Disclaimer:

This report commits only the Commission's services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission.

Table of content

1........... Procedural issues and consultation of interested parties. 6

2........... Problem definition. 7

3........... Objectives. 17

4........... Policy options. 17

5........... Assessment of impacts. 22

6........... Comparison of options. 44

7........... Monitoring and evaluation. 49

Annex I – Glossary. 51

Annex II – Consultation of stakeholders in the aviation sector 53

Annex III – Public on-line consultation. 62

Annex IV – Supporting analysis on environmental impacts. 66

Annex V – Modelling methodology. 71

Annex VI – Estimation of EU-ETS costs under different options in 2020. 74

Annex VII – Impact on tourism.. 75

Annex VIII – Administrative effort and feasibility. 77

Annex IX – Supporting legal analysis. 83

Annex X – Impact of a possible exemption of flights to and from "developing" States from the EU ETS 92

Annex XI – Resolution A38-17/2 of the 2013 ICAO Assembly with regard to MBMs. 96

Executive Summary Sheet

Impact assessment on PROPOSAL FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND COUNCIL for derogating from Directive 2003/87/EC

A. Need for action

Why? What is the problem being addressed?

CO2 emissions from aviation are one of the fastest growing sources of greenhouse gas emissions. As the technological potential for emissions reduction is limited in the aviation sector, it is necessary to use market-based measures (MBM) such that the aviation sector can off-set its strong emission growth through funding emission reductions in other sectors. The EU led the way in implementing MBMs by including aviation in its Emission Trading System (EU ETS). Despite its positive environmental effects at low economic costs, the implementation of the EU ETS has had to face significant international opposition. A number of states have claimed that the EU ETS would cover a too high share of international emissions and that the EU would have no competence to oblige their airlines to participate in the EU ETS. Furthermore, even with the EU ETS in place, a global "gap" in emissions reductions continues to exist. Without a further uptake of MBMs on a global level, the aviation sector will not be able to reach its emission reduction goals. The insufficient uptake of MBMs and the opposition against the EU ETS have been caused by the absence of a global political agreement on the key principles for the implementation of MBMs at the International Civil Aviation Organization (ICAO).

What is this initiative expected to achieve?

The EU is committed to move forward the ICAO action on MBMs and to work towards the implementation of an ambitious global MBM in 2020 with a view to close the "gap" in the coverage of international aviation emissions and to reach the sector's emission reduction targets. Based on the proposal by the EU Member States, the 2013 ICAO Assembly adopted a roadmap for the decision on the design of a global MBM in 2016 and its implementation by 2020 to cover all international aviation emissions. In response to this progress and to promote further momentum towards the successful establishment of a global MBM, amendments should be made to the aviation activities covered by the EU ETS.

What is the value added of action at the EU level?

The ETS is the EU's flagship initiative for addressing climate change. The integration of aviation into the EU ETS has been decisive in driving forward the ICAO negotiations. The intensive engagement of the EU in defending its right to regulate while encouraging international negotiations will continue to be crucial in maintaining momentum in ICAO towards a global MBM.

B. Solutions

What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why?

In preparation of the 2013 ICAO Assembly, the EU Member States expressed their openness to limit the scope of the EU ETS in proportion to the distance flown within the EEA (hereafter "hybrid option") in case of substantial progress with regard to the development of a global MBM. This hybrid option means that the EU ETS would continue to fully cover all emissions from flights within the EEA but the coverage of emissions from flights to and from 3rd countries would be limited in proportion to the distance flown within the EEA. Depending on how the sea boundaries of the EEA are defined, this would lead to reduced emissions coverage of 39% to 47% compared to the full-scope EU ETS. Alternative options have also been assessed: coverage of emissions from departing-flights only; coverage of 50 % of emissions from all departing and arriving flights; move to an upstream system with fuel suppliers as ETS participants. Even though these options achieve a higher coverage of up to 62%, they are likely to raise the same international objections as the full-scope EU ETS and to obstruct further negotiations on a global MBM. A full exemption of flights to and from 3rd countries, as under the temporary "stop-the-clock" decision for 2012, would reduce coverage to only 26% which is not a viable long-term solution from an environmental point of view. The hybrid option is the preferred option because it strikes the best balance between environmental effectiveness under the EU ETS and progress on the global MBM.

Who supports which option?

The aviation industry has recognized the suitability of MBMs and has urged ICAO to decide on a global MBM to be implemented by 2020. The hybrid option has been proposed by the EU Member States in the ICAO negotiations. European low-cost carriers consider that a complete exemption of flights to and from 3rd countries from the EU ETS would unduly favour large network carriers.

C. Impacts of the preferred option

What are the benefits of the preferred option (if any, otherwise main ones)?

The expected main benefit from a reduction in the scope of the EU ETS will be to facilitate the transition to a global MBM by 2020 to close the global "emission gap" and double the coverage of international aviation emissions (compared to the full-scope EU ETS that covers around 50% of international aviation emissions). If the scope of the EU ETS were not adjusted the political tensions around the EU ETS would be revived and obstruct the negotiations for the future development of the global MBM. Furthermore, a reduced scope of the EU ETS will increase the aviation sector's overall competitiveness in the period up to 2020: under the hybrid option, demand for aviation services is expected to slightly increase within a range of 0.38% to 0.43% up to 2020. No further direct benefits are expected.

What are the costs of the preferred option (if any, otherwise main ones)?

The main negative impact of a reduced EU ETS scope under the hybrid option will be the lower emissions coverage (38% to 46% compared to full-scope EU ETS) up to 2020 for flights to and from 3rd countries. Furthermore, the implementation of hybrid option will necessitate some adjustments in the monitoring, reporting, and verification (MRV) processes. However, as the hybrid option would keep the current MRV system (based on fuel consumption for the whole flights) and re-calculate the reduced coverage based on so-called "distance factors" (i.e. ex-ante defined percentages that are proportional to the distance flown in the EEA), the additional costs should be minimized for aircraft operators as well as national administrations. No further negative economic or social impacts are expected.

How will businesses, SMEs and micro-enterprises be affected?

Currently, the EU ETS covers about 2600 "small" non-commercial operators who are only responsible for 1 % of total emissions. Several simplifications (e.g. streamlining of procedures, de-minimis thresholds) are proposed to reduce the compliance costs for these small emitters.

Will there be significant impacts on national budgets and administrations?

In proportion to the reduced scope, less aviation allowances will be auctioned. The annual auction revenues for Member States are therefore expected to decrease by 39% to 47% (e.g. assuming a carbon price of €10, total revenues would go down from around €320 million to €120 to €150 million). The changes in the MRV may slightly increase administrative costs (as explained above).

Will there be other significant impacts?

The preferred hybrid option will eliminate some risks for competition distortions that would exist under other options. A level-playing field is ensured for all airlines. See section 5.2.2 of the IA report.

D. Follow up

When will the policy be reviewed? Maximum 4 lines

It will be important to closely follow the ICAO negotiations: Depending on the outcome of the 2016 ICAO Assembly, further adjustments to the EU ETS may become necessary to ensure a full transition to a global MBM in 2020. The Commission shall therefore report to the European Parliament and the Council in 2016, together with proposals as appropriate.

1. Procedural issues and consultation of interested parties

1.1. Impact assessment steering group (ISG)

Work on the impact assessment was carried out by an Inter-Service Steering Group (ISG) set up by DG CLIMA which met two times. The following Directorates-General (DGs) participated in the work of the group: Secretariat-General (SG), Legal Service (SJ), EEAS, DG ENTR, DG MOVE, and DG TRADE.

1.2. Consultation of the Impact Assessment Board (IAB)

The IAB gave an overall positive opinion with recommendations concerning an improved presentation of the gap in global emission coverage and further issues regarding the implementation of the EU ETS; a clearer description of the different scenarios following the 2013 Assembly of the International Civil Aviation Organisation (ICAO); a strengthened sensitivity analysis; a better presentation of the results; and an added explanation of the main concerns voiced by different stakeholder groups.

1.3. Consultation and expertise

1.1.1. External support

The underlying econometric modelling and analysis was carried out by Ricardo-AEA Ltd. Additional support in relation to small emitters was undertaken by a consortium of Price Waterhouse Coopers and CE Delft.

1.1.2. Stakeholder meetings

Aviation experts were consulted on the international developments with regard to market-based measures (MBMs) for aviation on 1 July 2013 (see Annex II for the minutes) and on 17 September 2013 (minutes to follow). The meetings took place in the presence of Member States within the framework of the European Environment Expert Group that has been extablished by the European Civil Aviation Conference. A stakeholder meeting with regard to simplifications for small emitters was held on 30 July 2013 (see Annex II for the minutes).

1.1.3. Public on-line consultation

An online public consultation was held from 21 June to 13 September 2013, i.e. 12 weeks. The public consultation was carried out using the “General principles and minimum standards for consultation of interested parties by the Commission”.

The public consultation confirms strong support for MBMs from public authorities, NGOs and the airlines. All respondents favour MBMs for the aviation sector, with one association opposing regional MBMs in advance of a global MBM. With regard to regional action, airlines emphasise administrative simplicity and political acceptability, as well as environmental effectiveness and avoiding discrimination on routes and between operators. Public authorities and NGOs emphasise covering meaningful emissions, administrative simplicity and political acceptability.

The results have been presented to the Impact Assessment Board at the meeting of 18 September 2013 and subsequently included in Annex III.

2. Problem definition

2.1. The problem

The EU is strongly committed to achieve the climate objective of limiting global average temperature increase to less than 2 degrees Celsius above pre-industrial levels. As the EU emissions will constitute a smaller share of global emissions in the future, multilateral efforts will become the most effective means to address climate change. As arguably strongest proponent of multilateral action, the EU has put international cooperation and global solution at the fore-front of its policy-making.

