EUROPEAN COMMISSION Brussels, 3.2.2017 SWD(2017) 31 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document PROPOSAL FOR A REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community in view of the implementation of a single global market-based measure to international aviation emissions



{COM(2017) 54 final}

{SWD(2017) 30 final}



Table of Contents 1. What is the problem and why is it a problem? 3 2. Why should the EU act? 10 3. What should be achieved? 12 4. What are the various options to achieve the objectives? 5. What are the impacts of the different policy options and who will be affected? 6. How do the options compare? 48 7. How would actual impacts be monitored and evaluated? 56 Annex 1: Procedural information 58 Annex 2: Stakeholder consultation 60 Annex 3: Who is affected by the initiative and how 73 Annex 4: Analytical models used in preparing the impact assessment. Annex 5: Strong Growth of Greenhouse Gas Emissions in the Aviation Sector. 77 Annex 6: 2016 ICAO Resolution A39-3 on a Global Market-Based Measure Sheme 80 Annex 7: Developments in the run up to the 2016 ICAO Assembly. Annex 8: Integration of Aviation in the EU's Emissions Trading System…………...88 Annex 9: Features of the EU ETS………………………………………………………...90



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



1.What is the problem and why is it a problem? 1.1.Context 1.1.1.The need for market-based measures to address greenhouse gas emissions in the aviation sector Greenhouse gas (GHG) emissions from aviation activities are increasing exponentially. In the absence of further measures, carbon dioxide (CO2) emissions from international aviation are estimated to almost quadruple by 2050 compared to 2010 (see Annex 5 for more details). The strong growth in GHG emissions from the aviation sector risks undermining the goal under the Paris Agreement of keeping global warming well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit temperature increase to 1.5 degrees Celsius (see section 3.1 for more details) . The International Civil Aviation Organisation (ICAO) has set the objective, supported by the aviation industry, of maintaining global net CO2 emissions at 2020 levels through 'carbon neutral growth' (CNG 2020), i.e. compensating emission growth above 2020 levels. However, as noted by Cames et al. (2015), the CNG2020 objective is insufficient to meet the Paris temperature goals. According to them, following an assessment of the remaining carbon budget derived from IPCC’s representative carbon pathway (RCP) 2.6, international aviation emissions should start declining not later than 2030. Furthermore, they remind that if aviation’s non-CO2 impacts were taken into account, efforts would need to be higher. It is also important to remind that the aviation industry has set itself the additional, more ambitious, goal to halve aviation emissions by 2050 below 2005 levels, but this has not been adopted by ICAO. As the potential for emissions reduction from new technologies and operational practices is limited and more costly in the aviation sector (see Annex IV of the 2013 Impact Assessment for more details on technological and operational measures), ICAO States and the aviation industry agree that the use of market-based measures (MBMs) are necessary for air transport to contribute to emission reductions. The use of MBMs allows the sector to offset its strong emission growth from increased activity through acquiring emission units from other sectors at lower abatement costs. Given the intrinsically transnational nature of aviation activities, effective ways of addressing GHG emissions from international aviation are through multilaterally agreed measures at global and regional level. The International Civil Aviation Organisation (ICAO) is widely considered to be the most appropriate forum for the development of an international market based measure for aviation. The EU has therefore continuously advocated for the promotion of ambitious, global action in ICAO to complement measures taken at national and regional level. Technical and operational measures in the aviation sector Technological and/or operational measures (e.g. improved air traffic management and more efficient operation of the aircraft in the air and on the ground) could achieve 10% emissions reduction in the coming years in the aviation sector compare to a business as usual scenario. The use of sustainable biofuels could be a further source for emission reductions; however considerable uncertainty exists over their availability and sustainability and their economic viability has not yet been proven. As a result, and as substantiated by data generated by the EU ETS, their present use by aircraft operators remains extremely small to date. All in all, and compared with the estimated traffic growth, the emission gap remains to be addressed by other means, which is presently being done by the EU ETS. In 2016, ICAO's Committee on Aviation Environmental Protection (CAEP) agreed on a CO2 standard for aircraft, which should guide their development towards greater fuel and environmental efficiency. For large new aircraft, the standard will apply as of 2020. Existing aircrafts will have to apply the new standard by 2028 the latest.

The reductions achieved through these developments are expected to be outpaced by the larger growth in demand of aviation services. Even under the most optimistic scenario about the effectiveness of non-market-based measures, aviation CO2 emissions in 2050 are still expected to be 3.8 times higher than 2010 emissions due to the forecasted strong increase in aviation activities. Therefore, technological and operational measures, although important, are on their own insufficient to achieve ICAO's self-declared target of CNG from 2020. CAEP therefore concluded that the only way to enable the agreed climate objective was through the Global Market Based Measure. 1.1.2.Integration of Aviation Emissions in the EU's Emissions Trading System The EU led the way in implementing a MBM for aviation by including flights between aerodromes within the European Economic Area (hereafter "intra-EEA flights"), as well as flights between aerdromes in the European Economic Area (EEA) and aerodromes in third countries (hereafter "extra-EEA flights") in the EU's Emissions Trading System (EU ETS) in 2008 (see Annex 8). As originally designed, the EU ETS covers 35% of global emissions from domestic and international flights and 50% of all international flights. According to Directive 2003/87/EC all aircraft operators carrying out aviation activities covered by the EU ETS have to report annually their emissions corresponding to the previous year. Then, they have an obligation to surrender as many allowances as emissions have been reported. Every year, a number of allowances are issued to aircraft operators. The total amount is defined by the "cap", which is 95% of the average 2004-2006 emissions. Contrary to the cap for stationary installations, the cap for the aviation sector is constant until 2020. 82% of this amount is issued to operators free of charge, 15% is auctioned and 3% is set aside in a "special reserve" to cover the free allocation to new entrants and fast growers. Annex 9 provides more information on the EU ETS for aviation. When the ICAO Council in 2012 decided that ICAO would begin developing guidance for the implementation of a single, global market based measure (GMBM) covering international aviation emissions, the EU legislators temporarily limited the scope of the EU ETS to give airlines a choice as to the scope applied to their flights (intra-EEA or all flights) in 2012. Following the 2013 ICAO Assembly decision to develop a global market-based measure (GMBM) to address international aviation emissions, the EU limited the scope of the EU ETS to intra-EEA flights during the period 2013-2016 to drive forward the ICAO process in relation to international emissions from aviation. Annex 8 sets out the chronological development of the EU ETS. 1.1.3.The adoption of a global market based measure for international aviation (GMBM) ICAO, after several years of intensive negotiations (see Annex 7) at its 39th General Assembly in September/October 2016, reached – for the first time – an agreement on an ICAO Resolution for the implementation of a global market based measure (GMBM) to address the growth in international aviation emissions globally from 2021 through an offsetting system aimed at stabilising them at 2020 levels (see Annex 6). In its first phase from 2021 to 2026, participation of states in the GMBM will be voluntary, with the possibility to opt-in or out from the system; all countries should then participate in its second phase starting in 2027, except least developed countries, land-locked developing countries, small island developing states and states with a small share of international aviation activity (revenue tonne kilometre (RTK) of below 0.5% individually or below 10% in cumulative terms). As ICAO has no competence for domestic aviation, the GMBM is not designed to cover domestic flights. Sixty-six countries, including all member states of the European Civil Aviation Conference, Australia, Canada, China, Indonesia, Japan, Mexico, New Zealand, Qatar, Singapore, United Arab Emirates and the United States of America had declared in October 2016 that they will apply the GMBM during its voluntary phase. A complete list of states that have expressed their intention to participate in the voluntary phase is available on the ICAO website. By itself, the GMBM does not aim at reducing aviation emissions. The GMBM is an offsetting mechanism, which enables the aviation sector to continue to grow after 2020 in as far as emissions above a certain threshold are compensated for through international offset credits (generated in non-aviation sectors mainly). The baseline for the GMBM is set at the global net CO2 emissions from international aviation in 2020 so as to achieve the aspirational target of CNG 2020 (although for technical reasons the average 2019-2020 emissions will be used). However, as said before, given the current level of participation in the initial phases and the exemptions for routes to and from certain countries, it is estimated that around 20% of emissions growth above 2020 levels will not be offset, leaving a 20 % gap to achieve the objective of carbon neutrality from 2020. While this resolution on the development of a GMBM is a breakthrough in ICAO's efforts to address the growth of international aviation emissions, a number of important features of the GMBM still need to be developed and agreed in ICAO before the GMBM can be implemented in 2021. They relate to monitoring, reporting and verification (MRV). i.e the transparency rules, and eligibility of offset units, as well as ways to avoid double counting, registry and governance/compliance set-up. Any delays in agreeing on those elements risk delaying the operationalization of the GMBM. These remaining features are key elements for the effectiveness and environmental integrity of the scheme from a climate standpoint. It should also be reminded that the GMBM is enshrined in a resolution adopted in ICAO and thus not a binding international agreement. However, detailed rules to implement the GMBM are to be adopted in the form of ICAO Standards and Recommended Practices, the former being binding on ICAO member states not filing differences to them. In addition, the actual implementation of the GMBM will depend on domestic legislation to be developed, adopted and implemented by countries and regions participating in the scheme. At its 39th Assembly, ICAO also adopted a resolution on climate action other than through the GMBM. This resolution includes an annex listing the key principles applicable to MBMs addressing international aviation emissions, which may also apply to other market measures different from the GMBM. Comparing the GMBM and the EU ETS Both the GMBM and the EU ETS are market-based measures to address GHG emissions. However, there are important differences between them.

