EUROPEAN COMMISSION Brussels, 14.7.2021 SWD(2021) 603 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC as regards aviation's contribution to the Union’s economy-wide emission reduction target and appropriately implementing a global market-based measure {COM(2021) 552 final} - {SEC(2021) 552 final} - {SWD(2021) 555 final} - {SWD(2021) 604 final}



Table of Contents 1.Introduction: Political and legal context 1.1.Aviation and climate change 1.2.EU action and relevant international fora: the Paris Agreement and the International Civil Aviation Organization (CORSIA) 1.3.Integration of CO2 aviation emissions in the EU's Emissions Trading System 2.Problems definition 2.1.What is/are the problems? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1.General Objectives 4.2.Specific objectives 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.3.Options discarded at an early stage

5.4.Overview of problems, objectives and policy options 6.What are the impacts of the policy options? 6.1.Environmental impacts 6.2.Competitiveness and economic impacts 6.3.Social impacts 6.4.Impacts on outermost regions (OMR) 6.5.Cross-cutting issues 7.How do the options compare? 7.1.Effectiveness 7.2.Efficiency 7.3.Coherence 7.4.Conclusions 8.Preferred option 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information Annex 2: Stakeholder consultations Annex 3: Who is affected and how? Annex 4: Analytical methods 1.Common analytical framework for the Impact Assessments of the revision of ESR, ETS, LULUCF, RED and EED 2.Specific analytical elements for this impact assessment

Annex 5: COVID-19 impacts on growth of greenhouse gas emissions in the aviation sector Annex 6: 2019 ICAO Resolution on CORSIA Annex 7: Developments following the 2016 ICAO Assembly Annex 8: Integration of Aviation in the EU's Emissions Trading System Annex 9: Features of the EU ETS Annex 10: Assessment of CORSIA pursuant to Art. 28b of the ETS Directive Annex 11: Study of cost pass-through pursuant to Art. 3d of the ETS Directive



List of Acronyms CAEP Committee on Aviation Environmental Protection CDM Clean Development Mechanism CNG2020 Carbon Neutral Growth from 2020 CO2 Carbon Dioxide CO2 eq. Carbon Dioxide equivalent CORSIA Carbon Offset and Reduction Scheme for International Aviation EAG Environment Advisory Group EEA European Economic Area EU European Union ETS Emissions Trading System EUA EU Allowance EUAA EU Aviation Allowance EUC Emissions Unit Criteria Extra-EEA Flights between aerdromes within the European Economic Area and aerodromes in a third countries GHG Greenhouse Gas GMBM Global Market-Based Measure GMTF Global Market-Based Measure Technical Task Force HLG High Level Group IATA International Air Transport Association ICAO International Civil Aviation Organization Intra-EEA Flights between aerodromes within the European Economic Area LDC Least Developing Country LLDC Land-locked Developing Country MBM Market-Based Measure MRV Monitoring, Reporting and Verification MT Million Tonnes RTK Revenue Tonne-Kilometre SARPs Standards and Recommended Practices SIDS Small Island Developing States UNFCCC United Nations Framework Convention on Climate Change



1.Introduction: Political and legal context Tackling climate change and reaching the objectives of the Paris Agreement and other environmental issues (including addressing air pollution and energy demand) are at the core of the European Green Deal . The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on our health and economic well-being. Unprecedented near term investments are needed to overcome the negative impact of the COVID-19 crisis on jobs, incomes and businesses, including in the sectors covered by the EU Emissions Trading System (ETS). The European Green Deal is a response to these challenges. It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the EU's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. At the same time, this transition must be just and inclusive. The climate neutrality objective, which the Commission proposed in 2018 and the European Council and Parliament endorsed, is at the core of this transformation. The Commission has proposed to enshrine climate neutrality into EU law. In order to set the EU on a sustainable path to achieve climate neutrality by 2050, and with the Communication on stepping up Europe’s 2030 climate ambition (2030 Communication) the Commission has proposed an EU-wide, economy-wide net greenhouse gas emissions (GHG) reduction target by 2030 compared to 1990 of at least 55% that will set the Union onto the path to climate neutrality. The Commission is reviewing all relevant climate and energy policies. This includes increasing the environmental contribution of the Emissions Trading System (ETS) in a manner commensurate with the overall target. 1.1.Aviation and climate change

Aviation accounts for 2-3% of global CO2 emissions, and is an important source of climate impacts from emissions other than CO2 . Long-term projections of aviation activity show major increases in traffic. The CO2 emitted in 2018 from all flights departing from the EU28+EFTA was at around 180 million tonnes of CO2 . At EU-level, aviation made up 3.7% of total CO2 emissions, or 15.7% of CO2 transport emissions in 2018. Despite significant technological development in the aviation sector, aviation emissions continued to rise up to 2019 and the prospect of impacts upon recovery from the COVID-19 crisis (see Section 2.1) represent an increasing challenge for reaching the EU’s economy-wide greenhouse gas emission reduction target and commitments under the Paris Agreement , as well as the temperature goals under the Paris Agreement. Under the Paris Agreement, the EU and its Members States agreed on a long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels and on pursuing efforts to limit the increase to 1.5% . The European Green Deal adopted by the Commission in December 2019, as well as the Climate Law and the Climate Target Plan (CTP), aim at enhancing the EU climate commitment under the Paris Agreement, consistent with its objective of reaching economy-wide climate neutrality in the EU by 2050. The EU is increasing its domestic economy-wide decarbonisation commitment, from 40% to at least 55% compared to 1990 levels by 2030, without using international credits. The updated Nationally Determined Contribution (NDC) of the EU reflecting the target of at least 55% domestic reduction compared to 1990 was communicated to the United Nations Framework Convention on Climate Change (UNFCCC) on 18 December 2020. To reach the increased climate target, all sectors, including aviation, must adequately contribute to the required emission reduction efforts. The European Parliament has underlined that, as co-legislators, the European Parliament and the Council are the only institutions that can decide on any future amendment to the ETS Directive, and stressed that any amendment of the ETS Directive should only be undertaken if it is consistent with the EU’s economy-wide GHG emission reduction commitment. A key tool for addressing CO2 emissions from aviation in Europe is the EU Emissions Trading System (EU ETS). It has allowed aviation to contribute to the 2020 climate objective, and this should be pursued for 2030, as fully recognized under the CTP. While the political “mandate” to reinforce the EU ETS for aviation is clear, this is being examined in conjunction with other related and relevant initiatives, such as the revision of the Energy Taxation Directive and the Renewable Energy Directive, as well as the ReFuelEU Initiative, which are being assessed separately, with due account of the ETS dimension and impacts. As indicated in the European Green Deal, reducing CO2 emissions from aviation relies on a mix of policy instruments, as there is no one single solution to decarbonise the sector. The revision of the EU ETS for aviation is therefore part of the so-called “basket of measures”, which includes market-based measures like the EU ETS and CORSIA, the boosting of the production and uptake of sustainable aviation fuels (“SAF”), aircraft technology improvements and operational improvements through e.g. the Single European Sky initiative. Globally as well, countries have to take increased action in respect of aviation to contribute to achieving the objectives of the Paris Agreement. While the EU ETS currently regulates intra-European aviation, and the Korean ETS, New Zealand ETS, and the Shanghai ETS within China have covered domestic aviation, broader and stronger action is essential. In the public consultation on updated rules for aviation ETS, 91 % of respondents agree that the aviation sector should contribute more to climate actions. 88% of respondents believe that market-based measures can be effective to tackle aviation emissions in line with the climate objectives. 1.2.EU action and relevant international fora: the Paris Agreement and the International Civil Aviation Organization (CORSIA) The International Civil Aviation Organisation (ICAO) Assembly set an objective to stabilise global net CO2 emissions from international aviation at 2020 levels through 'carbon neutral growth' (CNG 2020) , i.e. compensating emission growth above 2020 levels by purchasing carbon credits, and of improving fuel efficiency by 2% annually through 2050. These current objectives are to be attained by a ‘basket of measures’ that consists of measures in four different areas: aircraft technology and standards; air traffic management and operations; sustainable aviation fuels and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The initial CNG 2020 objective is recognized as largely insufficient to bring the necessary contribution from the aviation sector to the achievement of the Paris temperature goals. It has been suggested that aviation emissions should start decreasing no later than 2030 . The EU contributed significantly to, and supported the ICAO Assembly Resolution A40-18, whereby the ICAO Assembly decided to request the ICAO Council to explore “the feasibility of a long-term global aspirational goal for international aviation through conducting detailed studies assessing the attainability and impacts of any goals proposed, including the impact on growth as well as costs in all countries, especially developing countries, for the progress of the work to be presented to the 41st Session of the ICAO Assembly. Work is under way in view of the 41st Assembly in 2022. The EU has for long argued for moving beyond existing CO2 objectives and establishing a common long-term goal in ICAO, consistent with science and the temperature goals under the Paris Agreement, to best guide and boost the development of adequate measures and spur the necessary research and deployment of new technologies. In 2016, the 39th ICAO Assembly adopted a Resolution for a global market based measure for international aviation emissions (GMBM), known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), despite reservations – on different accounts - from China, India, Saudi Arabia and the US . By itself, CORSIA does not aim at reducing aviation emissions. CORSIA is an offsetting mechanism, which enables the aviation sector to continue to grow after 2020 in as far as collective international aviation emissions above a certain threshold (the baseline) are compensated through international offset credits (generated in non-aviation sectors mainly). The initial baseline, the average of international aviation emissions from CORSIA participating countries during 2019 and 2020, was deemed inappropriate by the ICAO Council in light of the COVID-19 crisis and was changed to 2019 emissions for the duration of pilot phase 2021-2023. The EU did not request such a change but accepted “to ensure support for CORSIA under the circumstances created by the COVID-19 pandemic and avoid unravelling CORSIA design elements” . The consequence of such a baseline change is that CORSIA compliance is unlikely to require any emissions to be offset under the pilot phase. States that voluntarily decide to participate in CORSIA offsetting may join the scheme from the beginning of a given year, and should notify ICAO of their decision to join by June 30 of the preceding year. As of 2021, 88 States decided to participate from the start of the pilot phase on 1 January 2021, including all G7 countries. While the US has confirmed its participations, some important partners, such as China, India or Russia, are not participating. Unlike the voluntary participation of states in the CORSIA offsetting in the pilot and first phases from 2021 to 2026, the second phase of the CORSIA from 2027 to 2035 applies to all States. There are, however, two categories of exemptions based on aviation-related and socio-economic criteria. To be able to implement CORSIA, detailed rules on transparency, accounting, offsetting, registry and governance had to be adopted in the form of ICAO Standards and Recommended Practices (SARPs), which are binding on ICAO member states not filing differences to them. The actual implementation of CORSIA will depend on domestic legislation being developed, adopted and implemented by countries and regions participating in the scheme. The EU and its Member States consistently argued in support of robust implementing rules and governance (e.g. the environmental integrity of eligible offsets, avoidance of double counting in line with the provisions still to be adopted under the Paris Agreement, robust sustainability criteria for sustainable alternative fuels), as well as adequate participation, in CORSIA’s voluntary and mandatory phases all being key to ensure CORSIA’s integrity and initial objective. In 2018, the ICAO Council adopted the First Edition of the International Standards and Recommended Practices (‘SARPs’) . The EU has actively contributed in the process on substance and has been amongst the first jurisdictions to adopt legally binding provisions for the purposes of implementing the monitoring, reporting and verification for ICAO's scheme , which is a key pillar for implementing CORSIA. While strongly supporting CORSIA in ICAO, the EU Member States notified differences to the ICAO SARPs, due to the presence of existing legislation in the EU addressing CO2 emissions from international aviation. In the differences, they highlight the main governance difference between the EU ETS and CORSIA (route-based, versus State-based regulation). The objective was to maintain the legality of the EU ETS and to preserve the EU policy space and climate ambition, consistent with the EU ETS as last revised in 2017 and with strong calls by co-legislators not to prejudge any further EU action . In the same spirit, the EU and its Member States, through the EU Presidency, re-stated the above principles during the 40th ICAO Assembly in 2019 at the occasion of the adoption of a new Resolution on CORSIA, reiterating, and making it clear that in the EU’s view CORSIA is not to be regarded as exclusive against other schemes and that it should not limit EU climate ambition . Consistent with previous declarations, in June 2020, the EU and its Member States notified ICAO their participation in CORSIA from the start of the pilot phase on 1 January 2021 subject to differences filed (Council Decision 2020/954), by the ICAO deadline of 30 June 2020. The ICAO Secretariat has not yet published the reservations of other States by that deadline, despite repeated calls from the EU to do so. The EU and its Member States have for long called for enhanced transparency in ICAO, as last reflected in an inter-institutional declaration agreed at the end of the last co-decision process on the EU ETS for aviation in 2017. The lack of publication of differences, which is key to understand whether and how our international partners intend to participate to CORSIA, is problematic.