Science tells us that in order to have a likely chance to stay below 2° C, the growth of global GHG emissions will have to be reversed before 2020 and decline thereafter, reaching at least 50 % below 1990 levels by 2050. To this end, one of the headline targets of the Europe 2020 Strategy for smart, sustainable and inclusive growth is to reduce greenhouse gas emissions by at least 20% compared to 1990 levels. As part of the necessary economy-wide efforts, the limitation of greenhouse gas emissions from aviation is an essential contribution in line with this commitment.

1.1.4. Strong growth of emissions from aviation sector

According to the International Energy Agency, global CO2 emissions from civil aviation stood at 740 million tonnes per annum in 2010, amounting to 2.5% of global CO2 emissions. Aviation was also one of the fastest growing sources of greenhouse gas emissions (GHG) in the preceding decade.

Looking forward, the International Civil Aviation Organisation (ICAO) forecasts that by 2036 international aviation emissions will increase by between 155% and 300% compared to 2006, depending on the level of technological and operational improvements (see Figure 2‑1). The international aviation’s share of total CO2 emissions is projected to reach at least 4% of total emissions by 2050 without any further mitigation efforts.[1]

1.1.5. Limited technological possibilities for emission reductions in the aviation sector

In the short-term up to 2020, several technological measures or operational measures could achieve 10 to 15 % emissions reduction (e.g. through improved air traffic management and more efficient operation of the aircraft in the air and on the ground). In the longer term until 2025 and beyond, investment in new aircraft could reduce emissions by another 20 to 30%. Finally, the use of sustainable biofuels could be a further source for emission reductions; however considerable uncertainty exists over their availability and sustainability (see Annex IV for more details on technological and operational measures).

Even under the most optimistic scenario about the effectiveness of technological measures, aviation CO2 emissions in 2036 are still expected to be 2.5 times higher than 2006 emissions due to the forecast strong increase in demand for aviation. Although technological improvements and biofuels are highly important, they are not sufficient to limit the increase of aviation emissions. Furthermore, the economic viability of biofuels has not yet been proven.

The emissions growth forecasts are at odds with both the EU and US goals of stabilising international aviation emissions at or below 2005 levels by 2020, and the reduction goals in the International Civil Aviation Organization (ICAO) 2010 Assembly Resolution. The ICAO goals are for a global annual fuel efficiency improvement of 2% through to 2020 and an aspirational goal of 2% per annum from 2021 to 2050. The 2010 ICAO Assembly also agreed a medium term aspirational goal of maintaining global net CO2 emissions at 2020 levels, and cites the aviation industry target to halve emissions by 2050 compared to 2005 levels (endorsed by the International Air Transport Association (IATA)). In view of the strong emission growth under even the most optimistic scenarios[2] (see Figure 2-1), technological measures on their own are insufficient to stabilize emissions at 2020 levels or to even achieve a 50% reduction of aviation emissions in 2050 compared to 2005 levels.

Figure 2‑1 Global aviation CO2 emissions projections (in percentage relative to base year 2006)

Source: ICAO Global Aviation CO2 Emissions Projections to 2050

1.1.6. Insufficient uptake of market-based measures to achieve the aviation sector's emission reduction goals

As the technological abatement of emissions is more limited and more costly in the aviation sector than in other sectors, an economic rationale exists therefore to fund emission reductions outside the aviation sector.[3] The use market-based measures (MBM) enables the aviation sector to off-set its strong emission growth through the acquisition of emission units from other sectors. The aviation sector will therefore be able to contribute its fair share to global emission reductions without compromising growth. As abatement costs are lower in other sectors, MBMs are an effective means to reduce environmental costs for the aviation industry, whilst still incentivising the introduction of new technologies and energy-efficiency measures.

The suitability of MBMs for international aviation has long been recognised. ICAO endorsed the application of open emissions trading systems to aviation in 2004. More recently the aviation industry has urged ICAO to decide on the development of a global MBM (see also section 2.4.1). However, no multilateral agreement has been up to now reached by States working through ICAO to develop such a global MBM.

The EU led the way in implementing MBMs by including aviation activities in its Emission Trading System (EU ETS). The EU decided in 2008 to integrate aviation activities into the EU ETS and started the implementation in 2010. Despite the extensive public consultations prior to 2008, the integration of aviation into the EU ETS has had to face significant international opposition from airlines and other states (see section 2.3.2.). A number of states have opposed the EU ETS alleging that it would cover a too high share of international emissions and that the EU would have no competence to oblige their operators to participate in the EU ETS.

Irrespective of the international opposition, the EU ETS, although it delivers a significant contribution to the reduction of aviation emissions, will not be sufficient to stop the strong global growth of aviation emissions ahead. Indeed, the EU ETS only covers about 35 % of global emissions (i.e. emissions from domestic and international flights) and about 50 % of emissions from international aviation. Without further MBMs, not even the target of stabilisation at 2020 levels would be reached because 50 % of the emission growth would not be addressed (see Annex IV for more details on the "emission gap" with and without MBMs).

Therefore, even with the EU ETS in place, the problem of insufficient uptake of MBMs persists on a global level (see Figure 2‑2). This global "gap" in coverage exists because no other regions apart from the EU have implemented or plan to implement MBMs and there has also not yet been agreement for a single global MBM as proposed by the industry itself.

Figure 2‑2 Global emission "gap" with EU ETS in place (schematic view of development of CO2 emissions relative to base year 2005)

Based on David S. Lee (2013) Bridging the aviation CO2 emissions gap: why emissions trading is needed (see Annex IV)

2.2. Problem driver

The problem drivers for the strong emission growth are, apart from the limited technical possibilities for in-sector emission reductions, of political nature. The insufficient uptake of MBMs and the strong opposition against the EU ETS have been caused by the absence of a global political agreement: It has neither been possible up to now to establish a clear commitment to the development of global MBM at ICAO nor to find an agreement on generally accepted principles for the implementation of regional MBMs, such as the EU ETS.

The negotiations to develop and implement a single MBM, which would cover all global emissions from international aviation, have been complicated by the divergent views on how to reconcile the principle of non-discrimination in the Chicago Convention on International Civil Aviation (Article 11 - all regulations are to apply equally to aircraft of all countries, without distinction as to nationality) and the principle of common but differentiated responsibilities and respective capabilities of states (CBDR RC) under the UNFCCC. The spill-overs from the UNFCCC negotiations have complicated the ICAO negotiations.

Furthermore, there has been no agreement within ICAO on a framework that would facilitate the application of MBMs by states or regions. The EU ETS is consistent with the 15 principles for MBMs in the 2010 ICAO Resolution, but international agreement on the geographical scope of MBMs has yet to be found (i.e. to which extent a state or region can cover international flights under its own MBM). Furthermore, it has been claimed that non-discriminatory application of any national or regional MBM to an airline registered in another State should be dependent on permission of the states in which an airline is based. The EU does not accept the claim as having any basis in international law and which would make implementing an effective and non-discriminatory MBM impossible.

To overcome these political tensions and to work towards a global MBM, the EU has already sought to move forward multilateral action at ICAO (see section 2.4). The next ICAO Assembly of September 2013 is expected to agree on the development of a single global MBM, which should cover all emissions from international aviation from 2020 onwards, and a framework for regional and national MBMs – like the EU ETS – that should apply until 2020.

As stated in the "stop-the-clock" decision No. 377/2013/EC (see section 2.3.3), the EU will consider whether changes to the EU ETS for aviation are required to allow for an optimal interaction between the EU ETS and the 2013 ICAO Assembly outcome with a view to facilitate and to accelerate the implementation of MBMs on a global level.

To address the problem of the global "gap" in emission coverage, any amendments to the EU ETS for aviation should aim to further facilitate the transition to a global MBM and to remove the political obstacles at the international level without compromising on the environmental integrity and the principle of non-discrimination.

2.3. EU action in a difficult international environment

1.1.7. Integration of aviation into EU Emission Trading System (EU ETS)

In view of the 2004 ICAO Assembly's decision not to develop a single global MBM but to favour inclusion of aviation into open regional systems, the EU proposed in 2006 to integrate aviation into the EU ETS. Directive 2008/101/EC amended the EU ETS Directive 2003/87/EC and included aviation activities within the scope of the ETS:

- All Member states from the European Economic Area (EEA) – including Iceland, Norway, and Liechtenstein – participate in the EU ETS.

- Total emissions are covered from flights that depart and arrive at EEA aerodromes (hereafter "intra-EEA flights"), from flights that depart from EEA aerodromes to destinations in third countries, and from flights that arrive at an EEA aerodrome from third countries (the flights to and from third countries are hereafter referred to as "extra-EEA flights").

- The emission cap from 2013 onwards has been set at 95 % of the average historic aviation emissions for the period from 2004 to 2006.

- Aircraft operators have been obliged to start emissions reporting in 2010 and full compliance – including surrendering of allowances – in 2012.

The inclusion of aviation into the EU ETS was based on the 2006 Impact assessment[4] that covered in detail the environmental, economic, and social impacts. It was based on an extensive public consultation. It concluded that the broadest possible geographic scope of all departing and arriving flights would give the highest environmental benefits without neither significantly affecting the demand for aviation services nor the competitive position of individual airlines.

1.1.8. International reactions

The inclusion of aviation in the EU ETS led to unsuccessful legal challenge from US commercial airlines, as well as diplomatic objections from a number of countries including China, India, and the US.

· Legal challenge by US airlines

The Air Transport Association of America (ATA) and major US airlines challenged the legality of the EU ETS arguing, among others, that it would be contrary to customary international law to apply the EU ETS to those parts of a flight that took place outside the airspace of the EEA countries. The European Court of Justice (ECJ) rejected those claims and confirmed that the EU had the competence to extend the EU ETS to the full distance of flights which depart or arrive at EU airports[5] (see also Annex IX). Furthermore, the ECJ confirmed that the EU ETS was in line with the non-discrimination principle and did not constitute a tax in violation of the EU-US Open Skies Agreement, including provisions similar to those in the Chicago Convention.