The first important difference is the nature of the measure: the EU ETS is a legally-binding cap and trade system setting a limit on the total GHG emissions so as to reduce them, whereas the GMBM is a carbon offsetting scheme, which allows emissions from the aviation sector to continue increasing above the CNG 2020 threshold provided they are compensated for with international emission reduction credits. Another difference is the level of ambition in terms of emission reductions or limitations to be achieved. In contrast to the CNG2020 target under the GMBM (which will only be met at 80% due the various flexibilities and exemptions), the cap in the EU ETS for aviation activities is set as 95% of the average 2004-2006 emissions from aviation and is expected to decrease annually by 2.2% starting in 2021. This shows that the GMBM is less ambitious than the EU ETS when comparing GHG emission reductions achieved in a given geographical scope. Thirdly, the GMBM is relying on international offsets. The quality of international offsets is harder to control and raises concerns over additionality and the applicable accounting rules. In addition, it should be recalled that the EU 2030 climate objective under UNFCCC should be met through domestic reduction efforts, i.e. without the use of international credits. This was agreed at the European Council conclusions from October 2014 and accordingly communicated by the EU under the Paris Agreement. Under the EU ETS, EU general allowances or EU aviation allowances must be surrendered for each tonne of emitted CO2 emissions by flights covered by the EU ETS. Up to 2020, certain types of international credits are allowed for surrendering but limited to 1.5% of emissions. In line with the EU contribution to the Paris Agreement, no international credits should be used after 2020 in the EU ETS to ensure that emissions reductions are taking place within the EU. Finally, the geographic scope is obviously different: the GMBM is applied to international flights globally (although routes to and from a number of countries are exempt), whereas the EU ETS applies to EEA-related flights, including domestic aviation emissions. More information on the EU ETS features on Annex 9. The main features of the GMBM can be found on the ICAO Resolution 39-3, in Annex 6. 1.2.The Problems Regulation (EU) No 421/2014 introduced Article 28a in the EU ETS Directive 2003/87/EC, which requires the Commission to report back to the Council and the European Parliament on the outcome of the 2016 ICAO Assembly. When doing so, the Commission shall consider and, if appropriate, include proposals in reaction to the ICAO developments on the appropriate scope for coverage of emissions from extra EEA-flights from 2017 onwards. Should the EU decide not to amend the EU ETS in response to the outcome at the 2016 ICAO Assembly, the EU ETS will – by default – apply in its full scope from 2017 onwards. This would mean that aircraft operators will be responsible for GHG emissions from all flights departing from or arriving at aerodromes situated in the EEA. In its review, the EU should recognise the landmark agreement reached by the 39th ICAO Assembly. With the GMBM, international aviation emissions would be adressed – for the first time – at global level. Although it is unlikely to result in a significant in-sector reduction of GHG emissions in the period up to 2035, which is insufficient under the Paris Agreement, which calls “to reach global peaking of greenhouse gas emissions as soon as possible […] and to undertake rapid reductions thereafter” – the GMBM will take the aviation sector one step closer to achieving CNG2020. Based on current levels of participation during the voluntary phase, it is estimated that around 80% of emissions necessary to achieve carbon neutrality from international aviation from 2020 will be offset, leaving a 20% emission gap compared to what would be needed to meet the CNG 2020 goal. In light of what has been agreed so far in ICAO, a return to the EU ETS full scope, even on a transitional basis until the GMBM is operationalised, may give rise to controversies with third countries and be interpreted as a signal that the EU does not intend to implement the GMBM. It could therefore negatively affect the prospects for finding agreement on the outstanding features of the GMBM (i.e. transparency, accounting and offsetting rules, registry and governance) and the ensuing implementation of the GMBM from 2021 by others. At the same time, the international climate policy context has also significantly changed after the latest review of the EU ETS for aviation. The Paris agreement goals and the EU commitment to contribute to them with an at least minus 40% domestic target by 2030, compared to 1990 GHG emissions levels, require a fair mitigation effort from all sectors and must be taken into account in the review. Section 3.1 provides further details on the EU’s domestic and international climate commitments, while Annex 5, section 3 highlights the need for early and significant action to reduce global GHG emissions to meet the well below 2 degrees Celsius objective under the Paris Agreement. In this context, the review of the EU ETS for aviation should ensure that the development and implementation of the GMBM are not put at risk whilst aviation fairly contributes to the EU’s climate targets in the period 2017-2020, but also after 2020.

While relevant rules for the implementation of the GMBM still have to be developed, the main parameters determining its impacts (environmental ambition / baseline, geographic scope, exemptions, type of units, etc.) are already known. This allows, as requested by the EU ETS Directive, for a first assessment of the outcome of the ICAO Assembly, which needs to look into the post-2020 period, when the GMBM will start to apply. Importantly, this also allows for a longer term vision of impacts of EU policies, including on reaching the 2030 climate targets. It must be noted that this is a first assessment carried out on the basis of the core features of the GMBM agreed in the 39th ICAO Assembly (climate objective/level of ambition, offsetting nature…). The adoption of additional rules applicable to the GMBM through Standards and Recommended Practices and the actual implementation of the GMBM by states in the coming years will provide further details on how this scheme will operate, its actual impacts and the extent to which it will deliver on carbon neutrality from 2020 while avoiding distortions of competition. This may require further analysis in the future.



