Jetrader - November/December 2013 - 17

not reach a compromise with respect to a
global MBM scheme, it did resolve several
other issues related to global air trafﬁc
management, air safety and liberalization
of market access.10
Originally implemented in 2005, EU ETS
initially regulated GHG emissions of landbased industrial installations across the EU
ETS Territory, but in 2008 was expanded to
include aviation activities.11 Applying EU
ETS to aviation has become contentious
and adversarial due to the EU's attempt
to unilaterally impose its scheme on those
airlines not otherwise regulated by the EU,
especially to the extent it imposed liability
on non-EU airlines for those portions of
ﬂights outside EU airspace, over international waters and on the ground in non-EU
countries. EU ETS created a system under a
"cap and trade" principle whereby a cap is
set on the aggregate number of free allowances (with each allowance corresponding
to 1 metric ton of GHG emissions) issued to
all covered participants (including aircraft
operators). Allowances for emissions are
then allocated to individual operators by
the member state charged with regulating that operator. Each covered operator
must surrender a quantity of allowances
equivalent to its emissions over the course
of each year, and excess allowances may
be subsequently auctioned or traded. EU
ETS imposes a number of tracking, veriﬁcation and reporting requirements and set
forth potentially stringent penalties for
non-compliance, including per-day and permetric-ton monetary ﬁnes, and in cases of
continued delinquency, possible operating
bans, aircraft seizures and sales by the
regulatory authorities.12
As of 1 January 2012, EU ETS Directive
2008/101 required covered operators to
monitor, report and surrender allowances
for flights arriving at and departing
from virtually any airport in the EU ETS
Territory, regardless of origin, destination
or registry.13 Vigorous opposition came from
governments across the globe, as well as
various domestic and international aviation
industry trade groups. The protest has
taken many forms. Large Airbus orders by
Chinese airlines were canceled or delayed.14
Russia has threatened to restrict overﬂight
permits for European carriers ﬂying to and
from Asia.15 India's Aviation Minister has
urged Asia Paciﬁc regulators to oppose
EU ETS and is likely to oppose EU ETS

ﬁnes on Air India and Jet Airways.16 And
the United States Congress passed an act
prohibiting U.S. operators from participating in EU ETS.17 Furthermore, in February
2012, a group of 23 countries (dubbed
the "coalition of the unwilling") signed
a Joint Declaration outlining their shared
opposition to the unilateral application of
EU ETS to the aviation sector.18
The EU defends the legitimacy of EU
ETS on the basis that more than 15 years
of diplomacy through ICAO failed to yield
any meaningful progress toward a global
emissions regulatory system. In November
2012, ICAO tasked a group of 17 member
states from across both the developed
and developing worlds with considering a
global MBM scheme as well as a "basket
of non-market-based measures" such as
state action plans, GHG aircraft standards,
sustainable fuel alternatives, improving air
trafﬁc management and other measures to
reduce the climate impacts of aviation19.
Welcoming this earnest progress, the EU
thereafter agreed to "stop the clock" for
one year on enforcing the requirements
of EU ETS to the extent they relate to
ﬂights to or from the EU ETS Territory,
commencing or ending outside the EU ETS
Territory (as the case may be). However,
the requirements still apply (and never have
been suspended) as to all ﬂights entirely
within the EU ETS Territory. The European
Commission leadership has maintained that
in early 2014, the original provisions of
EU ETS will be reinstated automatically
unless the EU Council and Parliament
decide otherwise. Alternatively, the latter
proposed amendment to EU ETS suggest
that a slightly scaled-back version, appraisable to operators worldwide who ﬂy within
or from the EU ETS Territory, would take
effect on that date.20
Regardless of what happens in early
2014, there is sure to remain ﬁerce debate
among the 191 ICAO member states, with
potential impact on (and continued maintaining for) the airline operators, owners
and ﬁnanciers of the world. The latest
proposed revisions to EU ETS will raise considerable credit risk exposures threatening
operators, owners and ﬁnanciers alike. At
the moment there are more questions than
answers for the global aviation industry.
Will the EU Parliament ratify the EU's latest proposed amendments to EU ETS and
mandate the reinstatement of EU ETS (on a

revised basis) with worldwide application in
early 2014, or will it keep the clock stopped
until a global MBM scheme can be negotiated and agreed? If faced with a reinstated
EU ETS, will countries in opposition renew
trade war threats and prohibit operator
compliance and payment of non-compliance
penalties? Will European carriers adhere to
EU ETS while certain non-EU competitors
prohibit compliance by their operators? Will
a reinstated and revised EU ETS result in
widespread lease terminations and repossessions against non-compliant operators? Will
the market for allowances recover and will
operators feel incentivized to partake in
carbon allowance trading? Will ICAO reach
a compromise for a global MBM program
by 2016? At the recent ICAO meetings and
the EU Commissions immediate response
suggest developing a global MBM program
that ICAO has laid before the world is
not an easy task; intensive efforts must
continue in order to reach an acceptable
solution for this increasingly signiﬁcant
environmental problem.

Endnotes
1

7
8

According to ICAO; market-based measures are
among the elements of a comprehensive mitigation
strategy to address greenhouse gas ("GHG") emissions from international aviation that are being
considered by ICAO. Such market-based measures
include emissions trading, emission related levies, charges and taxes and emissions offsetting.
http://www.icao.int/environmental-protection/
Pages/market-based-measures.aspx June, 2010.
European Comission. "Aviation emissions:
Commission proposes applying EU ETS to
European regional airspace from 1 January 2014."
http://europa.eu/rapid/press-release_MEMO-13906_en.htm October 16, 2013.
GreenAir Communications. "European Commission
to press ahead with airspace coverage of the EU
ETS despite ICAO Assembly defeat." http://www.
greenaironline.com/news.php?viewStory=1768
October 16, 2013.
The draft, along with all other working papers,
can be found on the ICAO website. http://www.
icao.int/Meetings/a38/Pages/documentation-wppresentations.aspx
Statement by John Hanlon, Secretary General of
ELFAA. "Following ICAO limits on regional carbon
schemes, European airlines disagree on next moves
over the EU ETS." http://www.greenaironline.com/
news.php?viewStory=1764 October 10, 2013.
Statement by Simon McNamara, Director General
of ERA. "Following ICAO limits on regional carbon
schemes, European airlines disagree on next moves
over the EU ETS." http://www.greenaironline.com/
news.php?viewStory=1764 October 10, 2013.
Statement by ICAO President Roberto Kobeh
Gonzalez.
ICAO General Assembly, 38th Session. Report of the
Executive Committee on Agenda Item 17. Note that
the cited report was recommended for adoption
by the Plenary.
ICAO General Assembly, 38th Session. Report of the
Executive Committee on Agenda Item 17. Note that
the cited report was recommended for adoption
by the Plenary.

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