· Joint declarations by opposing States ("coalition of unwilling")

Representatives from around 20 to 25 states – including Belarus, China, Cuba, India, Russia, and USA – signed declarations on 30 September 2011 in New Delhi and 23 February 2012 in Moscow opposing the EU ETS. They alleged that the EU ETS would be contrary to international law and should not apply to aircraft operators registered in their countries, and saying they would consider initiating proceedings under the Chicago Convention or barring the participation of aircraft operators in the EU ETS. On 2 November 2011, the ICAO Council endorsed a statement by 26 of its 36 Member States that had repeated parts of the New Delhi declaration.

· Non-compliance by most Chinese and Indian operators since 2011

Chinese mainland airlines and most Indian airlines have not complied with the EU ETS requirements. Claims have been made that the EU action to reduce emissions through the EU ETS is in violation of the UNFCCC's principle of common but differentiated responsibilities and respective capabilities (CBDRRC).

· US "Thune bill"

In 2012, the US Congress passed the Emissions Trading Scheme Prohibition Act ("Thune Bill") which would allow the US Administration, following public consultation, to issue an order that US-registered airlines should not comply with the EU ETS. No such order has been proposed so far. The bill also states that the US Administration should act to advance global action to tackle emissions from aviation.

1.1.9. "Stop-the-clock" decision No. 377/2013/EC

The EU has a strong history of multilateralism and has continuously sought to move forward the ICAO action on MBMs. To prepare for the 2013 ICAO Assembly Resolution with regard to MBMs, the ICAO Council decided on 9 November 2012 to set up the High-level Group on Climate Change (HGCC) that would develop guidance for the implementation of a single MBM covering all international aviation emissions (hereafter "global MBM") as well as for a framework for national and regional MBMs (hereafter "MBM Framework"). To encourage these positive developments at ICAO, the EU adopted the "stop-the-clock" decision to temporarily defer the enforcement of the EU ETS compliance obligations for flights to and from most third countries for 2012.

The EU "stopped the clock" in order to provide time for the 2013 ICAO Assembly to agree on a global MBM with a realistic timetable for further development and implementation, and the adoption of a framework for facilitating States' application of MBMs to international aviation pending the global measure's application. While many countries welcomed the "stop-the-clock" legislation, it raised complaints from EU airlines, in particular low cost carriers, claiming that it favoured airlines operating routes to third countries compared to airlines that operated flights mainly within Europe.

The vast majority of commercial operators – also from States whose representatives had previously signed declarations against the EU ETS – fully complied with their obligations for 2012 emissions. This was notably the case for the US where the US "Thune bill" was not put into effect and all US airlines complied with the "stop-the-clock" decision. China and India were the only two States from where no airline complied in 2012.

2.4. Recent developments in the run-up to the 2013 ICAO Assembly

The establishing of the HGCC in ICAO and the EU's "stop-the-clock" decision have created positive momentum for the 2013 ICAO Assembly to move forward on the development of a global MBM and an agreement on a MBM Framework which would apply until a global MBM will be implemented in 2020.

1.1.10. Global MBM

There is a broad agreement – including within the aviation industry – on the necessity and desirability of a global MBM to apply from 2020 in order to cap CO2 emissions.

· EU Proposal for roadmap to global MBM

EU Member States in the HGCC have proposed[6] that the 2013 ICAO Assembly should decide on a binding roadmap for the development of a global MBM: the work on the various design elements for a global MBM shall be completed by the next ICAO Assembly in 2016 and a global MBM would be implemented no later than by 2020.

It is important to note that this decision by the 2013 ICAO Assembly would only be the start of the negotiations on the key elements of a global MBM to be finally decided by the 2016 ICAO Assembly. Issues such as agreement on detailed architecture of the system; a common set of monitoring, reporting, and verification (MRV) standards; and the types of emissions units allowed into the system should also be developed as a matter of priority. The EU recognises that States have different circumstances and capabilities, and believes this can be taken into account in a non-discriminatory way, for example through phased-in route coverage and temporary exemption of certain routes.

· Proposal for global MBM by IATA

The International Air Transport Association's (IATA) Annual General Meeting on 3 June 2013 approved a resolution with an overwhelming majority in favour of a global market-based measure, albeit with opposition from Chinese and Indian airlines. IATA encourages governments to adopt, at the ICAO Assembly in September 2013, a commonly agreed, single global MBM to be applied from 2020 to offset the industry’s growth in emissions from then on, leading to emissions 50% below 2005 levels by 2050. The EU welcomes the industry’s support for action which contains a number of useful elements for the design of a global MBM (e.g. common MRV standards).

1.1.11. Framework for regional and national MBMs

The MBM Framework should provide guidance to ensure the consistent application of national and regional MBMs. In particular, the objective of a framework would be to avoid double counting emissions through different regional or national MBMs. Ideally, when a global MBM system is applied, the MBM Framework will no longer be needed.

· "Mutual agreement"

Some states still claim that – regardless of the establishment of a framework – any MBM must be subject to permission from states whose airlines fly in States applying an MBM. However, the very reason for having a MBM Framework is to enable some meaningful action to take place now, to prevent a fragmented outcome based on numerous different bilateral agreements, and to encourage action beyond what is already catered for by the existing international agreements such as the Chicago Convention. The EU and a considerable number of other States therefore do not agree with this claim.

· Geographic scope of a regional or national MBM

Another key issue relates to the coverage of international aviation emissions under a national or regional MBM. In the context of a MBM framework, the EU would have favoured a departing-flights approach which, as shown by a submission by EU Member States to the HGCC[7], would enable international aviation emission to be comprehensively addressed if and when all States act. Compared to the full scope EU ETS, emissions from all flights that depart from and arrive at an EEA airport would remain fully covered together with emissions from departing flights to non-EEA countries. The flights arriving in the EEA from 3rd countries would consequently be covered by the state of origin.

However, a large number of ICAO Member states oppose the departing-flights approach for a MBM framework because it would include emissions over the territory of other states (while not ruling it out for administration of a global MBM). Many ICAO Member states would prefer a framework to limit a regional MBM to emissions within the region in question. In a spirit of compromise and provided the level of ambition on the global MBM is high and the 2013 Assembly Resolution does not purport to require "mutual agreement" for non-discriminatory coverage of flights, the EU Member States would be ready to accept the following approach in advance of the application of the global MBM in 2020:

- Full coverage of emissions from all flights that arrive and depart within a group of States, plus

- A proportion of the emissions from flights that arrive from or depart to third countries outside the group of States, in relation to the total distance travelled across areas associated with the group of States (e.g. for a flight between Paris and Beijing, the EU ETS would cover the distance over EEA states to and from the border with a third country, in this case Russia).

The ICAO Council meeting of 4 September 2013 adopted a proposal for the MBM Framework along these lines for submission to the Assembly. Furthermore, the ICAO Council also proposed de minimis exemptions for developing countries to take account of special circumstances and respective capabilities (see Annex X).

2.5. Outcome of the 2013 ICAO Assembly

The ICAO Assembly adopted the proposed roadmap to a global MBM in 2020. However, no consensus could be found on guidance for regional MBMs to be applied in the meantime. The MBM Framework submitted by the ICAO Council was not adopted but a text proposed by Russia stating that "mutual agreement" would be needed for the implementation of national and regional MBMs. As at previous ICAO Assemblies, the EU Member States – together with other major aviation States – rejected this claim and made reservation with regard to the requirement of "mutual agreement". See Annex XI for the final resolution text.

2.6. Further issues regarding the implementation of the EU ETS for aviation

The EU ETS Directive foresees in Article 30 (4) that the Commission shall review the functioning of the Directive and give consideration to on-going improvements and refinements. The Commission has launched in early 2013 a study to investigate the costs and benefits of the inclusion of small emitters in the EU ETS.

Currently, the EU ETS covers about 300 "large" aircraft operators – with annual emissions higher than 25,000 tons CO2 – who are responsible for about 99 % of emissions and around 2600 non-commercial small emitters[8] (e.g. business jets) who are responsible for only 1 % of emissions.[9]

The study by PWC et al. shows that the obligations with regard to Monitoring, Reporting, and Verification (MRV) generate relatively higher administrative costs for small than large operators (see explanations in Annex II). Compared to the level of EU ETS revenues raised from a small emitter, the administrative cost can be up to 4 times higher.

In view of the low level of emissions compared to the high administrative burden, the administrative efficiency of the inclusion of non-commercial small emitters into the EU ETS can be questioned.

Concerning the transposition of the EU ETS in national law, the Commission is currently carrying out a study on the implementation by the different Member States.

1.2. EU's right to act

The EU ETS Directive 2003/87/EU, as amended by Directive 2008/101/EC, is based on Article 192(1) of the Treaty on the Functioning of the European Union.

The Commission will have to report on the results achieved at the 2013 ICAO Assembly to European Parliament and Council (according to Article 5 of the "stop-the-clock" decision. Furthermore, the "stop-the-clock" decision proposes in its recital 10 that the EU could consider further steps to facilitate the optimal interaction between the outcome of the 2013 ICAO Assembly and the EU ETS.

2.8. Baseline scenario – full-scope EU ETS

The full scope EU ETS for aviation is the baseline against which the other policy options will be assessed. The key features of the EU ETS that are applicable for aviation from 2013 as specified in Directive 2003/87/EC and amended by Directive 2008/101/EC are summarised below.

Table 2‑1 Key features of the EU ETS for aviation

EU ETS feature || Description

Geographical coverage || European Economic Area (EEA) which includes the 28 EU Member States, Iceland, Norway and Liechtenstein). Territories of Member States are treated as follows: - The 13 territories that are part of the EU are included in the EU ETS for aviation: Guadeloupe, French Guiana, Martinique, Reunion, the Azores, Madeira, the Canary Islands, Aland Islands, Akrotiri, Dhekelia, Ceuta, Melilla and Gibraltar - All other territories of Member States that are not part of the EU are outside of the scope of EU ETS for aviation (e.g. Greenland or Channel Islands)

Flights covered || All flights landing at or departing from EEA airports.

Emissions coverage || All CO2 emissions released during the whole flight.

Open or closed system || Aviation is regulated under the same rules as the general EU ETS i.e. as an open system, but allowances are specific to the aviation sector (i.e. they cannot be used by other EU ETS operators).