1.2.1.Problem 1: The Scope of the EU ETS in the transitional period (2017-2020) to effectively address aviation emissions The period between January 2017 and December 2020 must be considered as a transitional period during which efforts will focus on the operationalization of the GMBM, and in particular on finding agreement on the outstanding features of the GMBM (i.e. transparency, accounting and offsetting rules, registry) to ensure that the system will be fit for start from 2021. Therefore, and as required by present legislation, it must be carefully considered whether the scope of the EU ETS for aviation should be amended to take account of the positive outcome of the 2016 ICAO Assembly. Any amendments to the EU ETS for aviation should be fully consistent with EU 2020 climate targets by ensuring that aviation emissions in the EU/EEA are addressed effectively as planned, while further incentivizing the transition to and implementation of the GMBM from 2021 to maximize the global mitigation impact. 1.2.2.Problem 2: Post 2020 implementation of the GMBM and EU Action With the expectation that the GMBM will start in 2021, the preparations for its implementation through national legislation need to start soon to provide legal certainty to the aviation industry and national authorities. Besides, and considering the EU's commitment under the Paris Agreement and the implementation of the 2030 climate and energy framework, the contribution by the aviation sector to the EU's emission reduction targets needs to be determined. A higher or lower contribution from the aviation sector will have an impact on the efforts by other sectors to ensure that collectively the 2030 target of an at least 40% reduction compared to 2005 will be met. In view of the future implementation of the GMBM, it is essential to assess the environmental, economic (including on competitiveness), and social impacts of the different possible interactions between the GMBM and the EU measure for aviation in the period post-2020. The implications this may have on the relationship with ICAO and international partners must thereby also be taken into consideration, along with EU commitments under the Paris Agreement. 1.3.Retrospective evaluation/fitness check In the context of the review of the EU ETS for phase 4 (2021-2030) an evaluation of the existing ETS Directive was part of the impact assessment work and has fed into the assessment of the policy options. A specific retrospective evaluation for the EU ETS for aviation is not considered necessary at this juncture, since the EU ETS for aviation has never been applied in its full scope as initially designed: amendments to the scope of the EU ETS for aviation were done on the basis of extensive assessments to address the concerns and opposition raised in relation to the measure as initially designed. The 2013 Impact Assessment accompanying the proposal for Regulation (EU) No 421/2014 most notably assessed the political acceptability, as well as environmental effectiveness of the EU ETS for aviation under different options for geographical scope, and the impact of introducing minimum thresholds on evironmental effectiveness and administrative burden. In addition, the European Commission – on an annual basis – conducts indepth analysis of the functioning of the European carbon market and reports its findings to the European Parliament and the Council. Previous Carbon Market Reports have confirmed the effectiveness of, as well as the very high level of compliance with the EU ETS for aviation: airlines responsible for more than 99% of emissions from intra-EEA flights complied with the legislation, including more than 100 commercial aircraft operators based outside the EU but operating flights within the EEA. Moreover, analyses in the EU’s ICAO Action Plans have shown that, over 2013-2016, with the inclusion of only intra-European flights in the EU ETS, the EU ETS has contributed to achieve around 16 million tonnes of emission reductions annually, or almost 65 million over 2013-2016, partly within the sector (airlines reduce their emissions to avoid paying for additional units) or in other sectors (airlines purchase units from other sectors, which would have to reduce their emissions consistently). While some reductions are likely to have occurred within the aviation sector, encouraged by the EU ETS’s economic incentive for limiting emissions or use of aviation biofuels, the majority of reductions are expected to have taken place in other sectors. In parallel to providing a carbon price which incentivises emission reductions, the EU ETS also supports the reduction of GHG emissions through €2.1 billion funding for the deployment of innovative renewables and carbon capture and storage. This funding has been raised from the sale of 300 million emission allowances from the New Entrants’ Reserve of the third phase of the EU ETS. This includes over €900 million for supporting bioenergy projects, including advanced biofuels, which are relevant for the decarbonisation of the aviation sector. In addition, through Member States’ use of EU ETS auction revenue in 2013, over €3 billion has been reported by them as being used to address climate change. The extensive assessments above, as well as this Impact Assessment, which has been called for under Regulation (EU) No 421/2014, are effectively evaluating and assessing the effectiveness and functioning of the EU ETS Directive for aviation, which is considered adequate in terms of retrospective evaluation report and fitness check of the EU ETS Directive for aviation.





2.Why should the EU act? As can be seen from Annex 5, aviation CO2 emissions are growing sharply. Meaningful mitigation measures are required for the sector to contribute to effectively addressing global warming. The EU should continue doing so while facilitating global action, notably through ICAO, as well as through domestic action. Thereby, the EU should not only take into account the recent political agreement on the GMBM it supported in ICAO, but also its climate commitments, both at European and at international level. As recalled in the previous section and set out in detail in section 3.1, the EU has committed to reduce its GHG emissions through domestic efforts by at least 40% compared to 1990 levels by 2030. This is the basis of the EU´s and its Member States’ National Determined Contribution in the context of the landmark Paris Agreement, where the EU reiterated its, at least, minus 40% economy-wide target. All sectors, including aviation, must fairly contribute to decarbonise the European economy to meet this target. The current EU ETS legislation calls upon the Commission to consider the appropriate scope of the EU ETS for aviation emissions from activities to and from aerodromes located in countries outside the EEA following the outcome of the 2016 ICAO Assembly. Through the review of the EU ETS for aviation the EU should ensure that the development and implementation of the GMBM is not put at risk, in order to maximize global climate mitigation efforts, whilst safeguarding that aviation continues to fairly contribute to the EU climate targets. 2.1.Subsidiarity In line with the 2004 ICAO Assembly’s decision not to develop a GMBM but to favour inclusion of aviation into open regional systems, the EU chose to integrate the aviation sector in the EU ETS by amending the EU ETS Directive 2003/87/EC through Directive 2008/101/EC. Acting at EU level is more efficient than acting at the Member State level, due to the largely transnational nature of aviation, with almost 90% of GHG emissions from aviation in the EU coming from international aviation. Indeed, the single market in aviation is a key goal for the EU. Using emissions information as a proxy, it can be said that in relation to intra-EEA, on average, ~74% of aviation activity corresponds to flights departing from an EEA aerodrome flying to an aerodrome situated in another EEA Member State. Furthermore, acting at the EU level prevents the distortion of competition in the internal market by ensuring that the environmental constraints imposed on intra and extra EEA flights are harmonised at the EU level. This harmonized approach will also ensure that the regulation is compatible with meeting the EU's 2030 domestic climate targets. Lastly, from an aviation industry perspective, the existence of the EU ETS helps justify argumentation against action at national level by Member States. Without an effective system in place, the likelihood of such action would significantly increase. 2.2.Legal basis The legal basis for the EU ETS Directive 2003/87/EC, as well as all subsequent legislation amending it or other legislation regulating GHG emissions, is the environmental legal basis enshrined in Article 192 of the Treaty on the Functioning of the European Union. This should also remain the legal basis for the new Regulation, as the principal objective of the measure is the protection of the environment through the reduction of GHGs.



3.What should be achieved? Regulation (EU) No 421/2014 introduced Article 28a in the EU ETS Directive 2003/87/EC, which requires the Commission to report back to the Council and the European Parliament on the outcome of the 2016 ICAO Assembly. When doing so, the Commission shall consider and, if appropriate, include proposals in reaction to the ICAO developments on the appropriate scope for coverage of emissions from extra EEA-flights from 2017 onwards. Any amendments to the scope of the EU ETS for aviation should guarantee that the EU achieves its climate targets. In this regard the EU ETS should maintain a high level of environmental ambition within the EU, while further incentivizing the transition to and implementation of the GMBM to maximize the global mitigation impact. Should the EU decide not to amend the EU ETS in response to the outcome at the 2016 ICAO Assembly, the EU ETS will – by default – apply in its full scope from 2017 onwards. This would mean that aircraft operators will be responsible for GHG emissions from all flights departing from or arriving at aerodromes situated in the EEA. 3.1.The EU’s domestic and international climate targets The EU is bound to achieve its domestic and international climate commitments. It is evident from the different projections outlined in Annex 5 that all sectors of the economy, including aviation, must contribute already prior to 2020, to reduce global GHG emissions to achieve these targets. The need for all sectors of the economy to contribute to emissions reductions has been confirmed by the European Council on a number of occassions, as well as being restated in the EU and its Member States’ Nationally Determined Contribution under the Union’s instrument of ratification for the Paris Agreement. 3.1.1.EU climate targets