In terms of other major partners, there are public reservations to the 2013, 2016 and 2019 Assembly Resolutions made by the US, China, Brazil, Russia, Saudi Arabia, India and Venezuela (see Annex 10). While the US has issued reservations it made the following public statement: “The United States supported the decision to adopt the CORSIA SARPS based on the understanding that CORSIA is the exclusive market-based measure applying to international aviation, and that CORSIA will ensure fair and reciprocal commercial competition by avoiding a patchwork of country- or regionally-based regulatory measures that are inconsistently applied, bureaucratically costly, and economically damaging. Furthermore, continued U.S. support for CORSIA assumes a high level of participation by other countries, particularly by countries with significant aviation activity, as well as a final CORSIA package that is acceptable to, and implementable by, the United States.”. The US is collecting emissions data from US airlines on an expressly voluntary basis, with the FAA ensuring compliance with CORSIA monitoring, reporting and verification rules by filling data gaps from the limited airlines not providing data on a voluntary basis, and it has been noted that “the State Department will need to work with FAA to secure the implementing legislation necessary for further U.S. participation” . As regards the Chinese Government, it has publicly stated that: “China opposes any scheme that strays from realities faced by States and goes at the expense of the legitimate rights to development of developing countries and emerging market countries. … China has notified differences according to Article 38 of Chicago Convention.” 1.3.Integration of CO2 aviation emissions in the EU's Emissions Trading System The EU led the way in implementing a carbon market mechanism for CO2 aviation emissions by including all flights to and from aerodromes in the European Economic Area in the EU's Emissions Trading System (EU ETS) in 2008 (see Annex 8). The European Court of Justice confirmed the EU’s right to regulate airlines based outside the EU on a route basis, which is necessary to provide equal treatment on routes, i.e. to apply the principle of non-discrimination enshrined in Article 11 of the Chicago Convention . According to Directive 2003/87/EC, all aircraft operators carrying out aviation activities covered by the EU ETS have to annually report their emissions corresponding to the previous year. They have an obligation to surrender as many allowances as the emissions they have reported. Every year, a number of aviation allowances is issued. The total amount is defined by the allowed "cap", which was 95% of the average 2004-2006 emissions. Starting from 2021, allocations to aviation are reduced by the linear reduction factor (currently of 2.2%) now applicable to all ETS sectors (Annex 9 provides more information on the EU ETS for aviation). Allowances are distributed through two mechanisms: auctioning and free allocation. Currently, 82% of aviation allowances are distributed through free allocation, 3% are part of a special reserve for new entrants and fast growers, and 15% are auctioned. In 2009, the co-legislators noted that ‘auctioning should therefore be the basic principle for allocation, as it is the simplest, and generally considered to be the most economically efficient, system’ . The total number of allowances for aviation was based on average emissions in 2004-2006, while the allocation to each operator was based on activity data from 2010. The reason for including free allocation in the distribution of allowances was that the "no allocation" option would have treated the aviation sector differently from those sectors already covered by the EU ETS and it would have increased the demand for allowances towards other sectors. In addition, the share of auctioning for other sectors under the EU ETS has increased, leading to calls from some stakeholders and Member States to move away from free allocation for the aviation sector. The European Green Deal and 2030 Climate Target Plan clearly set out the Commission’s intention to propose to reduce the EU ETS allowances allocated for free to airlines. The EU ETS has delivered 200 million tonnes of reductions/offsets over 8 years, being applicable to all operators, EU and non-EU alike, on the same routes. The compliance rate is extremely high, as reported last in the recent Carbon Market Report issued by the Commission. This provides the aviation contribution to the 2020 EU climate objective and, as foreseen in the CTP, this will continue for 2030. The EU and its Member States’ strong support of international action complementary to domestic or regional action to address climate change, including in the field of international aviation at ICAO, is underlined by the fact that the European Parliament and Council have amended the EU ETS three times to reduce its initial geographical scope and thereby facilitate progress in ICAO on CORSIA. First in 2012, when the ICAO Council decided to begin developing guidance for a GMBM for international aviation emissions, EU ETS scope was temporary limited, allowing airlines to choose either full coverage or pan-European coverage. Following the 2013 ICAO Assembly Resolution A38-18 to develop a GMBM to offset international aviation emissions, the EU further limited the scope to intra-EEA flights only during the period 2013-2016 while maintaining equal treatment on routes. Pending the development of the CORSIA implementing rules and modalities (SARPs), the EU ETS Directive was last revised in 2017 to extend the most recent scope derogation until the end of 2023, while indicating the conditions under which the EU would consider implementing CORSIA, namely that its implementation is “consistent with the Union economy-wide greenhouse gas emission reduction commitment for 2030 with the aim of preserving the environmental integrity and effectiveness of Union climate action”. This was intended to provide continued momentum to the international process in the light of the political commitment made by the EU and its Member States to take part in CORSIA from its "pilot phase" (as of 1 January 2021), subject to certain conditions . The Commission has again recently recognised that international cooperation on aviation is desirable and that international instruments such as CORSIA should promote effective action in this context. In 2020, the EU ETS was extended to all departing flights from the EEA to Switzerland . As a result, Switzerland applies its ETS to all departing flights to EEA airports, ensuring a level playing field on both directions of routes, as a result of the EU/Switzerland Agreement on the linking of their respective emission trading systems. In the EU-UK Trade and Cooperation Agreement reached in December 2020, the EU ETS shall continue to apply to departing flights from the EEA to the UK, while a UK ETS will apply effective carbon pricing on flights departing from the UK to the EEA. (Annex 8 sets out the chronological development of the EU ETS) Comparing the EU ETS and CORSIA Both CORSIA and the EU ETS are market-based measures to address CO2 emissions. However, there are important differences between them, which have been studied extensively in advance of preparing this Impact Assessment and were already looked at in the previous Impact Assessment. The first important difference is in the nature of the two measures: the EU ETS is a legally binding cap and trade system setting a limit on the total GHG emissions of the participating sectors so as to reduce them in absolute terms within the EU (use of international credits to a limited extent was allowed in the EU ETS until 2020, but since the start of the fourth trading period, i.e. 2021, not any more). CORSIA is essentially a carbon-offsetting scheme, which allows emissions from the aviation sector to continue increasing above the baseline (now 2019 emissions for the pilot and 2019-2020 for future phases unless changed), and foresees offsetting with credits from reductions in other sectors worldwide (international offsetting). Secondly, the scope of EU ETS is route-based (applying to all operators, EU and non-EU alike) whereas the scope of CORSIA is state-based (applying to aircraft operators from each state only). All nationalities of companies operating in the European market have complied with the EU ETS across the economy, EU and non-EU alike. Under the ICAO State-based system, the SARPs do not foresee any State enforcing on “other State’s” airlines: No State shall ‘delegate enforcement ...towards ICAO, [or] to another State.’ (section 1.3.2 of the SARPs). The EU ETS is also binding in Union law, and has been enforced effectively by Member States. The Commission studied the means by which an effective global market-based measure could be developed, and the “downsides of [ICAO] Standards pertain to the uncertain legal status of such Standards which also affects their enforceability”. As ICAO is using the approach of a standard for CORSIA, no enforcement is possible by ICAO, and domestic implementation by States is key. Through the EU ETS, aviation has contributed to almost 200 million tonnes of reductions of CO2 emissions over the past 8 years. While the in-sector aviation emissions for intra-EEA flights kept growing, from 53.5 million tonnes CO2 in 2013 to 69 million in 2019, the flexibility of the EU ETS, whereby aircraft operators may use any allowances to cover their emissions, meant that the CO2 impacts from these flights did not lead to overall greater climate change. CORSIA is expected to generate significantly lower reductions than the EU ETS when comparing GHG emission reductions achieved in the geographical scope of the EU, as all the emissions credits will be purchased from programmes administrating projects outside the EU. However, on a global scale, CO2 emission reductions through CORSIA may be higher (as far as international aviation is concerned). CORSIA relies on international offsets. The quality of international offsets is harder to control and this may raise concerns over additionality, permanence, net harm and the applicable accounting rules to avoid double counting. In addition, it should be recalled that the EU 2030 climate objective under UNFCCC should be met through domestic reduction efforts, i.e. without the use of international credits. This was reflected in the European Council conclusions from October 2014 and accordingly communicated by the EU under the Paris Agreement. The CORSIA baseline for the pilot phase has been changed to “2019 only” in the course of 2020, whereas the EU ETS is based on a 2004/2006 average. The change of baseline in CORSIA is likely to mean that no offsets will be required for compliance purposes during the pilot phase of CORSIA. Under the EU ETS, allowances must be surrendered for each tonne of emitted CO2 by flights covered by the EU ETS. These allowances are currently worth around €30/tonne. Up to 2020, certain types of international credits were allowed for surrendering but limited to 1.5% of emissions. In the light of the EU’s experience with international credits and in line with the EU contribution to the Paris Agreement, no international credits can be used after 2020 in the EU ETS. Finally, the geographic scope is different: CORSIA applies to international flights between participating States, whereas the EU ETS currently applies to domestic and international flights within the EEA. More information on the EU ETS features on Annex 9. The main features of CORSIA can be found on ICAO Resolution A40-19, in Annex 6. 2.Problems definition 2.1.What is/are the problems?