Quantity of allowances || § Total number of allowances (cap): § Free allowances: § Allowances to be auctioned: § Special reserve: || 210,349,264 per annum from 2013 172,486,396 per annum from 2013 31,552,390 per annum from 2013 50,483,824

Allocation of allowances || 82% of allowances are allocated for free to operator based on a benchmark in line with their activity levels in 2010. In addition, 15% of allowances can be purchased through auctions. The special reserve shall ensure access to the market for new aircraft operators and to assist aircraft operators which increase sharply the number of tonne-kilometres that they perform.

International credits || Aircraft operators may use Certified Emission Reductions and Emission Reduction Units for up to 1.5 % of the number of allowances they are required to surrender.

Exclusions || Commercial airlines that operate fewer than 243 flights per period for three consecutive four-month periods or flights with total annual emissions lower than 10,000 tonnes per year. Other types of special purpose aircrafts are also excluded (e.g. military flights, medical / rescue / scientific research flights or flights performed in the framework of public service obligations on routes within outermost regions or on routes where the capacity offered does not exceed 30,000 seats per year). A full list is in Annex I to the Directive.

MRV approach || CO2 emissions are based on applying an agreed emission factor (tCO2/km) to fuel consumption measured by considering tank levels at specific points in time as well as fuel uplift at the airport. A simplified approach is available for small emitters with emissions estimated using a standardised distance flown based on Great Circle Distance.

Regarding the environmental impact, the full-scope EU ETS puts a cap of around 210 million tons CO2 emissions on flights to and from the EEA. As the technological and operational measures are not sufficient to bring the aviation emissions below this level, the aviation sector needs to acquire general EU allowances and international credits to fulfil its emission target in the EU ETS. The aviation sector is expected to be short of 20 to 30 million allowances in 2013 under the full-scope EU ETS. Depending on the assumed growth of aviation sector, the shortage is projected to be in a range of 40 million to 140 million allowances by 2020 (see section 5.1.3).

As shown by the 2006 Impact assessment and confirmed by this study, the full-scope EU ETS does not have a significant negative impact on the aviation sector's competitiveness: According to the updated calculations, the EU ETS is expected to slightly decrease demand for aviation services in the magnitude of 0.12% by 2016 and 0.86% by 2030.

Empirical evidence on ticket prices for consumers confirms the minor economic impact: Based on a sample of EU and US airlines, the EU ETS seems to lead to price increases between 0.43 % and 0.94 % for passenger tickets (excluding taxes and charges).[10] Ryanair has been one of the most transparent airlines by publishing figures of the cost to passengers of climate change measures. These are cited as being €0.25 for passengers flying from continental Europe[11], and £0.25 for passengers buying tickets in the UK. Concerning transatlantic flights, US airlines have included fees around $3 to cover for EU ETS costs in their ticket prices.[12] This price top-up due to the EU ETS is much lower than most airport taxes and charges (e.g. US charges of $16 for passengers to arrive and to depart).

Even though the EU ETS only puts small costs on the aircraft operators and the ECJ has unequivocally confirmed the legality of the coverage of all departing and arriving flights, it cannot be expected that international opposition would cease if the EU ETS were continued in its full scope. In particular, Indian and Chinese operators would probably continue their non-compliance with the EU ETS and the US government would be pushed to activate the "Thune bill". Furthermore, a full coverage of departing and arriving flights is currently not among the options that are considered for the 2013 ICAO Assembly. An application of the EU ETS in its full scope from 2013 onwards may therefore risk obstructing future ICAO negotiations on the development and implementation of MBMs (in particular if the 2013 ICAO Assembly endorses a MBM Framework with a reduced geographic scope).

Negative spill-over to sectors outside aviation have not been observed up to now. However, if the EU ETS were continued and the US activated the "Thune bill", negative impacts on the on-going trade negotiations with the US would seem likely.

3. Objectives

3.1. General objectives

The general objective – to ensure the contribution of the aviation sector to reducing the impacts of climate change – has not changed since the integration of aviation into the EU ETS through Directive 2008/101/EC. Furthermore, the EU continues to strive for achieving effective multilateral solutions to address climate change.

3.2. Specific objectives

The specific objectives are twofold with regard to amendments to the EU ETS for aviation following the 2013 ICAO Assembly:

- Facilitation of the development and implementation by 2020 of a global MBM covering all emissions from international aviation;

- Continuation of the EU ETS to cover emissions from all flights departing and arriving in the EEA, pending the implementation of a global MBM in 2020.

The results of the public consultation confirm that all stakeholders – industry, public authorities, and NGOs – strongly agree to the use of MBMs in the aviation sector.

3.3. Operational objectives

As stated in the "stop-the-clock" decision, in case that the 2013 ICAO Assembly achieves a meaningful outcome, the EU will consider whether changes to the EU ETS are required to allow for an optimal interaction between the EU ETS and the ICAO Assembly outcome. Any amendments of the EU ETS after the 2013 ICAO Assembly should deliver on the following operational objectives:

- Maintain environmental effectiveness (compared to emission coverage under full-scope EU ETS)

- Maintain competitiveness of aviation sector (compared to EU ETS costs for airlines and level of demand under full-scope EU ETS)

- Maintain level playing field in the internal market for aviation

- Limit additional administrative costs for aircraft operators and Member States' administrations

- Ensure coherence with international law and with non-binding ICAO Assembly resolutions, insofar as consistent with EU statements on such resolutions.

The environmental effectiveness, low administrative costs, and political acceptability are the main considerations that stakeholders have put forward in the public consultation.

4. Policy options

To respond to the positive outcome of the 2013 ICAO Assembly with regard to the devleopment of a global MBM and to provide further positive momentum to this process, the EU can consider further steps to adjust its EU ETS:

In particular, the draft text on the MBM Framework as poposed by the ICAO Council of 4 September (see section 2.4.2), but finally not adopted by the ICAO Assembly, can serve as a base for further policy development: It will be possible to maintain the full coverage of emissions from intra-EEA flights but the coverage of emissions from extra-EEA flights will have to be cut back in proportion the distance travelled within the EEA (hereafter "hybrid option"). The reduced coverage will be effective until the implementation of the global MBM in 2020. If the 2016 ICAO Assembly fails to agree on a global MBM the EU ETS will return back to its full scope.

Besides the hybrid option, alternative options have been discussed to adjust the EU ETS coverage of extra-EEA flights :

- Departing-flights option: All intra-EEA flights are covered but only the departing flights to third countries. This approach was the EU's initial proposition for the geographic scope of the MBM Framework but rejected by a large number of ICAO Member states (see section 2.4.2).

- 50/50 option: As shown by the public consultation, the majority of environmental NGOs have also proposed to limit the EU ETS coverage to 50 % of the departing and arriving flights for extra-EEA flights. However, this option has never been discussed at ICAO.

- A general exemption of extra-EEA flights (similar to the "stop-the-clock" decision) would only leave intra-EEA flights covered.

- Upstream option: A switch to an upstream system would make fuel suppliers the compliance entity instead of aircraft operators. This option would have similar emission coverage to the departing-flights option because fuel suppliers would surrender allowances corresponding to fuel sold to EEA airports.

Any changes to the EU ETS would not be expected to prejudge the development of the global MBM because regional MBMs and development of a global MBM are considered as two different tracks under the ICAO negotiations. Only changes with regard to exemptions for developing states may risk setting a precedent for the global MBM.

The different options will be explained in more detail in the following sub-sections:

4.1. No policy change – full-scope EU ETS

In case that the EU will not decide to amend the EU ETS in response to the 2013 ICAO Assembly, the EU ETS will apply in its full scope from 2013 onwards. This means that aircraft operators remain responsible for emissions for all flights departing from or arriving at EEA airports.

4.2. Hybrid option

It will be possible to maintain the full coverage of emissions from intra-EEA flights but the coverage of emissions from extra-EEA flights will have to be cut back in proportion the distance travelled within the EEA. While the emissions of a flight between London and Stockholm are fully covered, but the emissions of a flight between London and Dubai are only covered in proportion to the distance travelled within the EEA.

To determine distances travelled within the EEA, the land borders to non-EEA countries are clearly defined. However, various approaches exist with regard to the coverage of distances travelled over the sea. The impact of the territorial sea boundary, which extends to 12 nautical miles (nm), and of the exclusive economic zone (EEZ), which extends to 200 nm, will be assessed in more detail. Other boundaries could be considered[13], although third country concerns might be anticipated if the coverage included areas that third countries are associated with.

Figure 4‑1 Hybrid option coverage (12 nm and 200 nm being assessed)

The emission coverage would be adjusted on the routes to non-EEA destinations in proportion to the distance travelled up to the defined area borders. The route-based approach of the EU ETS is therefore maintained and over-flights – which do not depart or arrive at EEA airports – are consequently not covered. This approach is therefore not an "airspace" approach, which has been recognized as impracticable by ICAO, but an approximated scale-down of the EU ETS coverage which corresponds to the distance travelled within the EEA on routes to non-EEA countries. The amount of allowances to be auctioned and free allowances has to be adjusted accordingly.

With regard to MRV, two options will be considered:

- On-board measurement of fuel consumption: Aircraft operators would have to use on-board equipment to report fuel consumption.

- Approximated fuel consumption: Fuel consumption for the full flight would be measured in the same way as it has been done since 2010 but compliance obligations for extra-EEA flights would be limited based on a distance-factor (i.e. the % of the total flight which takes place within the EEA).

4.3. Alternative options

1.2.1. Departing-flights option

As explained above, the EU members of the HGCC have put forward the departing-flights option as the most practicable form for a regional or national MBM[14]. However, this option has not been considered further by the ICAO Council due to the strong opposition by other States. Applied to the EU ETS, all emissions from intra-EEA flights and from departing flights to third countries are covered while emissions from incoming flights from third countries are excluded.

The total cap as well as the quantity of the free allowances and the allowances to be auctioned is adjusted in proportion to the emissions coverage. The MRV approach is the same as under the full scope EU ETS.