Pursuant to the Commission's 2011 low-carbon economy roadmap, the EU should by 2050 cut its emissions to 80% below 1990 levels through emission cuts in all sectors. In relation to the this general commitment, the 2011 White Paper on Transport sets a specific target for the transport sector, including aviation, to reduce GHG emissions by 60% by 2050 compared to 1990 and by around 20% by 2030 compared to 2008. Projections of the European Environmental Agency suggest that the transport target will not be met, unless additional measures are put in place. The recently adopted Commission Aviation Strategy also pointed at the relevance and effectiveness of the EU ETS as key tool to reduce the carbon footprint of the aviation sector in the EU. In October 2014, EU leaders agreed on the climate and energy framework for 2030, including a binding domestic target to reduce domestic GHG emissions by at least 40% below 1990 levels by 2030. The European Council of October 2014 concluded that the target be met in the most cost-effective way possible, by reducing emissions domestically in the non-ETS sectors by 30% compared to 2005 and in the ETS sectors by 43% compared to 2005. To the latter end, the linear reduction factor in the EU ETS sectors would be increased from 1.74% to 2.2% after 2020. For these calculations the aviation sector, including all intra-EU flights, was considered as an EU ETS sector. The 2030 framework will succeed the 2020 climate and energy framework which contains the target of reducing GHG emission by 20% below 1990 levels by 2020. Legally binding legislation establishes the measures to meet the targets under the 2020 package (in force) and 2030 domestic climate framework (currently under discussion by the co-legislators). 3.1.2.International commitment under the Paris Agreement The EU is strongly devoted to achieve the climate objective of limiting global average temperature increase to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit global temperature increase to 1.5 degrees Celsius, as committed to under Article 2 of the Paris Agreement. Under the Paris Agreement, "Parties aim to reach global peaking of greenhouse gas emissions as soon as possible […] and to undertake rapid reductions thereafter […], so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century" (Article 4.1). The Paris Agreement states that “developed country Parties should continue taking the lead by undertaking economy-wide absolute emission reduction targets", while “developing country Parties should continue enhancing their mitigation efforts, and are encouraged to move over time towards economy-wide emission reduction or limitation targets” (Article 4.4). The Paris Agreement is a legally binding international treaty. It entered into force on the 4th of November 2016, following its ratification by the EU. Consistent with the climate and energy framework referred to above, in the EU and its Member States’ Nationally Determined Contribution under the Union’s instrument of ratification for the Paris Agreement, the EU and its Member States are committed to a binding economy-wide target of an at least 40% reduction in emissions compared to 1990 levels by 2030, with no contribution from international credits. As an economy-wide objective, all sectors of the economy are due to contribute to emissions reductions. The EU is also commited to meeting at least the global aspirational goal for international aviation that was agreed by the 2010 ICAO Assembly and reaffirmed by the 2013 and 2016 ICAO Assemblies, namely maintaining global net CO2 emissions from international aviation at 2020 levels through carbon neutral growth . In its recent resolution on the implementation of the Paris Agreement, the European Parliament states that “any amendment of the existing legislation on including aviation in the EU ETS can only be considered if the GMBM is ambitious, and that, in any case, intra-European flights will continue to be covered by the EU ETS”. 3.2.Policy objectives 3.2.1.General policy objective The general environmental policy objective of the amendments to the EU ETS for aviation following the 2016 ICAO Assembly remain unchanged since the integration of aviation into the EU ETS through Directive 2008/101/EC, namely to ensure the aviation sector's sufficient contribution to reducing the impacts of climate change. In reviewing the scope for the 2017-2020 period, the EU must ensure that the current level of environmental ambition under the EU ETS for emissions from the aviation sector is at least maintained to meet the EU's domestic 2020 target, while supporting the implementation of the GMBM in relation to international flights. For the period post-2020, when the GMBM is expected to be operational, the changes to the system must guarantee that the global mitigation impact of aviation emissions is maximised through the implementation of the GMBM, whilst securing the aviation sector's adequate contribution to achieving the EU's domestic 2030 climate target and international commitments under the Paris Agreement. In addition to the general environmental objective, it must be ensured that both in the period up to 2020 and post-2020, the action has no negative economic impact on the EU, and in paricular its aviation sector, and that it does not harm the relationship with ICAO. 3.2.2.Specific policy objectives The specific objectives for the 2017-2020 period are: Environmental objective:

Address emissions from aviation activities, pending the implementation of a GMBM in 2021, to achieve the EU's 2020 climate targets. Economic objective: Maintain the competitiveness level in the aviation sector and the level playing field in the internal market for aviation, including by providing legal certainty to operators and keeping the administrative costs associated with the measure low. Relationship to ICAO: Enable the development, transition and readiness for the implementation of the GMBM from 2021. Political/international acceptability of the EU. The specific objectives for the period post-2020 are: Environmental objective: Ensure that aviation emissions from flights to, from or within the EEA continue to be addressed effectively post 2020, so as to at least maintain the EU's current, domestic level of environmental ambition and relevant aviation contribution, in line with the EU's domestic 2030 climate commitment. Facilitate the implementation of the GMBM from 2021 to maximize the global mitigation impact to meet the at least 2 degrees Celsius target and to pursue efforts to limit global temperature increase to 1.5 degrees Celsius under the Paris Agreement and ICAO's target of CNG 2020. Economic objective: Maintain the competitiveness level in the aviation sector and the level playing field in the internal market for aviation, including by providing legal certainty to operators and keeping the administrative costs associated with the measures low and avoiding any duplication of regulation. Relationship with ICAO: Implementation of the GMBM by the EU and third countries. Political/international acceptability of the EU measure.



4.What are the various options to achieve the objectives?

Pursuant to Regulation 421/2014, the Commission is to report on the outcome of the 2016 ICAO Assembly to the European Parliament and to the Council and consider and, if approprite, include proposals in reaction to the ICAO developments on the appropriate scope for coverage of emissions of extra-EEA flights from 1 January 2017 onwards. The options described below were developed to take account of the positive outcome of the 2016 ICAO Assembly, namely the adoption of a resolution on the GMBM, including a roadmap for the completion of its key design elements, and to provide continued positive momentum to the ICAO process. They build on the expectation that the GMBM will become operational in 2021. Therefore, the policy options are divided into options available for the 2017-2020 period and options available for the period post 2020 when the GMBM is expected to be operational.The considered policy options up to 2020 and post-2020 are illustrated in Figure 4-1 below. Figure 4-1: Overview of considered policy options 4.1.2017-2020 Options All of the options for the 2017-2020 period maintain the EU ETS to regulate aviation emissions, but with various geographical scopes. They rank from a "do-nothing" scenario (automatic return to full-scope), over a scenario where all flights departing from (but not arriving at) an aerodrome situated in the EEA are covered, keeping the current intra-EEA scope. 4.1.1.Option 0: "Do nothing" (return to full scope EU ETS) According to the existing guidelines for impact assessments, the option of "changing nothing" must be considered as the "baseline". The “baseline scenario” should always be developed and used as the benchmark against which the alternative options should be compared. The EU policy aims at covering emissions from EU-related flights though market-based measures. In the absence of any international developments in this regard the EU ETS would continue covering flights to and from third countries. From a legal perspective, should the EU decide not to amend the EU ETS in response to the outcome at the 2016 ICAO Assembly, the EU ETS will – by default – apply in its full scope from 2017 onwards. This means that if no action is taken aircraft operators will be responsible for GHG emissions from all flights departing from or arriving at aerodromes situated in the EEA unless exemptions take place. This option, despite having been controversial in the past with third countries, has been favoured by some stakeholders due to its high envoronmental impact. This option is the baseline against which the other policy options will be assessed. The key features of the full scope application, as specified in Directive 2003/87/EC as amended by Directive 2008/101/EC and Regulation (EU) No 421/2014, are summarised in Annex 9. 4.1.2.Option 1: Intra-EEA scope Option 1 would extend the approach taken under Regulation (EU) No 421/2014 beyond 2016. Regulation (EU) No 421/2014 limited the effective coverage of the EU ETS for the 2013-2016 period to intra-EEA flights. The enforcement of compliance obligations up to 2020 would be waived for all flights to and from non-EEA destinations. The amount of allowances to be auctioned and the amount of free allowances to be allocated would have to be adjusted in proportion to the emissions coverage. This option is supported by some stakeholders, notably from the aviation industry and from Member States public authorities. 4.1.3.Option 2: Departing Flights Under option 2, all emissions from intra-EEA flights and from all departing flights to third countries would be covered, while emissions from incoming flights from third countries would be excluded. The total cap for emissions from aviation activities as well as the quantity of the free allowances and the allowances to be auctioned for aviation activities would have to be adjusted in proportion to the aviation emissions coverage. 4.2.Options Post 2020

All post-2020 options, except the baseline option, consider that the GMBM will be implemented from 2021 onwards, and it is assumed that it will, at least, cover emissions between airports in EEA and in third countries. Different options, however, are assessed with regards to intra-EEA flights. As referred before, this allows a preliminary analysis of the impacts that different potential scenarios on the basis of the already agreed features of the GMBM. 4.2.1.Option 0: Baseline As for the period before 2020, the "do nothing" scenario would be, by default, applying the EU ETS to all flights arriving to or departing from the EEA. As also said before, despite this option being controversial at international level it is supported by some stakeholders, notably individuals and environmental NGOs, due to its high envoronmental impact. Under this option, the full scope application of the EU ETS for aviation continues post 2020. Contrary to the full scope option under the 2017-2020 scenario, where a limited use of international credits for compliance is provided for, only EU allowances (general and aviation allowances) are eligible for compliance. Moreover, the ETS cap for aviation emissions of 95% of the 2004-2006 average will be reduced in accordance with the annual linear reduction factor that has been proposed to apply to other EU ETS sector of 2.2%. It must be noted that the implementation of the EU ETS for the post 2020 period must start some years before 2020. For example, in the absence of any amendments, allocation procedures, including a complete (full-scope) tonne-kilometre collection exercise, must be undertaken from 2018. Table 4-1: Key features of option 0 (2021-2030) Feature Assumptions Regional scopes Intra-EEA and Extra-EEA Aviation cap EU ETS aviation cap of 95% of the 2004-2006 average aviation emissions. From 2021 onwards, the annual linear reduction factor of 2.2% that applies to other EU ETS sector will apply to the aviation cap. Allocation Free allocation (85%) Surrendering requirements All emissions Eligibility of units EU allowances (general and aviation allowances) 4.2.2.Option 1 The EU ETS would continue to apply to intra-EEA flights. Consistent with the general review of the EU ETS for the period 2020-2030 and the analyses carried out to adopt the 2030 domestic climate target, the annual linear reduction factor of 2.2% that has been proposed to apply to other EU ETS sectors would also apply to aviation cap from 2021 onwards. In addition, only EU allowances (general and aviation allowances) will be eligible for compliance. In a complementary manner, emissions from extra-EEA flights would be subject to the GMBM. To avoid any duplication of regulation, the GMBM would only be applied to emissions from extra-EEA flights but not from intra-EEA flights. Some stakeholders, notably from the civil society, have stressed that in the light of the expected features of the GMBM the EU should at least keep intra-EEA covered by the EU ETS after 2020.