2.1.1.Problem 1: Aviation sector must contribute to economy-wide emission reductions necessary to achieve the increased level of climate ambition and to avoid the risk of global aviation emissions undermining the global temperature goals of the Paris Agreement Aviation emissions account for 2-3% of global CO2 emissions and have significantly increased since 1990 both at EU-level but also globally. At EU-level, CO2 emissions from aviation made up 3.7% of the economy-wide total or 15.7% of CO2 transport emissions in 2018. Aviation’s emissions in Europe increased an average of 5% year-on-year between 2013 and 2018 . In 2018, the EU was responsible for 15% of the global aviation CO2 emissions. Moreover, non-CO2 climate impacts are estimated to be at least as important in total as those of CO2 alone . Notwithstanding the recent reduction in traffic as a consequence of the COVID-19 pandemic, aviation climate impacts are projected to grow further given the sector’s historical growth of above the average of other economic sectors. Before the COVID-19 pandemic, Eurocontrol had projected an annual increase in European aviation emissions by 53% by 2040 compared to 2017 . Before the COVID-19 crisis, ICAO had estimated that, by 2040, international aviation emissions could rise by up to 150% compared to 2020 . However, given the impact of the pandemic, the airline industry does not expect air travel demand to return to pre-COVID-19 levels before 2024; however, this does not seem to impact significantly the dominant upward trend. Considering current and projected emissions from the aviation sector, and in the context of an enhanced climate ambition of the EU for 2030, the contribution from aviation to the achievement of the EU objective will need to be significantly strengthened, therefore, also with a view to allow for the necessary contribution to the EU climate neutrality by 2050. The 2019 European Aviation Environment Report also highlighted this need . Growing aviation emissions are not only an issue within the EEA but also at the global level. The latest UNEP gap report , recently issued, recalls the growing importance and urgency of reducing aviation emissions (CO2 and non-CO2 emissions having a climate impact) generated by aviation activities, against the temperature goals of the Paris Agreement and climate science. Since the last review of the EU ETS for aviation, the European political context has evolved with President Von der Leyen’s Political Guidelines , which emphasize that “carbon emissions must have a price, and every person and every sector will have to contribute”. Beyond the increase in EU 2030 ambition to achieve domestic EU-wide economy-wide greenhouse gas emissions reductions of at least 55% compared to 1990, the 2030 Climate Target Plan communication underlines that “in accordance with its international commitment to economy-wide action under the Paris Agreement, the EU should continue to regulate at least intra-EU aviation emissions in the EU ETS”. In its conclusions of 11 December 2020, the European Council “invites the Commission to assess how all economic sectors can best contribute to the 2030 target and to make the necessary proposals, accompanied by an in-depth examination of the environmental, economic and social impact at Member State level” . Outgoing flights are in the scope of the EU 2020 target of -20% GHG emissions reduction, and have been included in the legislation enacting the EU’s -40% GHG emissions reduction commitment and now a -55% NDC. For aviation to contribute to the goals of the Paris Agreement, broader global action is required. CORSIA is a step in this direction. Additional measures will in any event be needed to enhance the international aviation contribution to the fight against climate change. The Commission is also working with third countries to promote carbon pricing: co-operation with China has been underway for the last eight years, and China’s national ETS begins operating this year, but does not include (domestic) aviation in its scope for the time being. As part of a new trans-Atlantic agenda, the Commission has emphasized that the EU and US “should work closely together on emissions trading, carbon pricing and taxation”. The decarbonisation of the aviation sector requires an enhanced carbon price signal, including in view of the significant investments needed in Sustainable Aviation Fuels (SAF), improved air traffic management infrastructure, as well as further research and deployment of advanced and breakthrough technologies (such as open rotor engines, carbon-free synfuels, hydrogen or electrically-propelled aircrafts). The use of price instruments to decarbonise the sector is considered to have less-adverse distributional effects, and to be potentially socially progressive . The EU ETS’ current price incentive of approximately €115 per tonne for zero emission jet fuel, is by itself insufficient to bridge the price gap with conventional kerosene. However, by investing auctioning revenues through the Innovation Fund, the EU ETS can also support deployment of breakthrough technologies and drive the price gap down. EU Member States have reported using more than €46 billion or 77% of their ETS revenues for climate action over the last 8 years. Last, the need to further internalize environmental costs and allow for a level playing field among modes of transport is also recognised as an important element of the decarbonisation strategy of the sector. In that respect, the review of energy taxation is also considered as one of the initiatives that would contribute to achieving the 55% net reduction target presented under the ‘Fit for 55’ package of the European Green Deal . 2.1.2.Problem 2: Promote broad and effective participation by States in CORSIA and ensure effective implementation of CORSIA through the EU ETS in a manner that is fully compatible with the EU 2030 climate objectives and the EU’s commitment under the Paris Agreement 2.1.2.1.The effectiveness of CORSIA Effective implementation of CORSIA worldwide will depend on the baseline (beyond the pilot phase), the quality of required offsets, level of participation, how CORSIA is being implemented domestically, the avoidance of double counting, fuels framework and enforcement by states. Whether CORSIA will work depends on all these factors. Favoured by the design of CORSIA and its implementing elements, and significantly amplified by the new baseline adapted at the request of international partners as a result of the COVID-19 pandemic, the available supply of units exceeds the likely demand in the short-term (if any demand at all materializes during the pilot phase as a result of the new baseline). This in turn means that, as long as demand is low, CORSIA will not act in practice as an incentive towards emission reductions from the sector. Indeed, in comparison to current carbon price of around €30 per tonne CO2, international credits trade at far lower prices. For example, the CDM credit price is currently around €0.33 per tonne CO2. Added to this the uncertainty of any significant credit demand in the next years, the steering effect of CORSIA remains doubtful. Where supply exceeds demand, the price for credits will go towards zero. Notwithstanding the need for robust rules to be implemented by ICAO and participating States, broad/full participation from strategic partners in CORSIA is key if it is to deliver on its initial objective. The EU has demonstrated its determination to play its part and will continue to do so, but it should also be clear that, for CORSIA to work and to be effective, all strategic partners need to be on board and undertake domestic implementation. 88 countries are listed on the official ICAO Secretariat website, including all EU Member States and all G7 countries, but key States are still missing at this juncture e.g. China, India, Russia, Brazil. Against this backdrop, the EU will continue to support efforts, multilaterally in ICAO and bilaterally with strategic partners, to secure adequate participation and implementation, as well as to make sure that CORSIA delivers on its initial objective and is further strengthened, avoiding any backsliding at the occasion of the first review planned for 2022. 2.1.2.2.The implementation of CORSIA through the EU ETS in a manner that is fully compatible with the EU 2030 climate objectives and the EU’s commitment under the Paris Agreement Article 28b of the EU ETS Directive 2003/87/EC requires the Commission to present a report to the Council and the European Parliament in which it shall consider ways for CORSIA instruments to be implemented in Union law through a revision of this Directive. It shall also examine the ambition and overall environmental integrity of CORSIA, including its general ambition in relation to targets under the Paris Agreement, the level of participation, its enforceability, transparency, the penalties for non-compliance, the processes for public input, the quality of offset credits, monitoring, reporting and verification of emissions, registries, accountability as well as rules on the use of biofuels. In addition, the report shall consider whether the provisions adopted under Article 28c(2) need to be revised. Article 28b of the EU ETS Directive foresees the Commission accompanying the report with “a proposal, where appropriate, to amend, delete, extend or replace” the derogations provided for in Article 28a (which limit the scope of EU ETS to intra-EEA flights from 2017-23), that is “consistent with the Union economy-wide greenhouse gas emission reduction commitment for 2030 with the aim of preserving the environmental integrity and effectiveness of Union climate action”. The review of the EU ETS for aviation should ensure that CORSIA is implemented as appropriate through the EU ETS. Any amendment of the EU ETS Directive must be consistent with EU’s ambition to become climate neutral by 2050, the Union’s economy-wide greenhouse gas emission reduction commitment for 2030 and with the aim of preserving the environmental integrity and effectiveness of Union climate action. At the same time, Union legislation must ensure equal treatment for airlines operating on the same routes. Based on the ICAO definition of “international flights”, implementing the CORSIA SARPs for the offsetting would mean that airlines based in an EU Member State should offset CO2 emissions generated by international flights between states participating in CORSIA, above the baseline level, irrespective of the ETS in place in the EU and its higher level of climate ambition.