1.2.2. 50/50 option

Environmental NGOs have proposed to share the responsibility for emissions coverage for departing and arriving flights by 50/50 between the State of arrival and the State of departure. They consider that the concept of states sharing responsibility for emission reductions may be more attractive to those countries that have opposed the EU ETS than covering the whole trajectory of a flight as under the full-scope EU ETS or the departing flight option.

The emission coverage of this option is broadly similar to the departing-flight option, so the economic and environmental impacts will be the same. The 50/50 option does therefore not need to be modelled separately but the results from the departing-flights option will be relevant. Furthermore, it should be noted that third countries have not raised the 50/50 option in the HGCC or in other ICAO fora. Opponents to the EU ETS would bring forward the same sovereignty objections as with the departing-flights option.

The MRV approach would be similar to the full-scope EU ETS and the departing-flights option.

1.2.3. Coverage limited to flights within EEA and closely connected areas (as under the "stop-the-clock" decision)

The "stop-the-clock" decision provides for the most significant cut-back in coverage of extra-EEA flights. As explained in section 2.3.3, the "stop-the-clock" decision was adopted as a one-year measure to facilitate a meaningful outcome at the 2013 ICAO Assembly. The effective coverage of the EU ETS was in 2012 limited to intra-EEA flights and flights between aerodromes in the EEA and closely connected or associated areas such as Switzerland, Croatia and EEA Member states' dependencies and territories. The enforcement of compliance obligations was deferred for all other flights to non-EEA destinations.

The amounts of allowances to be auctioned and free allowances were adjusted accordingly. The same MRV approach as under the full-scope EU ETS was used.

1.2.4. Upstream option

Under this option, aviation fuel suppliers will become the compliance entity under the EU-ETS, instead of aircraft operators. This is the same approach as the Waxman-Markey bill that passed the US House of Representatives (H.R. 2454[15]) but was finally not adopted in the US Senate, which would have covered fuel supply to international flights on a non-discriminatory basis.

This option will have a similar coverage to the departing-flights option because fuel suppliers will surrender allowances corresponding to fuel sold to EEA airports. However, it will have different economic impacts because, with a view to avoid windfall profits for the fuel suppliers, free allowances are not given out but all allowances are auctioned. As several studies[16] have discussed, the pricing behaviour on energy markets may facilitate a full pass-through of the EU ETS costs and consequently lead to windfall profits for those suppliers who have received free allowances.

The upstream option will therefore lead to higher fuel prices for the airlines that are eventually passed on through higher passenger and cargo prices. To counter these price increases, it would still be possible to continue the allocation of free allowances to the airlines. The upstream option would then not only have the same environmental but also the same economic effects as the departing-flights or 50/50 option.

As explained in detail in section 5.4.4, the upstream option would require the most significant changes to the MRV system.

4.4. Cross-cutting simplifications to MRV and registry

As explained in section 2.6, the MRV costs are strongly driven by the high number of small aircraft operators included in the EU ETS. There are three main options identified which could further simplify MRV for small emitters:

- Possible introduction of de-minimis threshold for non-commercial operators, to remove any obligations for small emitters below this threshold.

- Streamlining of administrative processes by allowing Member States to apply simplified procedures for small emitters (e.g. removing the requirement for independent verification for those small emitters who are using the Eurocontrol ETS Support Facility combined with either credit card payment or CRCO-billing);

- MRV compliance could be performed centrally by one representative or consultant for a large group of small aircraft operators;

Such simplifications would reduce the administrative requirements for aircraft operators as well as for national administrations und all options described above.

Performing the MRV compliance centrally by one representative or consultant for a large group of small aircraft operators will not be considered further as this would require not only changes to the legislation and the reporting templates, but would mean that aircraft operators could indirectly change their administering Member State by choosing the representative/consultant.

The first two options can also be used in a complementary way (e.g. to exempt small emitters from EU ETS up to a certain threshold and to allow them to use simplified administrative procedures above this threshold).

5. Assessment of impacts

The quantitative assessment of the impacts is based on the AERO Modelling System (AERO-MS)[17]. The AERO-MS model is highly relevant to this project: it was developed as a tool for evaluating economic, regulatory, operational, technical and market-based measures to reduce the impacts of aviation on the atmosphere. It has already been applied for the initial impact assessment concerning the integration of aviation into the EU ETS in 2006 and has also been used to the analysis of policies at ICAO. A key aspect of the AERO-MS method is that it models the effects of policies on supply-side costs and, as they are passed through, on demand for air travel, in a feedback approach. As a result, it generates a balanced view of the effects of policies on economics and the environment. The methodology is explained in more detail in Annex V.

5.1. Environmental impacts

The most important environmental impacts from the options relate to CO2 emissions as the reduction of CO2 emissions is the driving objective of public intervention. Impacts on NOx have also been analysed and are reported in Annex IV.

1.2.5. Emissions’ coverage of policy options compared to the full EU ETS

The effectiveness of the options is measured in terms of their emissions coverage compared to the full-scope EU ETS. This is presented in Table 5‑1 as percentages of the EU ETS emissions covered by each option, by world region for 2020. Figures for 2012, 2016 and 2030 are provided in Annex IV. The percentages are related to the flights to and from a certain world region.

Table 5‑1 Percentage of emissions covered in 2020 compared to full-scope EU ETS

Departure / arrival region || Departing Flights || Hybrid – 200nm || Hybrid – 12nm || "Stop-the-Clock"

EEA || 100.0% || 100.0% || 100.0% || 100.0%

Africa || 50.1% || 37.6% || 22.5% || 0.0%

Europe (non-EEA) || 49.4% || 72.3% || 54.4% || 0.0%

Far East || 51.1% || 19.3% || 14.8% || 0.0%

Middle America || 49.4% || 15.4% || 7.0% || 0.0%

Middle East || 50.0% || 53.6% || 31.0% || 0.0%

North America || 48.1% || 20.9% || 9.0% || 0.0%

South America || 49.0% || 15.2% || 7.8% || 0.0%

Total || 62.4% || 46.5% || 38.5% || 25.3%

All options fully cover intra-EEA flights. As the departing-flights option covers 50% of emissions from extra-EEA flights and maintains a full coverage of all intra-EEA flights, it will still cover 63 % of emissions compared to the full-scope EU ETS. The upstream and 50/50 options would achieve the same coverage.

The hybrid-options reach coverage between 38.5% (for 12nm) and 46.5% (for 200nm) of the full-scope EU ETS. Both options cover a larger proportion of emissions from shorter extra-EEA flights (e.g. to the Middle East and the rest of Europe) than longer extra-EEA flights (e.g. to South East Asia or the Americas). For instance, the hybrid option with a border of 200nm would cover less than half the emissions from and to North America compared to the departing-flights option. As the "stop-the-clock" option only covers intra-EEA flights and flights to and from closely connected areas but not flights to other non-EEA countries, it only achieves 26% of the full-scope EU ETS’ emissions coverage.

It is important to note that the emission coverage under the alternative options is reduced over time by 2 to 5 percentage points compared to the full-scope EU ETS: The sharpest drop is recorded by "stop-the-clock" option with a reduction from 27 % in 2012 to 22 % in 2030, reflecting the role of extra-EEA travel in driving emissions in the future. The departing-flights option, which covers the highest share of extra-EEA traffic, would only experience a drop of 2 percentage points from 63 % in 2012 to 61 % in 2030 (see Annex IV).

As mentioned earlier, the model is based on the policy options applied to EEA countries. However, there is consideration of full including Switzerland in the EU ETS[18] for 2016 and it is worth considering the impact it would have on the effectiveness of the policies. The full inclusion of Switzerland would increase emissions coverage by 2% under the full-scope EU ETS to around 0.5% for the hybrid options.

1.2.6. Increase in CO2 aviation emissions (in-sector reductions)

As the coverage and consequently the EU ETS costs are reduced for the extra-EEA flights, airlines will have less incentive to curtail their activity and CO2 emissions will therefore be higher than under the full scope EU ETS. The following table shows the relative changes in CO2 emissions compared to the emissions under the full-scope EU ETS. The absolute numbers for the reported change in emitted CO2 are in a range of less than 10 million tons.

Table 5‑2 Change in emitted CO2 compared to full-scope EU ETS

|| 2016 || 2020 || 2030

Hybrid (12nm) || +0.24% || +0.44% || +1.77%

Hybrid (200nm) || +0.21% || +0.39% || +1.54%

Departing Flights || +0.15% || +0.27% || +1.07%

"Stop the Clock" || +0.29% || +0.52% || +2.12%

Upstream || -0.18% || -0.18% || +0.19%

The departing-flights, "stop-the-clock", and hybrid options to higher CO2 emissions compared to the full-scope EU ETS. In line with the level of emission coverage under the different options, the departing-flights option only records a 1% rise by 2030 while the "stop-the-clock" option has the highest increase of 2%.

The upstream option will lead first to a decrease in CO2 emission because the cancellation of free allowances imposes higher costs on airlines than the full-scope EU ETS. However, in the longer term, emissions will also increase because of the lower coverage on extra-EEA routes.

1.2.7. Decrease in demand for general EU ETS allowances and international credits (out-of-sector reductions)

As already discussed in section 2.8, the aviation sector needs to acquire general EU allowances and international credits to comply with the emission cap under the full-scope EU ETS. The technological and operational measures are not sufficient to cancel out the strong growth of the aviation sector. The aviation sector will remain a buyer of general EU allowances and international credits under all options but the demand will decrease in line with the reduced coverage. This means that relative to the full-scope EU ETS, the demand for general EU allowances and international credits is reduced by between 35 % and 75 % depending on the option chosen.