Table 4-2: Key features of option 1 (2021-2030) Feature Assumptions Regional scopes Intra-EEA Aviation cap EU ETS aviation cap of 95% of the 2004-2006 average aviation emissions. From 2021 onwards, the annual linear reduction factor of 2.2% that applies to other EU ETS sector will apply to the aviation cap. Allocation Free allocation (85%) Surrendering requirements All emissions Eligibility of units EU allowances (general and aviation allowances) Notes GMBM would apply to extra-EEA flights, including GMBM CNG2020 target and the eligibility of international credits for offsetting. 4.2.3.Option 2 This option should align the EU ETS for intra-EEA flights closer to the GMBM for extra-EEA flights by taking several of its design elements. Different manners of achieving this are conceivable. As under option 1, extra-EEA flights will be covered, in any case, by the GMBM. The most straightforward option (option 2) would change the design of the EU ETS for intra-EEA flights to operate like the GMBM as an offsetting mechanism, while maintaining a similar ambition level as option 1. Allowances for aviation activities would not anymore be issued. Instead, aircraft operators would have to surrender general ETS allowances for their emissions above certain levels.The design of the EU ETS would continue to maintain a high climate ambition through the following features: I.The baseline above which offsetting would take place would be the same as the cap for aviation emissions under option 1: 95% of the average 2004-2006 aviation emissions - and application of the EU ETS's linear reduction factor for stationary installations of 2.2% from 2021 onwards to the aviation cap.

II.Airlines surrender only general EU ETS allowances for emissions above the cap for aviation. This option also takes into account the opinion by some stakeholders to keep the EU action on intra-EEA flights after 2020.

Table 4-3: Key features of option 2 (2021-2030) Feature Assumptions Regional scopes Intra-EEA Baseline EU ETS aviation cap of 95% of the 2004-2006 average aviation emissions. From 2021 onwards, the annual linear reduction factor of 2.2% that applies to other EU ETS sectors will apply to the aviation cap. Allocation No issuance of aviation allowances (i.e no free allocation, no auctioning). Allowances will be purchased from other EU ETS sectors. Surrendering requirements Only above aviation cap Eligibility of units EU general allowances Notes GMBM would apply to extra-EEA flights, including GMBM CNG2020 target and international credits for offsetting. Another alternative (option 2.1) could consist of combining the implementation of both the EU ETS and the GMBM on intra-EEA flights. The GMBM would be used to offset emissions above 2020 levels, while the EU ETS would address the gap in ambition between the EU ETS cap for aviation and the GMBM CNG2020 baseline. In this scenario, technical details concerning the interaction between the GMBM and the EU ETS need to be clarified because of a number of differences between the key features of the two systems. Issues that would need to be addressed are outlined in Table 4-4.



Table 4-4: Difference in key features of the GMBM and the EU ETS Feature EU ETS GMBM Aviation Cap/Baseline Emissions capped for aviation at 95% of the 2004-2006 average aviation emissions. From 2021 onwards, the annual linear reduction factor of 2.2% that applies to other EU ETS sectors will apply to the aviation cap. Carbon Neutral Growth from 2020 (baseline calculated as 2019-2020 average emissions) Allocation Free allocation (85%) No free allocation Surrendering requirements Yearly. Obligation for operators is based on an individual approach. Annual calculation of offsetting obligations but three-year compliance cycle. Obligation for operators is based on global sectoral growth rates. Coverage Domestic flights and international flights (between EU Member States under the intra EEA scope; to and from third countries under the full-scope). All international flights between countries participating in the scheme (except on routes to and from exempt countries). Eligibility of units EU general allowances and EU aviation allowances. International credits (eligibility criteria to be determined) While the differences in key features and the need to clarify the details of the GMBM in the next years make it challenging at this stage to define the precise parameters to model the impacts of option 2.1, notably as regards the administrative effort required, an initial overall assessment of its effects is provided in section 5. 4.2.4.Option 3 All intra-EEA and extra-EEA flights would be covered by the GMBM. Intra-EEA domestic flights in respect of which ICAO has no jurisdiction would have to be opted into the GMBM to safeguard a level-playing field within the EEA market. This option would reduce the EU's level of climate ambition. The EU would move from its existing level of ambition to accept that aviation emissions are stabilized at 2020 levels. Furthermore, increases above this level would not be compensated with domestic emission reductions, but by using international offsets, representing reductions achieved in third countries and not coming from a cap-and-trade system with possibly less environmental integrity (e.g. emission reductions are not counted compared to a fixed cap but to projected "business-as-usual" emission growth; thus, in case of a too generous "business-as-usual" projection, emissions that would effectively have never occurred may be counted as "reductions"). As explained before, international credits cannot be accounted towards the at least -40% domestic climate target. This option is supported by some stakeholders, notably from the aviation industry. Table 4-6: Key features of option 3 (2021-2030) Feature Assumptions Regional scopes Application of GMBM to international intra-EEA and extra-EEA flights. Domestic flights to be opted-in. Baseline CNG 2020 Allocation No issuance of allowances Surrendering requirements Only above target Eligibility of units International credits Notes GMBM would be applied. The legal base for the EU ETS would be maintained but intra-EEA and extra-EEA flights exempted.

4.3.Discarded options The options of covering all intra-EEA flights and 50% of departing and arriving flights for extra-EEA flights (50-50 option), as well as an airspace approach whereby intra-EEA flights would be fully covered but emissions from extra-EEA flights cut back in proportion to the distance travelled within the EEA, were discarded. The 50-50 option has not been further assessed, as it is expected to deliver similar results as the departing flights option. An option based on "airspace" was not considered, as it was proposed by the Commission in 2013 but not adopted by the co-legislators in this form due notably to claims that it would hinder progress in ICAO and concerns linked to complexity. Some options mentioned by certain stakeholders, such taxation-related ones, have been discarded given the difficulties to impose fuel taxes for international flights due to legally binding commitments made in Air Service Agreements with third countries. It should also be noted that one of the advantages of market-based measures is that they allow meting climate targets at the lowest cost, achieving reductions where it is cheaper and improving cost-efficiency. This is also why the majority of stakeholders support the use of MBMs, as opposed to taxes. Furthermore, now that ICAO has adopted a global markets-based measure for international aviation emissions it would not be appropriate for Europe to move away from carbon markets to taxation on CO2 emissions, all the more since strategic partners such as China and South Korea are also addressing aviation through domestic emission trading schemes. 4.4.Cross-cutting simplifications 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. In view of the 300 largest aircraft operators being responsible for 99% of annual emissions, important simplifications have been made in the past in relation to small emitters. Small emitters are defined as aircraft operators operating fewer than 243 flights per period for three consecutive four-month periods and aircraft operators operating flights with total annual emissions lower than 25000 tonnes CO2 per year. While commercial aircraft operators (i.e. airlines offering scheduled flights) benefit from an exemption from the EU ETS in case that they emit less than 10000 tonnes CO2 per year, small, non-commercial aircraft operators were initially covered by the EU ETS. The Commission launched in early 2013 a study by PWC et al. to investigate the costs and benefits of the inclusion of small emitters in the EU ETS. It revealed amongst others that the obligations with regard to MRV generate relatively higher administrative costs for small than large operators. Compared to the level of EU ETS revenues raised from a small emitter, the administrative cost can be up to 4 times higher. Consequently, Regulation (EU) No 421/2014 introduced a number of simplifications for small emitters. The emissions of aircraft operators with total annual emissions lower than 25 000 tonnes CO2 are consided as verified emissions if they were determined by using the small emitters tool approved under Regulation (EU) No 606/2010 and populated by Eurocontrol with data from its ETS support facility. Moreover, Member States may implement simplified procedures for non-commercial aircraft operators as long as such procedures provide no less accuracy than the small emiters tool provides. In addition, Regulation (EU) No 421/2014 introduced in Annex I (k) of the EU ETS Directive a de-minimis threshold until 31 December 2020 to remove any obligations for small, non-commercial aircraft operator operating flights with total annual emissions lower than 1000 tonnes per year. While the MRV simplications for small emitters are permanent, the exemption of small, non-commerical aircraft operators ends at the end of 2020. The extension of the de-minimis threshold post-2020 should therefore be considered.