Thus, all international emissions of flights between EU Member States could potentially be subject to both the EU ETS and CORSIA regimes in as far as intra-EEA flights are concerned. However, the EU policy space and level of climate ambition have been safeguarded as a result of the differences agreed at the EU level and filed by EU MSs in ICAO, recalled in a formal EU statement delivered at 2019 ICAO Assembly at the occasion of the adoption of a CORSIA Resolution. This was considered crucial in order not to prejudge the review of the EU ETS in the light of CORSIA and to fully preserve the integrity of EU climate objectives. This also means that the validity of EU law (ETS) is fully preserved, with airlines being responsible to surrender allowances for their intra-European emissions (and in respect of departing flights to Switzerland) through the EU ETS. Ultimately, however, the issue is how to apply CORSIA while making sure that it does not allow for any backsliding in terms of climate ambition compared to what the EU has committed to for 2030, does not bring any undue administrative burden compared to the benefits expected and is fully consistent with the spirit and “mandate” of the last ETS review in 2017. 2.1.3.Problem 3: The current high proportion of free allocation of aviation allowances, in the absence of carbon leakage, undermines the price signal and risks future windfall profits. When the first proposal to include aviation in the EU ETS was issued, free allocation was provided to align with other sectors that received free allocation in the early phases of the EU ETS, also as a way to facilitate the initial acceptability of the new system. Under the ETS more generally, free allocation is now targeted at sectors at significant risk of carbon leakage, while auctioning is recognised as the basic principle for allocation, as it is the simplest, and generally considered the most economically efficient, system. While a significant risk for carbon leakage for aviation due to the ETS has not been substantiated due to its very nature (difficulties or even impossibility to change/divert route due to the very nature of the traffic), 85% of aviation allowances are nevertheless allocated for free which undermines the effectiveness of the carbon price signal thereby removing incentives for aircraft operators to decarbonise their activities. In 2019, aircraft operators received free allocation of 31.3 million allowances, covering 46% of the total emissions. In contrast, the majority of rail activity in Europe has been covered by the EU ETS since 2005, because of its use of electricity, and it has not received free allocation. The total number of allowances for aviation was based on average emissions in 2004-2006, while the allocation to each operator was based on activity data from 2010. However, the individual emissions of airlines have taken differing trajectories since 2010. This system has created unfair and unjustified treatment among operators, which now need to be rectified to allow for a better level playing field, also for new entrants. No action by the EU would perpetuate a free allocation scheme, which mirrors the market configuration of 2010. Taking into consideration the impact of COVID-19 on air traffic, and the likelihood that 2019 levels will not be reached before 2024, a continuation of the current allocation levels would generate not costs, but windfall profits for operators (i.e. a large proportion of the opportunity cost of using allowances received for free has been passed on to consumers/customers), and would create downwards pressure on the prices of ETS allowances. The price signal would not only be insufficient to generate emission reductions in line with the 2030 climate targets but would act in the opposite direction than that required by those targets. A transition to a higher or full auctioning share, whether immediate or staggered, would eliminate windfall profits and put new entrants on the same competitive footing as existing operators . Free allocation of aviation allowances does not take into account cost pass through from producers/service providers to customers and consumers, a behaviour which is much better understood now. The issue had been raised for a while by the EP and, as a result of the last co-decision, the EU ETS Directive requires the Commission to “study the ability of the aviation sector to pass on the cost of CO2 to its customers in both the EU ETS and ICAO’s market-based measure, comparing this to industries and to the power sector, and with the intention to propose to increase the percentage of auctioning pursuant to the review referred to in Article 28b(2)”. The Commission study on auctioning and cost-pass through shows that the majority of the opportunity cost of emission allowances is passed through to customers. Whether allowances are received free of charge or against payment would not be expected to make any difference to this cost pass-through decision. Consequently, full auctioning would not imply unreasonable costs on aircraft operators. Recently, in 2020 the European Court of Auditors found that “the number of free allowances allocated to the industry and aviation sectors in phase 3 was not based on their ability to pass through costs (see paragraphs 29 to 31) and that, while carbon leakage has the potential to affect EU carbon markets, and thus the evolution of the greenhouse gas emissions worldwide, there is limited targeting of the free allocation of allowances (see paragraphs 32 to 38)”. The Communication on a European Green Deal states that there will be a proposal to reduce the free allowances allocated to airlines. This is re-stated in the Communication on Stepping up Europe’s 2030 climate ambition: “For aviation, the Commission will propose to reduce the free allocation of allowances, increasing the effectiveness of the carbon price signal in this sector, while taking into account other policy measures such as energy taxation and the ReFuelEU initiatives”. In this context, the revision of the EU ETS for aviation should ensure that the allocation of allowances is aligned with the reinforced EU climate objective and is economically efficient. 80% of the public consultation respondents, half of which private sector stakeholders and including most of respondents from the aviation sector, believe that reducing or removing the free allocation of allowances to airlines would increase the cost of flying for operators and consumers. At the same time, 69% of respondents, gathering mostly NGOs and EU citizens, agreed that a reduction or removal of the free allocation of allowances to airlines would increase the climate change mitigation impact by the EU. 3.Why should the EU act? 3.1.Legal basis The legal basis for the EU ETS Directive 2003/87/EC, as well as all subsequent legislation amending it or other legislation regulating GHG emissions, is Article 192 of the Treaty on the Functioning of the European Union. This should remain the legal basis for any new legislation addressing climate impacts of aviation, as the principal objective of the measure is the protection of the environment through the reduction of GHG emissions. 3.2.Subsidiarity: Necessity of EU action As recalled in chapter 1, the EU has committed to economy-wide climate neutrality by 2050, and the Commission has proposed an EU-wide net greenhouse gas emissions reduction target by 2030 compared to 1990 of at least 55%, which has been endorsed by the European Council. To reach the target, all sectors need to contribute. The projected continued growth of aviation emissions represents a challenge to reaching the EU’s target and its commitments under the Paris Agreement. Article 28b of the EU ETS Directive, as amended by Regulation 2017/2392, requests the Commission to present a report to the European Parliament and to the Council in which it shall consider ways for CORSIA to be implemented as appropriate in Union law through a revision of the EU ETS Directive. Furthermore, Article 3d requires the Commission to undertake a study on the cost pass-through of the aviation sector with the intention of making a proposal to increase the percentage of auctioning of aviation allowances, pursuant to the review referred to above.

Any amendment to the ETS Directive can only be brought about by the EU. An EU legal act is required for Member States to apply CORSIA for the flights covered by the geographical scope of application of Directive 2003/87/EC as set out in its Annex I, i.e. flights departing from airports in the EEA and arriving to other airports in EEA or to third countries and, incoming flights to airports in the EEA from third countries. To ensure a joint effort of EU Member States towards meeting the EU's climate objectives and to ensure a level playing-field on the EU single market, it is essential for the EU to continue to act to ensure a harmonised approach to appropriate implementation of CORSIA across all Member States. 3.3.Subsidiarity: Added value of EU action Acting at EU level is more efficient than acting at the Member State level, in terms of scale – the larger an emission trading system is, the more cost-efficient the emission reductions. It also prevents distortion of competition in the internal market by ensuring that the environmental requirements are harmonised across the EU. In order to avoid distortions of competition in comparable circumstances, it is important that all flights on the same route be treated in the same way. This harmonized approach through an EU emission reduction tool (cap and trade system) has allowed for aviation's contribution to the EU 2020 climate objective and is set to ensure consistency with the 2030 target. Specifically, as regards the implementation of CORSIA, EU action ensures the participation of all Member States (effectiveness) while also ensuring a level playing-field on the EU single market and administrative simplification for operators concerned. 4.Objectives: What is to be achieved? 4.1.General Objectives 4.1.1.Ensure achievement of increased EU climate targets for 2030 and 2050 and fulfil international commitments under the Paris Agreement Through the 2030 Climate Target Plan, the Commission proposed to raise the level of ambition on climate action and to cut greenhouse gas emissions by at least 55% by 2030 in order to set Europe on a responsible path to becoming climate neutral by 2050. It states that mobility will still have to be made substantially cleaner and that transport, including aviation, will have to substantially reduce emissions in particular in sectors that so far have been hard to decarbonise such as aviation. This means enhanced emission reductions from all sectors of the EU economy, including aviation, consistent also with the EU’s economy-wide commitment under the Paris Agreement. As recently stated in the CTP, the EU ETS will remain a key tool to achieve reductions of CO2 emissions from aviation by 2030 (directly or indirectly). The EU ETS is a system designed to drive CO2 emission reductions first in the sectors covered and in the locations where it is cheapest to achieve. Given the rapid growth in aviation activities, the EU ETS has not yet led to aviation sector reductions in absolute terms. This state of play might change if ·the cheapest reductions have already been achieved (reducing emissions in the aviation sector is considered generally more expensive than in other sectors); ·the cost of allowances increases, to a level leading to investment into new technology, operational improvements and sustainable aviation fuels and this, combined with EU initiatives like RefuelEU, leads to direct emission savings; ·the carbon cost (through ETS, removal of tax exemption, removal of VAT exemption or other financial measures or through the ReFuelEU initiative) increases the air fares, potentially reducing demand and incentivising shift to other means of transport; ·demand for air travel is reduced due to rising awareness of the impact of aviation and more online conferencing replacing business travels. Therefore, strengthening the ETS is considered as an important part of the solution to achieve both emission reductions while reinforcing the price signal to incentivise necessary investments in decarbonisation. At the same time, other EU measures are also needed to further reinforce the price signal, outside the scope of this impact assessment (in accordance with the concept of a “basket of measures”), as also indicated by the fact that a growing number of Member States feel the need to adopt passenger duties. The concept is further supported by the fact that 82 % of respondents to the public consultation agreed that market-based measures such as the EU ETS and CORSIA should be combined with other policies such as support for innovative aviation technologies, operational improvements, taxation, and the production and use of sustainable aviation fuels. Enhanced action for both domestic and international emissions is needed to significantly reduce climate impacts from international aviation, consistent with the Paris Agreement, the commitments under ICAO and climate science. The objective of CORSIA, i.e. essentially to compensate for the growth of international aviation CO2 emissions beyond 2019 levels through international credits, is expected to lead to CO2 emission reductions on a global scale, and may even have a positive effect on domestic aviation emissions all over the world, but is in itself far from being sufficient to duly contribute to the EU’s objective of climate neutrality by 2050.