Table 5‑3 Estimated demand for general EU allowances from the aviation sector in 2020, in absolute terms (mt CO2) and relative to full-scope EU ETS

|| Demand for general EU allowances and international credits (= emissions over cap) || Demand for general EU allowances and international credits relative to full-scope EU ETS

|| High estimate (based on AERO-MS) || Low estimate (based on PRIMES) ||

Full-scope EU ETS || 136.4 || 36.9 || 100%

Departing Flights || 86.1 || 23.2 || 63%

Upstream || 85.0 || 22.9 || 62%

Hybrid (200nm) || 69.1 || 17.3 || 47%

Hybrid (12nm) || 53.7 || 14.4 || 39%

"Stop the Clock" || 33.6 || 9.2 || 25%

The AERO-MS is based on the traffic data projections from the CAEP-ICAO studies (see also Annex V). While this data is commonly used for studies in the aviation sector, it does not take account of the recent economic downturn. It may therefore overestimate the emission growth in the short-term (e.g. up to 2020) while still providing correct estimates for the long-term growth. Depending on how quickly the EU economy will pick up again, the demand from the aviation sector for EU allowances may therefore be lower in the short-term than projected by AERO MS. To have a more conservative estimate, the shortfall for the aviation sector has also been estimated based on emission growth projections for aviation extrapolated from the PRIMES model. Contrary to the AERO-MS, which assumes an annual growth rate of 5.4%, the PRIMES model is based on a significantly lower growth rate of 1.1% for the period up to 2020. Due to the significant difference in assumed growth rates, the absolute values for the shortfall in 2020 are between 3.5 and 4 times higher from the AERO MS than the PRIMES model.

Finally, it is important to note that a reduction in demand due to lower coverage under the hybrid and alternative options will further increase the surplus on the market for general EU allowances. In case that aviation emissions will grow strongly (as predicted by AERO MS), the cumulated demand from the aviation sector under full-scope coverage would be estimated at around 600 million general EU allowances for the period from 2013 to 2020. A reduction in the coverage down to 25 % to 63 % - depending on the option chosen – would lower cumulated demand for general EU allowance from 600 million to around 150 to 400 million for the period from 2013 to 2020 and increase the surplus accordingly. Based on a low-growth scenario (following the PRIMES model), the cumulated demand from the aviation sector would be reduced from around 230 million to around 60 to 145 million for the period from 2013 to 2020 and have a less significant impact on the surplus of general EU allowances.

5.2. Economic impacts

Aviation plays a central role in the EEA and global economies both as a sector which creates value and employment and as a support service which enables trade in other sectors. A change in the cost of air transport may therefore have repercussions on a range of economic agents.

1.2.8. Impacts on airlines’ competitiveness

The EU ETS has the effect to increase the competitiveness of fuel-efficient carriers compared to their competitors. Operational measures and investments to increase full efficiency are rewarded through lower EU ETS costs. However, as aviation is an essential mode of transport, attention must also be paid to its overall competitiveness of the sector. The reduction of the EU ETS scope will reduce the competitive advantage of the more fuel-efficient operators but increase the overall competitiveness of the sector through lower costs and a corresponding increase in demand.

· Impact on costs

The requirement to reduce emissions placed on the aviation industry by the EU ETS and the policy options entails compliance costs for operators. Airlines will be required to purchase allowances (through auctions or on the secondary market) or international credits and meet the MRV obligations.

The cost impact of the policy options is modelled by applying the cost of acquired allowances (i.e. auctioned allowances, general allowances, and international credits) as an additional fuel cost for the aircraft operators. The average EU ETS costs is calculated off model based on the required number of emission allowances (which equals emissions less free allowances) and the prices for EU allowances (as shown in Table 5‑4) and international credits . The number of allowances required on a route is adjusted in proportion to the reduced coverage under the different options in comparison to the full-scope EU ETS. The average EU ETS costs are then integrated into AERO-MS as a mark-up on fuel prices.

Table 5‑4 Price assumptions for EU allowances (€)

|| 2016 || 2020 || 2030

EU ETS || 6 || 10 || 35

The absolute level of EU ETS costs will be lowered in proportion to each option's reduced coverage (e.g. up to 61.5 % of the hybrid options). As Annex VI show e.g. for 2020, the absolute level of EU ETS costs would be reduced from estimated € 1 633 million for the full-scope EU ETS to € 1 025 million for the departing-flights option and to around € 700 million for the hybrid options. The "stop-the-clock" would in line with its reduced coverage of only 25 % cut the EU ETS costs down to around € 400 million.

Table 5‑5 shows these reductions in percentage of total costs and over time: Due to the minor share of EU ETS costs in total costs, the substantial reductions in absolute levels will only lead to minor relative changes in total costs in the range of -0.01 % to -0.15 %.[19]

Table 5‑5 Aggregated cost impacts compared to full-scope EU ETS (% change)

Impact on total costs || 2016 || 2020 || 2030

Hybrid 12nm || -0.01% || -0.03% || -0.13%

Hybrid 200nm || -0.01% || -0.02% || -0.11%

Departing flights || -0.01% || -0.01% || -0.07%

"Stop-the-clock" || -0.02% || -0.03% || -0.15%

Upstream || 0.01% || 0.01% || 0%

· Impact on prices and demand

The impact on the price for passenger tickets and freight rates will depend on the extent of cost pass-through in the aviation sectors. Some commentators[20] have suggested that the airlines would increase prices in line with their marginal EU ETS costs and consequently benefit from a windfall profit in proportion to the free allowances.

However, the research on cost pass-through rates has up to now focused on energy-intensive industries.[21] The market structure and the pricing behaviour in the aviation sector may be quite different from these product markets. In particular, the price pressure from low-cost airlines may not allow all operators to fully pass on costs. The empirical evidence[22] on the announced price top-ups to cover EU ETS also suggests that the airlines would pass on their incurred EU ETS costs only and consumer benefit from the free allowances.

To not overestimate the effect of reduced EU ETS coverage on demand, it is therefore assumed that prices are reduced in proportion to the reductions in incurred EU ETS costs (i.e. expenses for acquired allowances and international credits).

According to the AERO-MS estimates, a reduction of the EU ETS coverage for extra-EEA flights will result in a drop in average ticket prices for economy seats (excluding taxes and charges) of -1.1% to -0.1% compared to the full-scope EU ETS in 2020, depending on the remaining coverage on the routes to non-EEA destinations. The prices for intra-EEA traffic will remain unaffected except for the upstream option which will increase prices for intra-EEA flights.

The reduced ticket prices will increase passenger demand between 0.14% and 2.04% for extra-EEA flights in the period between 2016 and 2030, as summarised in Table 5‑6.

Table 5‑6 Change in passenger demand for extra-EEA flights (% change compared to full-scope EU ETS)

|| 2016 || 2020 || 2030

Hybrid 12nm || 0.23% || 0.43% || 1.72%

Hybrid 200nm || 0.21% || 0.38% || 1.51%

Departing flights || 0.14% || 0.25% || 1.01%

"Stop-the-clock" || 0.28% || 0.51% || 2.04%

Upstream || -0.07% || -0.04% || 0.41%

The freight rates will also be lower than under the full scope, experiencing a reduction between -1.8% to -0.1%, depending on the coverage of the routes to the different non-EEA destinations. If this decrease in freight rates is passed down the supply chain, the price of some consumer products may also marginally decrease depending on pass-through behaviour by manufacturers and retailers.

The reduced freight rates will increase cargo demand between 0.29% and 3.45% for extra-EEA flights in the period between 2016 and 2030, as shown in Table 5‑7.

Table 5‑7 Change in extra-EEA cargo demand (% compared to full-scope EU ETS)

|| 2016 || 2020 || 2030

Hybrid 12nm || 0.41% || 0.74% || 2.87%

Hybrid 200nm || 0.35% || 0.64% || 2.47%

Departing flights || 0.29% || 0.51% || 1.97%

"Stop-the-clock" || 0.49% || 0.88% || 3.45%

Upstream || 0.01% || 0.13% || 1.16%

A reduced coverage will therefore lead to an increase in passenger and cargo traffic on extra-EEA routes. However, the overall aggregated impact of the EU ETS – whether in full or reduced scope – will remain small compared to other cost drivers (e.g. fuel prices) or macro-economic drivers (GDP and income growth) that have a much more significant impact on the aviation sector.

The low impact of the EU ETS is also confirmed by a sensitivity analysis with regard to the level of the price of EU allowances. Even if the assumed prices for the EU allowances were increased by 50 % (e.g. € 15 for 2016 and € 70 for 2030 instead of the prices in Table 5‑4) the changes in demand would remain small compared to full scope. The demand increase for the hybrid option (for 200 nm) would go down from 0.38 % to 0.23 % in 2020 and from 1.51 % to 0.98 % in 2030.

1.2.9. Impacts on level playing field for competition

Competition distortion occurs when a policy applies dissimilar conditions to different trading parties on equivalent transactions. The EU ETS is designed to be neutral with regard to competition: it should not favour certain types of operators (e.g. based on their nationality, their network size, or any other characteristics) and maintain a level playing field.

At the international level, the Chicago Convention (Article 11), Open Skies Agreement between the US and Europe (Article 2) and a number of bilateral Air Service Agreements (ASA) build on the non-discrimination principle to avoid distortions of competition through favouring national operators over foreign operators.

· Competition on direct city-pair routes

City- or airport-pairs are usually taken as the relevant market definition to explore competition impacts because of the absence of widespread demand-side substitution[23], i.e. if the price of travel between Brussels and New York changes, it will not significantly affect demand for flights between Brussels and Miami, although this can vary depending on routes, as well as purpose and direction of travel.

In the European Court of Justice (ECJ) Case 366/10 Air Transport Association of America and Others, the ECJ confirmed that a public measure – like the EU ETS – does not distort competition in favour of certain operators if it is equally applied to all operators active on a certain route. The principle of non-discrimination, as contained in the Chicago Convention, the Open Skies Agreement and the bilateral ASAs, is therefore not violated by the EU ETS.

As all policy options continue to apply uniformly to all operators – irrespective of their nationality or any other characteristics – on a given city-pair, they would remain in line with the principle of non-discrimination and allow operators to compete fairly.

· Competition with one-stop services

In certain cases, one-stop services may be included besides non-stop services in the same relevant market because the connecting one-stop services offer competitive alternative to non-stop carriers in city-pair markets. Depending on the city-pair, a one-stop service may be a suitable alternative for non-premium passengers in long-haul markets where the passengers may be willing to accept a longer time in transit to obtain a lower fare. This approach will be less attractive to business travellers.