5.What are the impacts of the different policy options and who will be affected? This section will assess the environmental, economic and social impacts of the different policy options. The impacts will be assessed separately for the 2017-2020 options and the post-2020 options. The quantitative assessment of the impacts of the different policy options is based on the AERO Modelling System (AERO-MS), a modelling tool which is specialised in the aviation sector. It evaluates the environmental and economic consequences for all relevant actors (airlines, consumers, governments and manufactures) of responses to emission-related measures in the aviation sector. The AERO-MS model was selected as providing a mechanism for modelling the economic and environmental impacts of policies without the need for assumptions (for example, regarding the impact of changes in airline costs on demand or technology development). AERO-MS was also used for the analyses of policies at ICAO and has been performed as part of the previous study in 2013. Since that time, the tool has been updated and now uses a base year of 2010 and it includes forecast years of 2020, 2030 and 2040. 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 the effects of polices on the economics and the environmental impact on aviation. The methodology is explained in more detail in Annex 4. An important element is that AERO-MS applies growth rates as derived from ICAO's Committee on Aviation Environmental Protection forecasts. While this data is commonly used for studies in the aviation sector, it expects a continued strong growth in aviation emissions, also related to EU emissions. For instance growth in emissions related to departing flights (both intra and extra EU) in the period 2010-2020 is estimated at 36%, with growth even increasing after 2020 to reach an 86% increase in 2030 compared to 2010, overall resulting in average emissions in the period 2021-2030 being 63% above 2010. In contrast, the increase in aviation emissions experienced in the last few years is markedly lower (e.g., the UNFCCC inventory for the EU report for aviation fuel – domestic and international bunkers fuels, based on fuel sold - show almost no increase in the period 2010-2014). Therefore also a sensitivity scenario is applied using aviation emission projections from the PRIMES models. PRIMES sees significantly less growth, with emissions of aviation fuels sold in the EU increasing in the latest reference projections by only 18% on average over the period 2021-2030 compared to 2010 in the EU. This is referred to as the low aviation emission growth sensitivity. PRIMES energy model is not aviation specific. It derives its growth rates on the basis of aviation fuels sold in the EU and simulates the European energy system and markets on a country-by-country basis and across Europe for the entire energy system. The model provides amongst others projections of CO2 emission over the 2015-2050 period in 5-years intervals. The data is based on Eurostat statistics for the years 2000-2010. PRIMES has been used as a model for the revision of the EU ETS and for establishing binding reduction targets for EU Member States for non-ETS sectors under the Effort Sharing Regulation for the 2021-2030 period.

The main differences between PRIMES and AERO-MS are due to different growth rates (and different rates of energy efficiency improvement). While a continued strong growth in global aviation activities is likely, in particular due to significant growth of aviation activities related to developing countries, it was deemed appropriate to develop a more conservative sensitivity scenario using PRIMES growth projections, in particular for aviation activities related to the EU. In the PRIMES Reference scenario increase by ~80% between 2005-2030 (63% intra-EU and 89% international extra-EU), but the resulting energy demand increases far less. (15% total, 6% intra-EU and 20% international extra-EU), showing the impact of energy efficiency. These are due to stock replacement of older aircraft, better logistics including more passengers per flight, as well as policy measures such as the Single European Sky. 5.1.Environmental Impacts In terms of environmental impacts, not only the direct impacts of the policy options on the overall (EEA-related/global) aviation emissions must be considered. The indirect impacts of the policy options through the purchase and surrendering of EU allowances from other EU ETS sectors and offsets through international credits are at least equally important. With the aviation sector contributing to the EU's 2020 and 2030 climate targets, its inability to achieve absolute emission reductions implies that it will be required to purchase allowances from other EU ETS sectors. These purchases of EU allowances from other sectors and the use of international credits up to 1.5% of emissions represent additional emission savings which would occur in other sectors. 5.1.1.Impacts on Aviation Emissions Compared to a ‘business-as-usual’ scenario with no MBM in place to address aviation emissions, all policy options are expected to reduce overall aviation emissions, both in the 2017-2020 and the post-2020 period. However, neither the 2017-2020 options, nor the post-2020 options can prevent an increase in aviation emissions in absolute terms from 2010 to 2020 and from 2020 to 2030 respectively. 5.1.1.1.2017-2020 Options With regards to the 2017-2020 policy options, the results in terms of annual CO2 emissions of intra-EEA and extra-EEA aviation activities depend on the geographical scope of the option. Variation between options in terms of total EEA-related (flights to or from EEA airports) emissions is small, lower than 1%. None of the options is foreseen to have an impact on the aviation emissions that are unrelated to EEA flights. Option 0 covers 35% of global aviation emissions and is projected to result in 306.72 Mt CO2 emissions from EEA-related aviation activities per year. 8% of global aviation emissions fall within the scope of option 1. This option is expected to lead to 308.98 Mt CO2 emissions from intra-EEA and extra-EEA aviation activities per year. Option 2 covers 22% of global aviation emissions and its annual EEA-related aviation emissions are estimated to amount to 307.84 Mt CO2 emissions. Table 5-1. Annual emissions 2017-2020 options Geographic scope CO2 emissions (Mt per annum) % change from Option 0 Option 0 Option 1 Option 2 Option 1 Option 2 Total EEA - related 306.72 308.98 307.84 0.74% 0.37% Total world 945.38 947.65 946.53 0.24% 0.12% Covered 327.84 80.08 199.36 -75.57% -39.19% 5.1.1.2.Post-2020 Options