CORSIA – as the first international sectorial agreement on CO2 emissions following the conclusion of the Paris Agreement – should in particular deliver CO2 emissions reductions compared to ‘business as usual’ on the global scale. In case it will ensure contribution from all major international aviation states, thereby leading to world-wide collective action on a non-discriminatory basis, it should be considered as a complement to the EU ETS. Assuming adequate environmental integrity of offsets and avoidance of double counting, CORSIA offsetting would be transitionally helpful pending the deployment of breakthrough technologies such as electrification, hydrogen or synthetic fuels produced from renewable energy sources. CORSIA relies on airlines purchasing and cancelling offset units that certify reductions achieved in other sectors. The Paris Agreement covers all anthropogenic emissions, from all sectors of the economies, with developed countries being required to undertake economy-wide action while developing countries are expected to move towards economy-wide action over time. 4.2.Specific objectives 4.2.1.Lead international efforts, build alliances with the like-minded and maintain competitiveness In order for the EU to lead international climate efforts, it should encourage other countries to follow. In 2018, the EU-27 accounted for around 22.5% of total global aviation CO2 emissions (7.5% intra-EU and 15% from flights that either depart or land in the EU to/from a non-EEA third country). The need for the EU to also spur on ICAO states to take action to contribute to achieving the temperature goals of the Paris Agreement is self-evident against this backdrop. In this context, it is encouraging that China has put a national ETS into operation, which may be extended to aviation, and that Korea and New Zealand have ETSs, which cover some emissions from aviation. 4.2.2.Increase carbon price signal, while avoiding carbon leakage and ensuring a level playing field and fairness As in other areas of climate action, it is important to ensure that the options selected to reduce emissions do not lead to an increase in climate impacts elsewhere, the so-called carbon leakage. There is no evidence of carbon leakage at present for aviation, because there is equal treatment of all airlines on flight routes covered by the ETS. On the other hand, the issue of ‘hub leakage’ (aviation activity could theoretically be somewhat displaced to hub airports where carbon pricing is not applied), should be examined. Another aspect worth examining is substitution of air travel by other means of transport, such as trains. Ensuring that operators on the same route are treated equally remains a key specific objective, to avoid any discrimination on grounds of nationality. This includes examining the situation of flights to and from outermost regions in addition to impacts on outermost regions in general. It should also be taken into account that EU carriers have a relatively large share of their emissions covered by the EU ETS compared to their non-EU competitors. 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? Baseline For CORSIA implementation, options are assessed against option C1BASE (as described below), the current ETS scope, where the application of the EU ETS legislation is limited to intra-European flights. This is the situation under the current scope derogation, which applies to emissions until end 2023. The baseline against which all other options for auctioning of allowances are assessed is option A0BASE, the ‘do-nothing’ option, under which 15% of allowances for aviation are auctioned as under the current legal situation until 2030. These are the baselines for the assessment of policy options modelled using the Aviation Integrated Model (AIM) for aviation sector impacts as described in Annex 4.2. As for other impact assessments for the Fit for 55 proposals, we use values from the REF scenario modelled under PRIMES (as described in the common methodological annex 4.1), the common baseline, as inputs for the AIM modelling. The baselines C1BASE and A0BASE use values from the REF scenario to ensure consistency. Modelling approach and assumptions The quantitative analysis of impacts of each option and combinations is based on modelling of the aviation sector using the AIM global aviation systems model and of the wider economy using the E3ME global macro-economic model. The full results are presented in the study by ICF commissioned by the Commission. The modelling also relied on information from the assessment of CORSIA, the assumption that a large number of countries apply CORSIA through domestic regulation and maintain their participation, the price of CORSIA eligible credits, and from the study of cost pass through under the EU ETS. The modelling was carried out both for a set of ‘most likely’ trajectories for input variables (oil price, carbon price, demand growth, CORSIA participation and changes in technology), which give the nominal values for which the results are presented here, unless otherwise stated, and across a series or grid of different ranges or scenarios for these input variables. Uncertainty is examined by using in most cases a high, central and low value for each input variable. This allows highlighting of the cases where a variable is particularly important. The impact of some variables that do not require model runs were also tested and are presented here, such as the extent to which offsets under CORSIA are real and additional. The model runs were first undertaken in 2020, but were updated by new model runs in January 2021 to reflect the latest information on the impact of COVID-19 and revised Commission projections of aviation demand. The results presented here are those updated to reflect the impacts of COVID-19.

Table 5.1: Broad categorisation of AIM model inputs which may lead to differences in outputs (as assessed by total aviation sector CO2 up to 2050 on a global/extra-EEA/intra-EEA basis) Level of uncertainty Potential impact on outcomes Low Mid High Low -Biofuel characteristics -Carbon intensity of electricity generation -Electricity price Mid -Coverage of flights to/ from UK and Switzerland -Allowance allocation methods -Urbanisation -EUA/CER prices -Cost pass-through assumptions High -Population growth -CORSIA participation -Future aircraft technology characteristics -Rules on quality of CORSIA credits -GDP/capita -Oil price



The variables to which results are most sensitive include CORSIA implementation by states and continued participation, technology assumptions and demand. Participation CORSIA coverage will vary substantially depending on its implementation and continued participation by states. CORSIA only covers emissions from international flights when both origin and destination countries are participants. In other words, if a country does not implement or decides not to continue participating in CORSIA, none of the flights to and from that country are covered. In addition, CORSIA foresees that no state should regulate airlines based in any third country. This would pose challenges to ensuring equal treatment on routes, which is important for any economic measure to be effective. As a result, emissions coverage decreases rapidly with reduction in participation. As the ICAO Secretariat has not published the responses which were required by 30 June 2020 to a State letter, these responses and any conditions attached are not public. The analysis in this impact assessment is based on what the ICAO Secretariat has published on its website. The analysis looks at the following CORSIA participation scenarios: ·Initial assumed implementation: the level assumed for the results presented (nominal) values, assumes implementation and continued participation throughout the period 2021-2035 of the 88 States listed by the ICAO Secretariat on its website in December 2020 (which includes the US), but that none of the larger countries which have opposed CORSIA (China, Russia, India, Brazil or Vietnam) participate in any of its phases. ·High implementation and continued participation: assumes implementation throughout the period 2021-2035 of all of the 88 States listed by ICAO Secretariat on its website in December 2020, plus starting in 2027, participation of the currently five additional States - China, Russia, India, Brazil and Vietnam - which are not exempt from CORSIA’s second phase. Technology Technology developments are modelled by specifying individual characteristics of candidate technologies for nine aircraft size class. However the characteristics of future technologies (e.g. new aircraft models, retrofits, operational measures or alternative fuels) can be highly uncertain. In many cases, estimates of the benefits of technologies depend on engineering breakthroughs that have still to be made. Therefore, the technology adoption model uses scenarios to assess the impact of uncertainty in technology parameters. This assessment is based on three scenarios using technology parameters, including changes in aircraft operating costs by cost type and changes in fuel burn, as derived from Schäfer et al. (2016) and Dray et al. (2018). For example, the ‘pessimistic’ technology scenario used in this study describes a future in which it is particularly hard to reduce aviation emissions through technology; this assumes the reduction in fuel use from new technologies is at the low end of available estimates, costs are at the high end of available estimates, and the date from which the technology is available is at the late end of available estimates. The central scenario assumes all technology parameters are at central/’most likely’ values from available estimates, and in the ‘optimistic’ scenario reductions in fuel use from new technologies are at the high end of available estimates, costs are at the low end of available estimates, and the date from which the technology is available is at the early end of available estimates. In all cases, consistency with ICAO’s CO2 standard is assumed. Measures are adopted based on their cost-effectiveness. This means that high fuel and/or carbon prices can affect which technologies, retrofits and operational strategies are adopted. The results also depend on a number of other input assumptions, for example the scale of supply of cellulosic biomass-derived drop-in aviation fuel. Projections of how much biofuel might be in use in aviation up to 2050 vary widely and are dependent on the costs, sustainability and supply of biomass assumed, as well as the characteristics of and demand from other sectors and policies. Most recent multi-sectoral analyses project relatively low aviation biomass use to 2035. Electrofuels (or power-to-liquid fuels) also have potential to contribute to climate neutrality. However, given the current costs at 3-6 times that of untaxed kerosene and uncertainties about uptake, electrofuels are not included in the modelling for this impact Carbon prices The following carbon price scenarios are used in this impact assessment for EU allowances and CORSIA eligible offsets (adjusted for the impacts of COVID-19). Table 5.2: Carbon price assumptions by scenario and allowance type, corrected for the impacts of COVID-19. Scenario Carbon price €/tCO2, year 2020 euros 2015 2020 2025 2030 EUA (EU ETS) Base COVID-19 (nominal) 7.8 26.5 27.5 32 EUA (EU ETS) IIb COVID-19 (high) 7.8 26.5 47.8 84.5 CORSIA Sc1 (nominal) 0.20 1.02 1.02 1.02 CORSIA Sc2 (high) 0.20 1.02 5.09 13.2