As all policy options fully cover intra-EEA flights, possible competition distortions are avoided. As the policy options - depending on different geographical scopes - may not cover non-stop services in the same way as one-stop services, there could be some potential for distortion through the use of hubs outside the EEA in order to limit the quantity of emissions covered by the EU ETS.

For instance, under the full-scope EU ETS, it may be more advantageous to take a flight via a non-EEA hub than a direct flight to a non-EEA destination (e.g. to stop-over in Dubai on a London to Hong Kong flight instead of flying directly) because only the first flight until the non-EEA hub would be covered. This may reduce the attractiveness of EEA hubs and favour airlines which use hubs outside Europe.

The 2006 Impact assessment explored the risk of route change to use extra-EU hubs under the full-scope EU ETS but found that the likelihood of such a distortion would only become positive at a carbon price of €75 per tonne CO2. This means that at the assumed carbon price up to 2030, there would be no risk for competition distortions. The same is theoretically also possible under the departing flights, 50/50 and upstream options but even less likely because of the more limited coverage of extra-EEA flights.

The "stop-the-clock" option reduces potential competitive advantages for non-EEA hubs because all extra-EEA flights – irrespective of their final destination – are exempted from the EU ETS. However, individual airlines claim that stop-the-clock would nevertheless create "serious distortions of competition in the intercontinental air travel business at the expense of the EU airlines" because a feeder flight to an EEA hub (e.g. from Brussels to Frankfurt) is subject to the EU ETS while a feeder flight to the foreign hub (e.g. from Brussels to Abu Dhabi) is exempt. Given that feeder flights within the EEA will tend to account for a small proportion of the total distance flown to overseas destinations and given the low level of current carbon prices, there exists no significant risk for such a distortion.[24]

By relating the scope of the EU ETS to the distance flown within the EEA rather than to the distance to the final destination, the hybrid options eliminate any potential risk of distortions in favour of non-EEA hubs because all flights are treated equally irrespective of their final destination. Non-stop flights and one-stop flights have to pay the same EU ETS costs for their distances flown within the EEA. The only potential source for distortions could come from one-stop flights using hubs in Switzerland due to its specific geographic position in the middle of Europe: As flights from Switzerland to non-EEA countries are currently not included in Switzerland's own ETS, and are not covered under the EU ETS, one-stop flights over Swiss hubs could potentially benefit from an advantage over their competitors. The ETS linking agreement with Switzerland – which is currently negotiated – will remove this potential distortion.

Therefore, while the incentive to use non-EEA hubs will exist to different degrees depending on the policy option considered (see Table 5‑8 for a summary) it is very unlikely that any policy options would generate significant competition distortion in favour of airlines operating from non-EEA hubs or incentivise airlines to relocate their hubs, especially at current carbon prices.

Table 5‑8 Summary of competition impacts on aviation markets

|| Competition on city-pair markets || Competition on markets with one-stop services

Potential distortions || Significance

Full-scope EU ETS, departing-flights, 50/50, and upstream options || No risk of distortion || Airlines using hubs outside the EEA could benefit from lower emission coverage under EU ETS compared to non-stop flights to the same destination. The risk is lower than under the full scope EU ETS however. || None at current carbon prices

"Stop-the-clock" option || Reduced risk because all flights to 3rd countries are exempted from EU ETS.

Hybrid option || No risk of distortion || No risk of distortion because emission coverage is independent of final destination || None

· Competition between tourist destinations

As mentioned in the Section 5.2.1.2, the policy options (except upstream) are expected to result in reductions in ticket prices compared to the full scope EU ETS. This means that tourism will benefit from a reduced scope of the EU ETS even though only to a marginal extent (see also Annex VII for the price elasticity in the tourism sector).

With regards to a level playing-field between different tourists destinations, all intra-EEA destinations – including outermost regions (e.g. Azores, Canary Islands, Madeira, and the French overseas departments) – continue to be covered so no destination will gain a comparative advantage over others. As already discussed in the 2006 Impact assessment, in case that aid may be justified in favour of inhabitants of outermost regions to facilitate the access to aviation services, such aid should be granted through specific public service obligations (PSO) and not through exemptions to the EU ETS.

With regards to non-EEA destinations, stakeholders have raised a potential risk for distortions under the "stop-the-clock" option in particular with regard to the Mediterranean area. This is because higher demand substitutability may exist between tourist destinations in this area than in other aviation markets. For instance, if flights to North-Africa or Turkey were completely exempted from the EU ETS, as under the "stop-the-clock" option, compared to flights to EEA destinations in the Mediterranean area, a potential advantage in favour of non-EEA destinations may exist. However, given the low carbon prices, it is unlikely that such risks would materialize in any significant shifts in demand.

With regards to competition with other international destinations, located farther away, the potential distortion across tourist destinations are not a concern in view of the lower price elasticity for long-haul flights and the smaller proportion of the EU ETS costs in relation to total costs.

1.2.10. Impact on auction revenues for public authorities

15 % of the total aviation allowances are auctioned and the revenues are distributed to the Member States. In proportion to the reduced scope, less aviation allowances will be auctioned. The annual auction revenues are therefore expected to decrease from €316 million under the full-scope EU ETS to €122 to €147 million under the hybrid options at assumed carbon prices of €10. The reductions are always in proportion to the reduced coverage. Except for the upstream option, the auction revenues will increase strongly because allowances are not any more given out for free and all allowances are auctioned. See also Annex VI.

Table 5‑9 Estimated auction revenues from aviation allowances in 2020 (at assumed price of €10)

|| Estimated auction revenues from aviation allowances (€m) || Percentages relative to full scope

EU ETS full scope || 316 || 100%

Departing Flights || 197 || 62%

Hybrid 200nm || 147 || 46%

Hybrid 12nm || 122 || 39%

"Stop-the-Clock" || 80 || 25%

Upstream || 1280 || 333%

5.3. Social impacts

The social impacts of a policy are the impacts on people, their employment prospects, and rights, access to services, quality of life, income, health and safety. It focuses on distributional impacts i.e. across and within different social and economic groups, identifying ‘winners’ and ‘losers’ and assessing whether it is likely to improve or aggravate existing inequalities. For this study, the main areas of interest are the potential impacts of the policy options on lower income social groups by potentially reducing access to air travel, and on employment if jobs are lost / created as a result of the policy options.

1.2.11. Impact on lower income groups

The minor impact on ticket prices and overall passenger demand has already been established in Section 5.2.1.2. This section investigates whether there is a risk that lower income groups may be disproportionately affected by the policy options.

Access to air travel is closely linked to income levels. This is despite the fact that the growth in Low Cost Airlines (LCAs) is often claimed to have contributed to the democratisation of air-based travel by bringing it within the reach of lower income groups.

LCAs have indeed generated a spectacular growth in air travel since 2000. Between 2006 and 2012 alone, the number of passengers of LCAs has, according to the European Low Fares Airline Association (ELFAA), almost doubled from 105.7m to 202.4m. However, this rapid growth is due to a range of drivers which do not include attracting low income customers. The main ones are: a continued rise in incomes; and the opening of numerous new routes which have captured latent demand. The introduction of low-cost flights has resulted in two main trends: more short trips are made as people take advantage of the cheaper tickets to take weekend breaks or city breaks; and an incentive to buy a secondary home abroad was created.[25] In other words, the main effect of LCAs has been to draw new people to air travel by reaching new markets and increasing the frequency of travel. However this has mostly benefited middle and high income groups rather than low income groups.

As the ticket prices will remain stable for intra-EEA flights and even decrease for extra-EEA flights with reduced coverage, low income groups will not be negatively impacted and there will not be a risk to increase inequalities in Europe.

1.2.12. Impact on employment

Employment impacts may occur from a rise or fall in airlines’ activity as a result of the policy options. AERO-MS estimates that by 2020, the full-scope EU ETS is expected to generate a drop of -0.6% in aviation employment at EU level compared to a situation with no EU ETS. By reducing the scope of the scheme, the drop in employment would slightly decrease compared to the full-scope EU ETS (between 0.13% under "stop-the-clock" option and 0.07% under departing-flights option).

5.4. Administrative effort and feasibility

This section provides analysis on the administrative effort and feasibility to implement the policy options with regard to monitoring, reporting and verifying emissions (MRV). Annex VIII provides additional information on the costs and the implementation timeline for each option.

The main challenge will be to adapt the EU ETS in very short time and to keep to a minimum the necessary legal changes and additional MRV costs for aircraft operators and national administrations. The current MRV system should therefore be maintained as far as possible and not be changed in its principles. Any changes should be simple and easily implementable.

1.2.13. Full-scope EU ETS

At the core of the current MRV system for the EU ETS is the monitoring plan, which aircraft operators submit in advance of the start of the trading period, and which is subject to the approval of the competent authority. The plan includes information on how you obtain, process, record and monitor emissions. The monitoring plan sets out detailed, complete and transparent documentation concerning the methodology of an aircraft operator and is subject to regular update to respond to the verifier’s findings and on the basis of the aircraft operator’s own initiative. Currently, the main responsibility for the implementation of the monitoring methodology in the plan as specified by requirements in EU legislation remains with the aircraft operator.

On the basis of the monitoring plan, each aircraft operator must report annual emissions by submitting an annual emissions report to the competent authority which must be verified in accordance with EU legislation by an independent accredited verifier prior to submission. The competent authority reviews and approves such reports. In general, emissions are based on an agreed emission factor applied to fuel consumption measured based on methodologies included in the monitoring plan. A simplified approach is available for small emitters whereby emissions are calculated using a standardised distance flown based on Great Circle Distance (GCD) multiplied by the emission factor.

The administrative tasks involved in the monitoring, reporting and verification (MRV) of emissions under the current EU ETS are broadly summarised in Table 5‑10.