In relation to the post-2020 policy options, the overall emissions relate to the degree of interrelationship of the EU measure with the GMBM. The forecasted emissions under option 0 are based on the assumption that the GMBM is not operational in the post-2020 period. Variations between options are not significant (between 393.26 Mt and 403.86 Mt per year). Option 0 is projected to result in 393.26 Mt CO2 annual EEA-related emissions in 2030. Over the period 2021-2030 this option is projected to result in 11,573.57 Mt CO2 emissions from global aviation activities. Option 1 will result in 1,333.24 Mt CO2 annual emissions from global aviation activities in 2030 out of which 400.45 Mt CO2 come from EEA-related flights. This corresponds to 11,617.58 Mt CO2 emissions over the period 2021-2030. Option 2 results in 1,333.62 Mt CO2 annual emissions (400.82 Mt CO2 from EEA-related flights) in 2030, which correspond to 11,620.58 Mt CO2 emissions from global aviation activities over the period. Under option 3, annual emissions amount to 1,336.66 MT CO2 annual emissions in 2030 (403.86 Mt CO2 from EEA-related flights), corresponding to 11,640.46 Mt CO2 emissions over the period. Although emissions for sub-option 2.1 were not modelled in detail, they are estimated to be in between those for options 2 and 3, closer to the latter when looking at 2030 figures, as the growth above 2020 levels becomes more significant. These results would be significantly lower in case of the sensitivity scenario with low growth of emissions in aviation, which leads to only 289 Mt CO2 EU-related emissions on average in the period 2021-2030 5.1.2.Impacts on Emissions from other Sectors This sub-section analyses how under the different options aviation contributes to achieve emission reductions in other sectors by acquiring and surrendering emission units, either EU allowances under the EU ETS or international credits. Divergences between different options are more significant in this case compared to subsection 5.1.1. Before 2020, the aviation sector contributes to the EU's 2020 climate target of reducing emissions by 20% compared to 1990 levels. Sectors under the EU ETS are expected to reduce emissions by 21% compared to 2005 levels. For the 2017-2020 options, an EU ETS emissions cap for aviation emissions has been calculated based on the historical aviation emissions for each of the policy options. EU aviation allowances are surrendered for CO2 emissions up to the aviation cap. Above the aviation cap, emissions must be offset through the purchase and surrender EU allowances from other ETS sectors (or, in a limited manner, international credits issued under the Kyoto Protocol mechanisms. Also post-2020 the aviation sector will continue to contribute to the EU's climate target of reducing emissions by 2030 by at least 40% below 1990 levels. Sectors under EU ETS are to reduce emissions by 43% below 2005 levels, whereas emissions falling under the proposed Effort Sharing Regulation are to decrease by 30%. As the 2030 target is domestic, international credits cannot be used to achieve it. Similarly to the 2017-2020 options, thresholds have been set for the post-2020 options above which emissions must be offset. For option 3, this would be ICAO's target of CNG2020, whereas for the other options it would be established in accordance with the EU ETS aviation cap: 95% of the average 2004-2006 historical aviation emissions, and application of the EU ETS's linear reduction factor for other EU ETS sectors of 2.2% from 2021 onwards to the aviation cap. 5.1.2.1.2017-2020 Options Under none of the policy options will the aviation sector achieve absolute emission reductions in the pre-2020 period. Since none of the policy options prevent an increase in aviation emissions between 2010 and 2020, there will be a demand from the aviation sector for emission allowances from other ETS sectors and for international credits, thus favouring reductions in them. The larger is the scope, the more significant is that demand. It is expected that under option 0, 117.37 Mt of CO2 emissions (112.45 through EU allowances) will have to be offset annually (in 2020) through EU allowances and international credits. Under option 1, this amounts to 25.10 Mt of CO2 emissions (23.90 through EU allowances). Under option 2, the figure is 71.67Mt of CO2 emissions (71.67 through EU allowances). 5.1.2.2.Post-2020 Options Under all post-2020 policy options, it is assumed that aviation emissions will increase further between 2020 and 2030. Aviation emissions covered by the EU ETS or GMBM are expected to increase by at least 81% under option 0 and up to 91% under option 3 by 2030 compared to 2010. Therefore, under all options demand will be generated for emission units and reductions would be fostered in other sectors. Apart from option 0, main divergences between options are related to the environmental ambition of the measure: the EU ETS cap or the GMBM baseline (CNG 2020). Depending on whether emissions are covered by one or the other emissions reductions will be favoured within EU ETS sectors or in other sectors in third countries. Under option 0 it is expected that 2,062.35 Mt of CO2 emissions reductions will fostered in other sectors covered by the EU ETS over the period 2021-2030 (206.2 annually on average). This would be markedly lower in the sensitivity with low aviation emission growth, with only 832.35 Mt of CO2 emissions to be offset over the period 2021-2030 at the EU level, 83.2 Mt per year.

Options 1 and 2 show very similar results. Under option 1, 1,703.65 Mt of CO2 emissions would be offset over the period, including through the EU ETS and the GMBM. From this, 493 Mt CO2 would correspond to intra-EEA activity covered by the EU ETS, thus fostering reductions in other ETS sectors. Under option 2, the global impact is of around 1,705.7 Mt CO2 over the period, from which 495Mt corresponds to intra-EEA activity – resulting in reductions in EU ETS sectors. For both options 1 and 2 this would be markedly lower in the sensitivity with low aviation emission growth, with a demand of only 23 Mt of CO2 per annum at the EU level for other ETS sectors. Similar figures can be estimated for sub-option 2.1. However, as only around 26 Mt per year would be covered with allowances under the high growth scenario (whilst for the rest of the obligation international credits would be used) the contribution to domestic reductions in the EU would be smaller and proportionally decreasing over time. Under option 3, 1,354.99 Mt of CO2 emissions would be offset under the GMBM over the 2021-2030 period, from which 144.42 would correspond to intra-EEA flights. These emissions would be entirely offset with international credits. This means that there will be no contribution from aviation to domestic reductions in the EU, while all other sectors would be required to step up their efforts after 2020 to compensate for that. This shortfall in ambition by intra-EEA aviation could put at risk the economy-wide -40% reduction to which the EU committed in the Paris Agreement. 5.1.2.3.Impacts on the EU ETS The potential impacts of the various options on other ETS sectors will be proportional to the scale of the net demand for allowances from the aviation sector. Table 5-3 shows the volume of additional annual demand between 2021 and 2030, for a range of modelling outcomes. As can be seen from the table, the scale of this impact depends primarily on the scope of the coverage of emissions based on the option chosen and the expected growth in aviation emissions. To reflect the uncertainty concerning the growth in aviation emissions, numbers are shown for both an estimate based on detailed AERO-MS emission projections as well as for emissions projections from the PRIMES model. The subsequent impact of additional net demand on the carbon price is the result of the interplay between the supply and demand for allowances.



Table 5-3: Estimated average annual demand for general EU allowances from the aviation sector in 2021-2030, in absolute terms (Mt CO2) Average annual demand for general EU allowances (= emissions aviation over cap for aviation) in the period 2021-2030 High estimate (based on AERO-MS emission projections), EEA scope Low estimate (based on PRIMES emission projections, EUCO30 projection), EU scope Option 0 206 83 Departing flights scenario (for comparison purposes) 135 49* Options 1 and 2 49.5 23 Option 3 0 0 * The impact assessment supporting the 2030 Climate Change and Energy Framework (SWD(2014) 15final), which included all outgoing aviation in its projections, as covered by the PRIMES model, estimated for the scenario GHG40 an average annual demand for general EU allowances from the aviation of 49 million. As the EU ETS cap sets a binding limit for emissions from stationary installations, additional demand for allowances from aviation would not lead to additional emissions but would have to be matched by additional reductions in other ETS sectors. Therefore, a net increase in demand could be reflected through a limited impact on the carbon price signal for other ETS sectors as well as through increased revenues from the auctioning of allowances by Member States, leading to higher revenues from auctioning being available for climate and energy measures. Increased demand for allowances will have a different impact on the power sector and on energy intensive industry which both fall under the ETS. Installations in the power sector have to buy all allowances needed for compliance on the carbon market, and an increase in demand would impact the carbon price for these installations. Any such impact will depend on the volume of allowances and the interaction with the Market Stability Reserve. By contrast, a smaller impact on industry is expected, since the proposal for revision of the EU ETS foresees the continuation of free allocation to industry. Any potential price impact would therefore affect mainly those allowances which are purchased on the market while at the same time being offset by a higher value of free allocation. The impact due to changes in the carbon price is expected to be proportional to the overall increase in the demand for allowances. The overall cap or limit on the number of allowances for stationary installations in the ETS is some 15.5 billion allowances in 2021-2030. The different options are expected to have a limited economic impact on other sectors covered by the EU ETS, due to the small size of the net demand from the aviation sector when compared to overall emissions figures. Aviation demand is relatively modest compared to the total GHG emissions covered by the EU ETS. Overall emissions covered by the system in the period 2021-2030 is forecasted to be between 1887 Mt of CO2 eq in 2020 and 1558.8 Mt of CO2 eq in 2030. When these figures are compared with the expected demand from the aviation sector it can be noted that, with the exception of the baseline option, the proportion remains between 1% and 3%. For the baseline option due to the larger scope the proportion ranges from 5-12%, depending on the assumed growth in emissions. This means that while the net demand for allowances from aviation would result in an increase in the demand for ETS allowances this is limited in scale when compared to the overall number of allowances on the market. Furthermore, from 2019 on the Market Stability Reserve will lead to adjustment of the number of allowances to be auctioned depending on the number of allowances in circulation. In general, scenarios with a higher net demand from aviation could lead to a swifter reduction in the surplus. However, because the number of allowances to be placed in the reserve reflects the number of allowances in circulation, at the same time a faster increase in the net demand for ETS allowances will be partially offset by a lower amount of allowances being placed in the reserve. The MSR will therefore mitigate the impacts of an increase in demand on the overall balance between supply and demand for allowances in the EU ETS, and thus the impact on the carbon price. Under option 0, 206.2 Mt of CO2 emissions must be covered through ETS allowances annually (over the period 2021 - 2030), or translating to in total a demand of over 2 billion allowances in the ETS over 10 years. This number would be reduced to as much as 83 Mt of CO2 emissions that need to be covered by ETS allowances annually over the 10 year period in case of the sensitivity with low aviation emission growth. It is clear that options 1 and 2 would have an impact on the ETS in terms of the net demand for ETS allowances from the aviation sector, although the extent of this impact depends strongly on the growth of emissions in aviation in intra-European flights, as flights to and from third countries would be covered by the GMBM. Under options 1 and 2, the need to cover emissions through ETS allowances would be reduced to around 49.5 Mt of CO2 emissions per annum, or around half a billion over the 10 year period. This number would be reduced further to as little as 23 Mt of CO2 emissions per year (230 Mt over 2021-2030) in case of the sensitivity with low aviation emission growth. Under options 1 and 2, impacts on the ETS are thus probably more limited. It should be noted that for instance the Impact Assessment accompanying the proposal for a 2030 Climate and Energy Framework simulated a net demand from aviation towards the other ETS sectors, based on all outgoing flights equal to around 488 Mt of CO2 emissions over the period 2020-2030, or the need to cover emissions through allowances from the ETS at around 49 Mt of CO2 emissions per year. Under option 3, there would be no need at all to cover emissions via allowances from the ETS, as also intra-European emissions would be addressed through the GMBM, where international credits are allowed. Under this scenario, fewer emissions reductions would need to take place in other ETS sectors to meet the binding cap on emissions from stationary installations compared to a situation in which aviation would still remain part of the ETS.