The nominal values in table 5.2 above are those used for the results presented in this impact assessment, unless stated otherwise. The nominal case uses the REF scenario EU ETS price, as inthe Impact Assessment for the EU ETS and other proposals. The ETS carbon price in REF only reflects currently adopted policies, with 2030 price at €32 and average prices at €29 for the period 2021 to 2030. Currently observed carbon market prices do already respond to the increased GHG target and vary between €40 and €55. The policy scenarios modelled under the ETS revision Impact Assessment project average carbon price ranges between €45 and €70 for the period 2026 to 2030, with projected carbon prices in the year 2030 ranging between €50 and €85. This is broadly in line with external analyses, for which the average of price forecasts for 2030 is €71, with a large range between €42 and €89 (with all prices adjusted to 2020 Euros). Both this and the ETS impact assessment recognise that an increase in GHG reduction ambition would lead to higher carbon prices. In addition, the broader EU ETS revision impact assessment also uses the following rounded central carbon price assumptions, based on these and other sources, for the assessment of some impacts, such as auctioning revenues, (in €2020): €50 as average for the whole period 2021 to 2030. Higher carbon cost scenarios for both EU ETS allowance and CORSIA were also used in sensitivity testing for this aviation ETS impact assessment. These were defined before the finalisation of the modelling exercises for the general ETS impact assessment and are given in table 5.2 above (see the ‘high’ scenarios). The 2030 carbon price assumptions for the ETS high price scenario (EUA (EU ETS) IIb COVID-19 (high)) are however consistent with the upper range of the above price projections, so that the full range of carbon prices is covered by the scenarios modelled. Also, when expressed as averages, the high cost scenario for EU allowances under the EU ETS are above the above mentioned levels used in the broader ETS impact assessment with (in €2018): €51.7 as average for the whole period 2021 to 2030 To ensure consistency in the calculation of revenues, the assumptions of the general ETS impact assessment have been used just for revenues. 5.2.Description of the policy options 5.2.1.CORSIA implementation 5.2.1.1.Option C0WIDE: Return to full scope EU ETS This option proposes applying the EU ETS legal scope of departing flights to third countries (other than Switzerland and the UK), and incoming flights from third countries (unless exempted), if no amendment to the ETS Directive was adopted before surrender requirements apply to emissions as of 2024. Currently, the flights exempted from this scope are those incoming from Switzerland, while a delegated act is being prepared to exempt incoming flights from the UK, which are in the scope of the ETS of the UK. Incoming flights could also be exempted to provide for optimal interaction between the EU ETS and third countries' measures for reducing the climate change impact of flights. This would maintain the equal treatment of aircraft operators on routes, with the EU regulating departing flights to countries applying CORSIA, while these countries would be responsible for flights to the EEA. This would also be consistent with the EU’s NDC that covers outgoing flights. In this option, EU allowances are required to be surrendered by airlines for these emissions, while CORSIA is not applied at all by any EU or EEA member state. Features Assumptions EU ETS Scope Flights to, from, within EEA, including domestic (from 2024) CORSIA Scope International flights between participating non-EEA countries; to/from/within EEA not covered EU ETS cap 95% of average full scope year 2004-2006 aviation CO2;

LRF of 2.2% per year from 2021 EU ETS allocation Existing situation Modelling CORSIA CO2 eligibility N/A Outermost regions coverage Flights to, from and within any given OMR are included. 5.2.1.2.Option C1BASE: Intra-EEA scope This option is the baseline. It mirrors the current application of the EU ETS. The EU ETS would be applied in line with the scope of the system as currently applied: allowance surrendering obligations for aircraft operators would be based solely on emissions from flights between aerodromes located in the EEA, and for departing flights to Switzerland and the UK. In this option, CORSIA is not applied to any intra-EEA routes, nor on flights to and from the EEA. Features Assumptions EU ETS Scope Flights within EEA, including domestic; departing flights to CH and UK CORSIA Scope International flights between participating non-EEA countries; to/from/within EEA not covered EU ETS cap As option 0 but reduced to reflect reduced scope; LRF of 2.2% per year from 2021 EU ETS allocation Existing situation Modelling CORSIA CO2 eligibility N/A Outermost regions coverage Flights within any given OMR are included. Flights to and from OMRs are exempt. 5.2.1.3.Option C2CONLY: CORSIA only In this option, only CORSIA would be applied to all international flights (as commonly defined by ICAO): flights between EEA states and flights between EEA states and third countries. The EU ETS would no longer apply to aviation in this option.

Features Assumptions EU ETS Scope N/A CORSIA Scope All international and intra-EEA (non-domestic) flights (excluding to/from CORSIA non-participating States) EU ETS cap N/A EU ETS allocation N/A Modelling CORSIA CO2 eligibility Emissions above CORSIA baseline Outermost regions coverage International flights to and from OMRs are included, domestic flights within OMRs are exempt 5.2.1.4.Option C3CLEAN: Clean The EU ETS would continue to apply to the current intra-EEA scope, as in Option C1BASE, and CORSIA would be introduced for extra-EEA flights, i.e. flights between EEA States and third countries (other than to Switzerland and the UK). In this option, the EU ETS would be applied as at present and CORSIA would be applied to flights to and from third countries which participate in the scheme, provided that a level playing field is maintained on routes. Any emissions above CORSIA’s baseline on routes to and from those third countries would be offset by airlines based in Europe using CORSIA eligible offsets. A variation of this option is that the EU operators use a sub-set of the ICAO CORSIA Implementation Element listing eligible units, or use ETS allowances if they choose to do so. The EU might decide that units should originate from reductions in countries which are Party to the Paris Agreement, to encourage participation in the global agreement to tackle climate change. The EU might also decide that units should originate in countries which participate in CORSIA, so as to incentivise participation in ICAO’s scheme and discourage free-riding. It could also be ensured that double-counting is avoided with Paris commitments. The EU could also decide to extend the list of eligible offsets to project types not on ICAO’s list. The option would continue to keep the currently applicable scope of the EU ETS and would potentially strengthen it by application of CORSIA on extra-EEA flights, which could generate additional emissions reductions compared to the current situation, when international aviation emissions as a whole exceed 2019 levels (the current CORSIA baseline). Features Assumptions EU ETS Scope Flights within EEA, including domestic; departing flights to CH and UK CORSIA Scope International flights (excluding to/from CORSIA non-participating States), intra-EEA excluded EU ETS cap Same as in C1BASE EU ETS allocation Existing situation Modelling CORSIA CO2 eligibility Emissions above CORSIA baseline Outermost regions coverage Flights within any given OMR included under the EU ETS. International flights to and from OMRs included under CORSIA. 5.2.1.5.Option C4MIX: Mix In this option, the EU ETS would continue to cover the emissions from domestic flights within each EEA state. For flights between EEA states, which are covered by the EU ETS at present, the ETS would continue to apply for emissions up to the CORSIA baseline (bearing in mind that no CORSIA obligation to offset emissions arises as long as emissions are below that baseline). For emissions above the baseline, CORSIA would then apply. In practical terms, given that CORSIA has a later timeline than the ETS, the EU ETS would apply in a way that any CORSIA offsetting that actually takes place could simply be deducted from the next EU ETS emissions surrender obligation, thereby avoiding an airline paying both the ETS carbon price and for offsets under CORSIA, for the same emissions. Accordingly, to ensure the environmental integrity of the EU ETS, the emissions covered by CORSIA offsetting would be deducted from the available amount of allowances (the cap). For extra-EEA flights between EEA states and third countries, only CORSIA would apply. Same as for Option C3CLEAN, a variation also of this option would be that the EU applies some specific conditions to the choice of offsets to be used for CROSIA by operators administered by an EEA member state. De facto, this option would retain the applicability of the EU ETS within the currently applied scope, as long as aviation emissions on all routes worldwide covered by CORSIA do not exceed 2019 levels. Afterwards, intra-EEA emissions would be offset with international credits to the extent required by CORSIA (with the consequence that they could represent reductions achieved potentially outside the territory of the EEA). Features Assumptions EU ETS Scope EEA domestic flights. Intra-EEA flights up to CORSIA baseline CORSIA Scope All international flights and intra-EEA (non domestic) flights (excluding to/from CORSIA non-participating States), intra-EEA excluded EU ETS cap Same as in Option C1BASE, CORSIA offsetting deducted EU ETS allocation Existing situation Modelling CORSIA CO2 eligibility Emissions above CORSIA baseline Outermost regions coverage International flights to/from OMRs included in CORSIA. Flights within any given OMR are fully subject to EU ETS (i.e. inc. emissions above CORSIA baseline) 5.2.1.6.Option C5MIX2: Mix bis

In this option, for operators with licences issued by EEA States, the EU ETS would apply to non-domestic intra-EEA flights (for all emissions generated by these flights, independently from the level). CORSIA would apply to flights by these operators to and from third countries participating in the scheme. For operators with licences issued by third countries, the EU would no longer be able to ensure that there is a level-playing field on routes as CORSIA would also apply on those non-domestic intra-EEA flights, in addition to flights between EEA States and third countries participating in CORSIA. The EU ETS would not be applicable to third country operators. This option would not cover domestic flights at all. Features Assumptions EU ETS Scope Flights within EEA, excluding domestic, if operator licence issued by an EEA State CORSIA Scope International flights to/from EEA. Flights within EEA, if operator licence issued by a non-EEA state EU ETS cap As Option C1BASE but reduced further to reflect reduced coverage; LRF of 2.2% per year from 2021. EU ETS allocation Existing situation Modelling CORSIA CO2 eligibility Eligible operator emissions above CORSIA baseline Outermost regions coverage For aircraft operators with licences not issued by EU Member States, non-domestic flights to and from OMRs are included under CORSIA. Table 5.9: Summary of CORSIA implementation options Policy option Domestic flights Intra-EEA flights (including departing to CH, UK) Extra-EEA flights C0WIDE ETS ETS ETS C1BASE ETS ETS - C2CONLY - CORSIA CORSIA C3CLEAN ETS ETS CORSIA C4MIX ETS ETS/

CORSIA (above CORSIA baseline) CORSIA C5MIX2 - EEA airlines: ETS

non-EEA airlines: CORSIA CORSIA 5.2.2.Auctioning share increase 5.2.2.1. Option A0BASE: “Do nothing” Article 3d paragraph 2 of the EU ETS Directive provides that 15% of allowances for aviation shall be auctioned and that the Commission shall study cost-pass through by airlines “with the intention of making a proposal to increase the percentage of auctioning” in the current review. In the absence of any amendment, this level would continue under a revised ETS as well. This option is the baseline against which the other policy options will be assessed. The aviation cap would be subject to the linear reduction factor, which is currently 2,2%, yearly, and which will be subject to revision in the upcoming ETS legislative proposal. The total number of corresponding allowances would be distributed through free allocation (82%), special reserve (3%) and auctioning (15%). 5.2.2.2.Option A1FULL: Immediate full auctioning In this option, 100% of the allowances for aviation would be auctioned from the entry into force of the revision (assumption for the assessment: 2023). The aviation cap, as calculated before starting full auctioning, would be decreased by the (revised) linear reduction factor each year up to 2030. In case the scope of the EU ETS were to change as a consequence of the application of one of the options in section 5.1.1, which differs from the intra-EEA scope, the aviation cap would have to be recalculated proportionally. 5.2.2.3.Option A2SWIFT: Swift phase out The application of this option would lead to full auctioning of allowances for aviation by 2025. It would start with an auctioning share of 60% in 2023, and then a share of 80% in 2024. The method of distribution between operators would continue the current situation, based on 2010 traffic. 5.2.2.4.Option A3SLOW: Slow phase out This option would entail a slower movement to full auctioning by 2030. It would start from 20% of auctioning of allowances for aviation in 2023 and would increase in a linear manner to full auctioning by 2030. The method of distribution between operators would continue the current situation. 5.2.2.5.Option A4RED: Slow reduction Under this option, the auctioning share of 20% of allowances for aviation would also be set in 2023. It would increase in a linear manner to end at 55% at least until 2030 (and afterwards, in the absence of future revisions of the ETS). This option would maintain a number of free allowances for aviation at least until 2030 (and afterwards in the absence of future revisions of the ETS). The method of distribution between operators would continue the current situation.