Table 5‑10 Key administrative tasks under the EU ETS

Operators || Competent authorities in Member States || European Commission

Application for monitoring plan; notifying changes to monitoring plan; setting up monitoring and report systems; collect, and archive data; prepare annual emission report; ensure that annual emission reports are verified by accredited independent verifiers; submit annual emissions report to competent authority; || Approves monitoring plan for each aircraft operator and subsequent updates to the monitoring plan; approves annual emissions reports as verified by accredited verifiers; monitor compliance and enforce in case of non-compliance || Establish and maintain implementing provisions related to monitoring, reporting and verification of emissions, create central templates for reporting of emissions and monitoring plans, subject to approval through comitology process; Issue guidance; update aviation operator list; administer allocations of free allowances

The most relevant factors in terms of administrative effort under this system are the large number of aviation operators covered by the EU ETS, the review of the monitoring plan for each and the amount of data reported annually through the annual emissions reports.

1.2.14. Hybrid option

The MRV system would need to change under each of the hybrid options in order to reflect the proportion of emissions or distance covered within a defined area. There are three possible approaches for an adapted MRV process:

- MRV Option 1 (on-board measurement of fuel consumption), using on-board equipment on all aircraft to monitor actual fuel flows to the engines combined with GPS data.

- MRV Option 2 (approximated fuel consumption) which applies a distance factor to total fuel consumption, as reported under the current MRV system.

- MRV Option 3 (modelled fuel consumption), modelling emissions using Eurocontrol’s Advanced Emissions Model. This may significantly reduce costs for operators but it would likely reduce accuracy and more importantly it would all but remove incentives for improving fuel efficiency and reducing emissions levels. Modelling is not deemed appropriate as a monitoring approach and is not considered further.

· MRV Option 1 – On-board measurement of fuel consumption

Under this option, the fuel consumption for the distance travelled within the EEA would be monitored with on-board devices tracking fuel flow measurements to the engines combined with GPS data. The fuel flow occurring between fuel uplift for the flight and reaching the EEA border is summed up and considered to be the fuel consumption for that part of the flight.

In order to monitor fuel consumption and geographical position in flight, aircraft operators could use the data recorded by either the Digital Flight Data Recorder (FDR) or, if installed, Quick Access Recorder (QAR). The recorded data on fuel flows in the engines and GPS positions provides a high level of accuracy and as data is digitally logged a detailed verification of the fuel flow data can be performed.

In terms of monitoring, the applicability of this option depends on the extent to which these devices are present on aircraft and the number of operators who would need to invest in such equipment. Regulation and data on aircraft fleet suggest that QAR and FDR systems are available on most commercial airlines. Where FDRs or QARs are not available, this option places potentially significant costs on operators. These include the purchase of new equipment for each aircraft in a fleet and adjusting the relevant flight permit after installation: new QAR equipment can cost between 7,000€ and 10,000€ for the hardware and possibly up to 50,000€-80,000€ for the software.

However, the cost effectiveness of this option is uncertain as a substantial amount of post-flight processing would need to be undertaken. As this option results in a much greater quantity of data collected, significant additional effort in reporting and verification, both for operators and MS' competent authorities, may be required. As a first step, a reporting entity would need to be identified and agreed (e.g. reporting to competent authority directly by the operator or, alternatively, by a central reporting entity (such as Eurocontrol)). Furthermore, depending on how the boundaries of the EEA are defined, there would be additional work to encode the boundaries (e.g. 12nm or 200nm boundaries) into flight management data bases.[26] In general, it is the reporting element of this approach, rather than the monitoring element, which results in the greatest share of added administrative burden.

Finally, this MRV approach may also be subject to legal constraints. The requirement for on-board equipment may be challenged under the Chicago Convention. According to Article 33 of the Chicago Convention, if a certificate of airworthiness is issued by the state where the aircraft is registered, the EU MSs will be obliged to recognise it, provided that the requirements under which such certificate was issued meet or exceed ICAO standards. Therefore, as long as the required on-board equipment is not recognized as an international standard, it may be difficult to legally oblige all aircraft operators to install it through EU legislation.

In conclusion, MRV Option 1 might be feasible for medium-sized and large aircraft operators, who have already installed the necessary equipment on board, but will increase the administrative costs with regard to the reporting element, not alone because of the significant increase in the amount of data to be reported and the post-flight data processing required by the operator, verifier and/or Member State competent authority.

Smaller operators and those without this equipment would face additional investment costs for the installation of the equipment per aircraft. Operators may face higher independent verification costs and MS' competent authorities would likely have to bear higher costs in validating emission reports because of the added complexity and may further face initial costs related to establishing the required system.

In terms of implementing such an approach, there would be time-consuming steps including the installation of the necessary equipment on aircraft where this equipment is not yet available, and the revision of MRV legislation by the Commission. It is estimated that this option would take at least 2 - 2.5 years to implement, while the precise costs for airlines are not fully known. Though such a system would potentially result in a very high level of accuracy, considering that such an MRV system would potentially only be in place until the implementation of a global MBM in 2020, and in view of the additional effort and cost for parties involved, the risk of legal challenge under the Chicago Convention, and the implementation time, on-board measurement is not considered to be the preferred solution.

· MRV Option 2 – Approximated fuel consumption

With this method, emissions would be determined using a pro rata calculation (proxy) to the fuel consumption by applying a “distance factor” proportional to the distance travelled within the EEA to the total fuel consumption of a flight. Hence, the current MRV system would largely be maintained. This approach maintains the incentive to reduce emissions from aviation, and does so for the whole flight route. In addition, it does not encourage alterations in flight paths merely to avoid covered areas, because the distance factor is set once for the period (phase 3 EU ETS, 2013-2020) and would not change during the period. This approach is not applied as a traditional "airspace" approach, which previous ICAO analysis has considered being "impracticable" but rather a proxy to limit the coverage for extra-EEA flights to the distance flown within the EEA based on best available data. Under this approach, a premium is placed on workability and simplicity.

The distance factors could be pre-determined based on the proportion of the Great Circle Distance (GCD) between city- or country-pairs (e.g. determining the share of GCD within the EEA as a percentage of the total GCD). Alternatively, the distance factor could be pre-determined using flight plans.

- Reporting based on country-pairs would be in line with existing monitoring legislation and would use the existing reporting template applicable since 2010. It would also require significantly fewer distance factors to be calculated and applied by each aircraft operator as far fewer country-pairs exist relative to city-pairs. This may facilitate earlier implementation of any change. However, defining the GCD for a country-pair may become controversial because of potential claims by some operators will benefit and some will lose out. A loss of accuracy may be claimed compared to more precise calculations such as city-pairs though it is possible that this loss of accuracy would be small, especially with a 12nm boundary, as this represents a small part of the total flight.

- The determination of distance factors based on city-pairs would imply more administrative effort than determining distance factors based on country-pairs. Nonetheless, the administrative effort required to pre-determine distance factors under either approach are considered to be moderate because the existing Eurocontrol Support Facility can facilitate this process. A city-pair approach to the calculation of distance factors would likely require changes to the current MRV legislation. Additional costs from implementing this method would stem primarily from required changes to aircraft operators’ or competent authorities' monitoring and reporting systems to allow them to apply relevant distance factors in their annual emissions reports. However, once the required changes have been implemented and the distance factors have been calculated and published, additional reporting effort by the operator would be minimal.

- The approximation based on GCD would have limitations in terms of accuracy because actual flight trajectories can vary considerably from the GCD (because of weather conditions, operators choose flight routes which minimise headwind and maximise tailwind); hence, these approaches do not reflect real fuel consumption patterns. To achieve a higher level of accuracy, the distance factor could possibly be pre-determined based on Eurocontrol’s Advanced Emissions Model which uses flight plans as a basis. It should be noted that distance factors pre-determined using this model will nonetheless not represent real time flight data.[27]

As regards the development of distance factors and implementing required changes to reporting systems, it is estimated that this would take 0.75-1.5 years to implement.

· Conclusions

The final choice of approach for the hybrid option will depend on the preferred trade-off between efficiency and accuracy: MRV Option 1 – on-board measurement – would provide the greatest level of accuracy at potentially significant costs to the aviation industry, complex implementation and risk of legal challenge. MRV Option 2 – approximated fuel consumption – is likely to be less accurate but has efficiency gains as implementation of such an approach is relatively straight forward, does not increase the annual MRV costs once it is implemented, and maintains the incentive for efficient flight operations. Furthermore, it will be important to develop a coherent system for intra and extra-EEA flights as most major aircraft operator, operate at both levels. Only MRV Option 2 can apply consistently to intra-EEA and extra-EEA flights.

1.2.15. Alternative options (except upstream option)

The departing-flights option would use exactly the same approach to MRV as the existing EU ETS. Monitoring plans and templates would not need to be resubmitted nor reviewed to accommodate such a change. The primary difference is that the current MRV approach would be applied to fewer flights (i.e. all intra-EEA flights and departing extra-EEA flights) upon the application of such an approach. As a result this option may generate some savings compared to the full scope EU ETS: for operators as fewer flights would need to be monitored, reported and subject to verification; for Member States as they would may have fewer annual emissions report to review and approve. However these cost impacts are likely to be minor.

The 50/50 option would also follow the same approach as the existing EU ETS, applied to the same number of flights (i.e. incoming and departing). The annual emissions figure would be established by monitoring emissions on the entire route, as is currently the case, and then subsequently applying a factor of 50% to the total emissions figure. Hence, the 50/50 approach would result in the same costs as full scope EU ETS.

Under the "stop-the-clock" option, the current approach to MRV would similarly be maintained, but applied to fewer flights (i.e. intra-EEA flights only).

All three of the above options are technically feasible with similar costs and effectiveness in relation to the current system. These could be implemented without delay.

1.2.16. Upstream option

This option would place the responsibility with the suppliers of aviation-related fuels (i.e. refineries) instead of the aviation operators. MRV would rely on invoices and metering data in the same manner as MRV is conducted for fixed installations under the full EU ETS. It is estimated that only around 100 to 200 installations would be covered by this option, reducing the number of compliance entities significantly compared to the oth