerosene taxes, blending quotas, CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), and the EU ETS.  This complex regulatory environment can create challenges for airlines in managing compliance and costs.
  4. Market Distortions: The regional nature of the EU ETS poses a risk of market distortions within the aviation sector, as compliance costs associated with the system may increase transportation costs on routes within its scope. This could impact various actors in the value chain and potentially lead to market distortions.

These challenges highlight the complexities and potential impacts of integrating the aviation sector into the EU ETS, emphasising the need for careful consideration of policy measures to address compliance issues while maintaining competitiveness within the industry.

 
 
 
 
 
 

EU ETS Timeline

The timeline of the EU ETS is as follows:

  • 2005: The EU ETS was launched in January 2005, making it the oldest system in force and the world’s first international emissions trading system.
  • 2021-2030: The EU ETS entered its fourth trading phase from 2021 to 2030, aligning with the updated 2030 climate target of the European Green Deal.
  • 2023: In 2023, a new emissions trading system, Emissions Trading System 2 (ETS 2), was created for fuels used in buildings, road transport, and industry.
  • December 2023: The European Parliament and the Council of the EU reached a provisional agreement on the reform of the EU ETS, which includes various measures such as increasing emission reductions, updating the Market Stability Reserve parameters, phasing out free allocation in the aviation sector, and gradually phasing out free allocation in industries covered by the new carbon border adjustment.
  • 2024: Emissions from the maritime sector were included in the EU ETS starting from 2024.
  • 2026-2034: Free allocation is gradually phased out over the period 2026-2034 in the industries covered by the new carbon border adjustment.
  • 2026: Free allocation in the aviation sector is gradually phased out by 2026.
  • 2028-2030: The linear reduction factor is raised to 4.4% for the period 2028-2030 as part of the EU ETS reforms.

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Conclusion

In conclusion, the EU ETS has significantly advanced efforts to reduce greenhouse gas emissions in the aviation sector since its establishment in 2012.

Through its ‘cap and trade’ mechanism, it incentivises emission reductions and promotes sustainable practices. Despite challenges such as cost increases and competitive disparities, recent reforms and ongoing efforts demonstrate a commitment to enhancing the system’s effectiveness and inclusivity. The timeline of revisions underscores a continuous evolution toward more ambitious climate targets. As the aviation industry navigates the complexities of climate change, the EU ETS remains a crucial instrument for driving progress toward a greener future. Continued collaboration, innovation, and international cooperation will be key in realising its full potential in combating climate change and fostering a more sustainable aviation sector.

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