A mix of business associations and NGOs made suggestions to revise options listed in the questionnaire or to introduce new options. The top three reasons for such suggestions were the importance of creating a level playing-field between EEA airlines and non-EEA airlines; avoiding market distortions on certain routes and avoiding hub leakage; and the impact of COVID-19. The concrete suggestions included aligning policy reference year with CORSIA baseline year 2019; ensuring no double counting; and four new options varying in their coverage of EU ETS. 5.2.3.Cross-cutting issues In combination with the options on the main parameters above, there are some issues which need to be addressed by the proposal: 5.2.3.1. Exemptions for outermost territories Currently, the EU ETS temporarily exempts flights to and from outermost regions (e.g. Tenerife – Madrid; Berlin – Tenerife), as well as flights between two different outermost regions (Madeira - Azores) from 2013-2023. However, flights within the same outermost region are covered by the EU ETS (Lanzarote – Tenerife), the exception to that being Public Service Obligation (PSO) flights, which are excluded. From an environmental perspective, this exemption covers about 14% of the EU ETS aviation emissions. The share of flights to/from outermost regions considered as domestic (to their respective Member State) represents about 6% of the aviation emissions currently covered by the EU ETS. CORSIA does not foresee any special status and exemptions for remote or outermost regions. The flights to and from outermost regions could: ·Continue to be exempted from the EU ETS, and seek to apply CORSIA ·Be included in EU ETS and CORSIA ·Be exempted from any obligation 5.2.3.2. SAF implementation EU ETS incentivises operators to use Sustainable Aviation Fuels (SAF) at a level of around EUR 115/tonne, but this incentive is insufficient for large-scale use of fuels that are more expensive. The EU ETS considers a tonne of SAF, which fulfils all the sustainability criteria of RED II to count as zero emissions. Whereas the EU will continue to rely on the RED II framework for the definition of Sustainable Aviation Fuels, there are different options for dealing with the incentives to use SAF: ·Continue to consider SAF as zero-emissions in EU ETS and consider it zero-emissions for CORSIA too; ·Consider it zero-emissions for EU ETS, but use the life-cycle emissions value from the CORSIA SARPs for purposes of reductions of offsetting requirements to CORSIA; ·Adopt the proportional emissions reduction for the EU ETS too. The ReFuelEU Aviation initiative would also aim at incentivising operators to use SAF, through obligations on both the supply and demand sides. On the supply side, the ReFuelEU Aviation initiative could introduce an obligation for fuel suppliers to supply only SAF-blended fuels at EU airports. On the demand side, the ReFuelEU Aviation initiative could oblige airlines departing from an EU airport to use a share of SAF. In order to prevent fuel tankering (i.e. a practice whereby an airline refuels with more jet fuel than necessary at an airport outside the EU with less strict SAF obligations and thus cheaper fuel), the ReFuelEU Aviation initiative could foresee an obligation for airlines to refuel before departure at an EU airport with an amount of jet fuel corresponding to that necessary to operate the next flight. Therefore, if adopted, the ReFuelEU Aviation initiative would share the same objectives as the revision of the EU ETS for aviation, namely reducing CO2 in the aviation sector and supporting the uptake of SAF. 5.2.3.3. Exemptions for business aviation Currently the EU ETS provides for an exemption for aircraft with a total mass below 5700 kg; for flights of non-commercial aircraft operators with annual emissions less than 1000 tonnes; and for flights of commercial aircraft operators with a yearly emission less than 10000 tonnes or less than 243 flights in a year. The effect is that the majority of business aviation is de facto exempted from any obligation of reporting or surrendering allowances. Business aviation flights which are exempted from the EU ETS amounted to 1,1% of emissions of the intra-EEA scope in 2019.

The proposal should examine whether this exemption is still justified or no longer warranted. 5.3.Options discarded at an early stage Variations of option C4MIX could be maintaining the EU ETS for intra-EEA flights, and also apply CORSIA for the emissions above the 2019 CORSIA baseline. The operators which, having surrendered EU allowances, then cancel ICAO offset units for the same emissions, would receive free allocation proportional to the costs of those offsets (noting that allowances are currently worth around €30, and CDM credits are currently worth around €0.30). This option would create double compliance obligation for the same emissions, implying increased complexity and additional burden both on aircraft operators and competent authorities. Furthermore, this would require continuing free allocation, unless auction revenue were used to purchase any such credits. Therefore, this possibility was not further assessed. Option C5MIX2 was not further analysed as it would add high level of complexity to the system without significant additional benefit compared to other options and introducing concerns for equal treatment of airlines on routes. In the public consultation, this option received no support, it was the second least favoured option of the respondents. 5.4.Overview of problems, objectives and policy options The policy options above, to a different extent, directly contribute to the achievement of the objectives defined in Chapter 4. Table 5-8 shows how the policy options are meant to contribute to the solution of the problems described in Chapter 2. Table 5.10: Overview of intervention logic Problem Objective Policy options Increased climate ambition General objective: ensure aviation’s contribution to achieve the increased targets All Implementation of CORSIA Specific objective:

Lead international effort 4.2.1 C options 5.2.1 Carbon price signal is weak Specific objective: Increase price signal while avoiding carbon leakage and ensuring level playing field 4.2.2 A options 5.2.2 6.What are the impacts of the policy options? This section assesses the environmental, economic and social impacts of each option, for the aviation sector and more generally. 6.1.Environmental impacts The policy options assessed involve the use of flexible, market-based measures, where airlines can choose either to reduce their own emissions or to buy and surrender allowances under the EU ETS or offsets under CORSIA to comply, which can lead to emissions reductions outside the aviation sector. As a result, the assessment looks both at the direct impact on CO2 emissions from aviation and the net impact on greenhouse gas emissions both for intra-European and global aviation. The net impacts are those which are most important in terms of aviation’s contribution to meeting 2030 emissions reduction targets. In-depth analysis considers that aviation emissions are currently warming the climate at approximately three times the rate of that associated with aviation CO2 emissions alone. These impacts are reflected in the narrative but not in the tables presenting results for direct and net CO2 emissions. This section goes on to look at the external costs for other environmental impacts associated with each policy option. 6.1.1.Impacts on aviation emissions This section assesses the impact of the different policy options on direct aviation emissions- CO2 emitted by aircrafts.

It is worth noting that the price for international credits today is less than €1, as compared with the price of ETS allowances, which is above €35. Therefore, the options C2CONLY and C4MIX would simply consist in relaxing the current mitigation policies in place for limiting intra-EEA aviation emissions which have proven effective. Direct emissions from aviation grow in all options between 2015 and 2030. As shown in Table 6.1 below, direct global aviation emissions are projected to be 1079 Million tonnes (Mt) in 2030 for the baseline option C1BASE and options C2CONLY to C4MIX, up from 769 Mt in 2015. This is down from the growth in projected direct global emissions in the pre-COVID-19 model runs of 1138 Mt in 2030, a drop of about 5% in global aviation emissions taking into account the expected impacts of the pandemic. Option C0WIDE, full scope, is estimated to lead to 1077 Mt in 2030 (down from 1135 Mt in pre-COVID-19 modelling). Direct emissions from Extra-EEA flights (to and from the EEA) show a similar pattern, with options to C4MIX projected to have CO2 emissions of 174 Mt in 2030. Option C0WIDE has emissions of 172 Mt. For intra-EEA emissions in 2030 Options C1BASE 1 and C3ONLY and C4MIX are projected to emit 52.5 Mt CO2, C0WIDE 52.4 Mt and Option C2CONLY 52.7 Mt. The results in the last row of the table below show that when ETS rather than CORSIA is used for extra EEA flights, there is a difference in emissions of 60 Mt (154-94) in C3CLEAN vs C0WIDE scenario and 67 (151 -94) in C4MIX vs C0WIDE, all in 2030. Table 6.1: Comparison of direct and net aviation CO2 by policy option. Direct CO2 includes all CO2 emitted by aircraft engines. Net CO2 totals take into account the emission reductions taking place in other sectors due to aviation sector’s demand for offsets, allowances and use of alternative fuels. The table also shows how allowance and offset use is distributed between CORSIA offsets and EU allowances. The calculations assume CORSIA offsets are of high quality and fully additional. Due to the functioning of the model, EU-EFTA totals include Switzerland and exclude the UK as EU ETS coverage of departing flights to UK was not agreed at the time of modelling. Policy option Global aviation CO2 emissions, Absolute, in Mt Aviation sector (Direct) global CO2 in 2030 in Mt that are offset under: Intra-EU/EFTA aviation CO2 emissions, Absolute, in Mt Extra-EU/EFTA CO2 emissions, Absolute, in Mt Aviation sector emissions (Direct) 2015 Aviation sector emissions (Direct) 2030 Emissions after accounting for reductions in other sectors from use of CORSIA offsets and EU ETS allowances (Net) 2030 CORSIA EU ETS Aviation sector emissions (Direct) 2015 Aviation sector emissions (Direct) 2030 Emissions after accounting for reductions in other sectors from use of CORSIA offsets and EU ETS allowances (Net) 2030 Aviation sector emissions (Direct) 2015 Aviation sector emissions (Direct) 2030 Emissions after accounting for reductions in other sectors from use of CORSIA offsets and EU ETS allowances (Net) 2030 Total Compared to Baseline Total Compared to Baseline Total Compared to Baseline C0WIDE 789 1077 918 -74 61 98 52 52.4 29.5 -2.5 151 172 94 -76 C1BASE 789 1079 992 - 61 25 52 52.5 27.0 - 151 174 170 - C2CONLY 789 1079 1047 55 32 0 52 52.7 49.2 22.2 151 174 161 -9 C3CLEAN 789 1079 1003 11 50 25 52 52.5 27.0 0 151 174 154 -16 C4MIX 789 1079 1022 30 32 25 52 52.5 23.9* -3.1 151 174 161 -9 6.1.2.Impacts on emissions from other sectors This section looks at the net impact of the different policy options on emissions, including the reductions brought about in other sectors through the use of EU allowances from stationary installations or eligible offsets under CORSIA for compliance. 6.1.2.1.CORSIA Options Net aviation emissions are presented alongside the direct emissions in Table 6.1 above. Under the baseline (Option C1BASE), which maintains the EU ETS for aviation at its current, reduced scope, global net aviation emissions are projected to be 992 Mt CO2 in 2030, an increase of 29% from 2015 levels. Intra-EEA net aviation emissions are projected to be 27 Mt CO2 in 2030, a reduction of 27% between 2015 and 2030. Looking at net global aviation emissions under other options, the reduction in emissions when taking account of reductions under CORSIA and ETS ranges from 15% for option C0WIDE to 3% for C2CONLY. The greatest impact is for emissions from flights between EEA States, where all options with an EU ETS component lead to a reduction in impacts relative to direct emissions of 43% (for C0WIDE) to 55% (C4MIX), though the impact of the latter is inflated by operators of intra-EEA flights offsetting a share of CORSIA emissions that exceeds their own growth in emissions (see text box 7.1). For emissions to and from the EEA, the biggest impact on emissions, when emissions reductions under CORSIA and EU ETS are taken into account, is also for C0WIDE with a 45% reduction in CO2 emissions while C2CONLY and C4MIX show a 7% reduction and C3CLEAN a 27% reduction. The detailed results are in Table 6.1, and the implications in terms of comparison of options are elaborated further in chapter 7. Two messages emerge from this table on net emissions: first is that net emissions intra EU-EFTA are of the same order on all options except for C2CONLY and secondly that all the options under extra EU-EFTA showed a similar scale except for C0WIDE. The results are sensitive to assumptions about CORSIA participation, as set out in Chapter 5. The results presented in the report are based on the initial assumed participation. Table 6.2 below shows the proportion of global aviation emissions that fall under CORSIA under this scenario as well as under the high CORSIA participation scenario. Note that the values in Table 6.2 below are all emissions that fall under the CORSIA remit, not the proportion of global aviation CO2 that is offset under CORSIA. It includes emissions below the CORSIA baseline that are not offset and biofuel-related direct CO2 emissions which are exempt. For Option C4MIX, it includes intra-EEA emissions below the CORSIA baseline (not offset), which are also covered by the EU ETS. The proportion of global aviation CO2, offset under CORSIA is therefore significantly below the proportion of international emissions covered shown in the table below. It should be noted that ICAO has no jurisdiction in respect of domestic aviation emissions, which comprise more than 40% of total emissions from aviation. So the table excludes domestic aviation emissions Table 6.2: CORSIA percentage coverage of international aviation CO2 emissions in 2025, 2030 and 2035, by participation scenario, with the COVID-19-adjusted demand scenario and all other input variables set to nominal values. Policy option CORSIA coverage of global international CO2, Initial Assumed Participation, % CORSIA coverage of global international CO2, High Participation, % 2025 2030 2035 2025 2030 2035 C0WIDE 31.2 30.8 30.8 31.2 48.2 48.4 C1BASE 31.1 30.7 30.6 31.1 48.0 48.2 C2CONLY 53.6 51.5 50.2 53.6 73.0 71.8 C3CLEAN 47.5 ) 45.9 45.1 47.5 67.4 66.7 C4MIX 53.6 51.4 50.2 53.6 73.0 (72.8-73.2) 71.8

A better measure of emissions potentially covered by CORSIA is given by looking at the potential demand for CORSIA offsets, Table 6.3 below. Table 6.3: Potential demand for CORSIA offsets in the pilot, first and second phases, showing the total demand for each full period (the Pilot and 1st Phase the total over 3 years for each and the 2nd Phase, the total of 9 years), under COVID-19-adjusted nominal scenario assumptions Policy option CORSIA offset demand at Initial Assumed Participation, million CORSIA offset demand at High Participation, million Cumulative demand over the period: Cumulative demand over the period: Pilot 2021-2023 First 2024-2026 Second 2027-2035 Pilot 2021-2023 First 2024-2026 Second 2027-2035 C0WIDE 51 (24-62) 113 (53-155) 547 (303-880) 51 (24-62) 113 (53-155) 941 (546-1450) C1BASE 51 (24-62) 113 (53-155) 548 (310-882) 51 (24-62) 113 (53-155) 942 (558-1450) C2CONLY 0.0 (0.0-3.4) 9.9 (0.0-76) 375 (79- 867) 0.0 (0.0-3.4) 9.9 (0.0-76) 783 (275-1500) C3CLEAN 12 (0.0-25) 63 (0.0-127) 494 (173-962) 12 (0.0-25) 63 (0.0-127) 902 (409-1590) C4MIX 0.0 (0.0-3.1) 9.6 (0.0-75) 373 (78- 865) 0.0 (0.0-3.1) 9.6 (0.0-75) 781 (271-1492) Under current CORSIA provisions, until 2030, the baseline and the offsetting required for each operator under CORSIA are based on the collective emissions in the baseline year, 2019 for the pilot, and 2019-2020 for future phases, and the growth in emissions above the baseline level for all routes included in CORSIA. For the purpose of modelling only, the assumption made is that the 2019 baseline applies to the pilot phase and future phases. The impact of these collective provisions is that including or excluding a country changes the collective effort. A decision by a large, emerging economy (such as China or India) with a faster growing aviation sector than in Europe to implement and continue to participate in CORSIA would for example lead to Europe offsetting a larger share of emissions. For comparison reasons, global aviation demand in 2030 would be around 1 bn Mt in 2030. Tables 6.2 and 6.3 above show, for example, that under Option C1BASE (Intra-EEA), CORSIA coverage, which is projected to be 30.7% of global international aviation CO2 under the initial assumed implementation and continued participation, could rise to 48.0% of global international emissions in 2030 under high participation. In terms of offset demand looking for example at the pilot phase and Option C1BASE, this implies a total offset demand under CORSIA of around 51 Mt for the initial assumed and high participation scenarios. For the first phase running from 2024 to 2026, total offsets demand could be around 113 Mt for the initial assumed and high participation scenarios. For the second phase, 2027-2035, it could go up to 942 Mt under high participation. The impact of participation on other options is shown in the tables. Uncertainty about implementation and continued participation in CORSIA and its enforcement by participating states has a larger impact than oil or carbon price uncertainty on the outcomes of the options. Note that all the net results presented in Table 6.1 assume that CORSIA is implemented by all 88 countries in the initial participation scenario and that offsets are of high quality and fully additional. The risk of higher CO2 emissions if CORSIA offsets are not additional has also been modelled. Other risks such as double counting have not been modelled but are discussed in chapter 7. The results show that the modelled outcomes, especially for global and extra-EEA flights, are sensitive to assumptions about CORSIA offset quality. Table 6.4 below looks at the extreme case where none of the CORSIA offsets are additional. In this case, net global emissions are 32 to 61 Mt CO2 higher across the options in 2030. There is also an impact on some net intra-Europe emissions outcomes (see Table 6.4 below). Table 6.4: Year-2030 and 2035 net aviation CO2 after offsets and EU ETS allowances are subtracted, for different levels of CORSIA offset additionality. Central values shown are for all scenario variables at nominal values, including demand growth. Policy option Direct annual CO2 emissions, Mt Net annual CO2 emissions, Mt (0% additional CORSIA offsets) Net annual CO2 emissions, Mt (100% additional CORSIA offsets) 2030 2030 2030 Global Emissions Compared to baseline Emissions Compared to baseline C0WIDE 1077 979 -74 918 -74 C1BASE 1079 1053 - 992 - C2CONLY 1079 1079 26 1047 55 C3CLEAN 1079 1053 0 1003 11 C4MIX 1079 1054 1 1022 30 Extra-Europe (to/from EEA, excluding UK, including OMRs) Emissions Compared to baseline Emissions Compared to baseline C0WIDE 172 94 -76 94 -76 C1BASE 174 170 - 170 - C2CONLY 174 170 0 161 -9 C3CLEAN 174 170 0 154 -16 C4MIX 174 170 0 161 -9 Intra-Europe (EEA, excluding UK, including OMRs) Emissions Compared to baseline Emissions Compared to baseline C0WIDE 52.4 29.5 2.5 29.5 2.5 C1BASE 52.5 27.0 - 27.0 - C2CONLY 52.7 52.6 25.6 49.2 22,2 C3CLEAN 52.5 27.0 0 27.0 0 C4MIX 52.5 27.3 0.3 23.9 -3.1 The EU ETS requires the tonnes of direct CO2 emissions covered to be reported and an equivalent number of allowances to be surrendered each year. The coverage of direct CO2 emissions by policy option is shown in Table 6.5 below. This shows that 45 million tonnes of aviation CO2 emissions are projected to be covered by the EU ETS in the year 2030 under Option C1BASE (Intra-EEA), up from 44 Mt in 2025. At the upper end, Option C0WIDE (return to full scope) leads to 224 Mt under the EU ETS in 2030, while Options C3CLEAN (clean cut) and C4MIX (mix) both lead to 45 Mt under the EU ETS in 2030. Table 6.5: Modelled direct CO2 emissions from routes under the EU ETS, by policy option at nominal values for uncertain input variables in the years 2015, 2025, 2030 and 2035 Policy option Direct CO2 emissions under the EU ETS scope, Mt, for nominal scenario inputs and uncertainty range 2015 2025 2030 Compared to baseline Compared to baseline C0WIDE 58 213 169 224 179 C1BASE 58 44 - 45 - C2CONLY 58 0 -44 0 -45 C3CLEAN 58 44 0 45 0 C4MIX 58 44 0 45 0 As aviation emissions continue to grow, and as the overall EU ETS cap declines according to Linear Reduction Factor (with the LRF assumed here to be 2.2%), airlines will use EU allowances from other sectors under the EU ETS for compliance. Additional demand for