5.2.Competitiveness and Economic Impacts With regards to the economic impacts, it is important to assess the policy options' implications on operating costs, prices and demand, as well as auction revenues. It will also be necessary to contemplate whether there is a potential of the policy options to distort competition, in particular in relation to direct-city pair routes, one-stop services and tourist destinations. The administrative effort resulting from the different options is also be evaluated. Competitiveness relates directly to improvements in productivity. Assessing impacts of policies on productivity is difficult, not least because there are multiple ways in which to measure productivity. In the widest sense, an increase in productivity refers to an improvement in the ratio of inputs to outputs. An increase in fuel prices should lead to the reduction of fuel as an input per unit of output (RTK), for example by incentivising high occupancy rates of aircraft, as well as investment into more efficient aircraft. At the same time, it may lead to a decrease in the average productivity of capital, as existing aircraft are used less intensively (e.g. only when high occupancy rates can be guaranteed). A conclusive assessment of overall productivity impacts in this wider sense is therefore not easily modelled. The present assessment, instead, looks at what is defined as cost/price competitiveness: the estimated impact of the policy options on costs and prices in the sector. In addition, we look at how the changes in price affect demand and the impact this has on the level playing field. Since the administrative costs associated with the measure can also have an impact on the level playing field, they must also be considered 5.2.1.Impacts on Operating Costs, Prices and Demand All policy scenarios up to 2020 and post-2020 imply minimal additional operating costs compared to a business-as-usual scenario without any market-based-measures in place to regulate aviation emissions. The differences in operating costs have a minimal impact on the average price per RTK and thus on demand. Indeed, empirical evidence on ticket prices for consumers confirms the minor economic impact the EU ETS for aviation has had up to date: 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). Ryanair has been one of the most transparent airlines by publishing figures of the cost to passengers of climate change measures. These have been cited as being €0.25 for passengers flying from continental Europe, 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. 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). 5.2.1.1.2017-2020 Options For the 2017-2020 policy options, the expected additional operating costs rise with an increase of the geographical scope of the option. Total operating costs are summarized in the table below, showing very little variation compared to the baseline option. Table 54: Summary of total operating costs and change over baseline on flights with origin or/and destination within the EEA in 2020 Total operating costs (in € million) Change over baseline Change in operating costs per RTK over baseline Intra-EEA/EEA domestic Option 0 93,699 - - Option 1 93,711 0.01% -0.26% Option 2 93,720 0.02% -0.11% Extra – EEA Option 0 281,816 - - Option 1 281,406 -0.15% -0.71% Option 2 281,631 -0.07% -0.34% The slight differences in operating costs result in an almost identical average price per RTK for the three options. The results are presented in the table below. The price reductions achieved under options 1 and 2 compared to option 0 are for all options around 0.7% for flights to and from third countries, and 1.11% under the three options, for intra-EEA flights. Differences are thus negligible. Table 55. Summary of price per revenue tonne kilometre (RTK) and overall RTK on flights with origin or/and destination within the EEA in 2020 Calculated price (€) per RTK Total RTK (millions) Intra-EEA/EEA domestic Option 0 1.11 89,765 Option 1 1.11 90,008 Option 2 1.11 89,886 Extra-EEA Option 0 0.71 411,554 Option 1 0.70 413,888 Option 2 0.70 412,700 The slight difference in price is also reflected in a very limited variation in demand expressed as overall RTK of intra-EEA and extra-EEA flights. Option 0 results in an overall RTK of 501,319 million, option 1 in an overall RTK of 503,896 million and option 2 in an overall RTK of 502,586 million.

5.2.1.2.Post-2020 Options In relation to the post-2020 options, the projected operating costs depend on the degree to which international credits are used for compliance within an option. This is due to the fact that the average price of an international credit is estimated to be lower than the average price of an EU allowance in the 2020-2030 period. Operating costs in 2030 are summarised in the table below. This shows how the variations linked to the different options are very limited compared to those related to other operating costs (i.e., variations in fuel cost). Differences between the options are also very small, not reaching 0.5%. Table 56 Summary of total operating costs and change over baseline on flights with origin or/and destination within the EEA in 2030 Total operating costs (in € million) Change over baseline Change in operating costs per RTK over baseline Intra-EEA/EEA domestic Option 0 134,230 - - Option 1 134,304 0.06% -0.33% Option 2 134,329 0.07% -0.59% Option 3 134,541 0.23% -2.61% Extra-EEA Option 0 429,921 - - Option 1 427,955 -0.46% -2.08% Option 2 427,979 -0.45% -2.13% Option 3 428,182 -0.40% -2.53% For the same reason the operating costs slightly vary, the average price per RTK does not differ much between the options. As shown in the table below variations on prices per RTK only amount few € cents. Table 57 Summary of price per revenue tonne kilometre (RTK) and overall RTK on flights with origin or/and destination within the EEA in 2030 Calculated price (€) per RTK Total RTK (millions) Intra-EEA/EEA domestic Option 0 1.13 127,276 Option 1 1.13 127,773 Option 2 1.13 128,130 Option 3 1.10 130,997 Extra-EEA Option 0 0.70 631,988 Option 1 0.69 642,439 Option 2 0.69 642,810 Option 3 0.68 645,796 As regards sub-option 2.1, impacts were not modelled, but are estimated to be between those for options 2 and 3, as part of the obligations are met with allowances and part with international offsets. In line with the difference in price per RTK, total demand in RTK of intra-EEA and extra-EEA flights also varies moderately between the options. Option 0 results in an overall RTK of 759,264 million, option 1 in an overall RTK of 772,791 million, option 2 in an overall RTK of 770,928 million and option 3 in an overall RTK of 776,793 million. All these impacts would be even lower with the sensitivity that foresees moderate aviation emissions growth, where the amount of emissions to be offset on flights within the EEA is expected to be lower. 5.2.2.Impacts on Level Playing Field Under all policy options, the EU ETS, and the GMBM when applicable from 2021, are applied uniformly to all operators irrespective of their nationality or any other characteristics. Thus, they do not present a direct distortion of competition. However, under certain circumstances a potential risk of indirect distortion of competition could arise due a preference for alternative flights, which would not be covered by any of the policy options. It should be noted that distortions have not been identified during the 5 years where the EU ETS has been applied to aviation, and it is expected that this should be even less the case where other routes will be covered, after 2020, by a new market instrument such as the GMBM. It must be stressed that the possibility of distortions could increase with higher operational costs associated to the different measures. Nevertheless, as section 5.2.1 demonstrates, this will not be the case in the period up to 2030, where impacts on costs or prices per RTK remain very limited. Finally, it is important to highlight that under Option 3 the GMBM would apply to all intra-EEA flights, including those operated by carriers based in third countries. Therefore, if the GMBM was not adequately implemented by some third countries a risk of competitive distortions arises even within the EEA. It must be recalled that the GMBM obligations are enshrined in an Assembly Resolution, which is not, in itself, legally binding. States can reserve to it and not apply the GMBM to their operators flying on European routes. Even if technical rules are developed and adopted as standards, it remains to be decided what level of detail those standards will have, and what is left to "recommended practices" or guidance documents, increasing the risk of a heterogeneous implementation that could hinder a level playing-field. There is also a risk that countries with lower capacities are not ready to implement it by 2021, and that could equally affect flights within the internal market. For those reasons, it must be pointed out that under Option 3, risks of competitive distortions could even affect direct competition on routes within the EEA, as the decision to apply the GMBM obligation on intra-EEA routes, for some operators, would be in the hands of third countries' administrations.

5.2.2.1.Competition between Direct City-Pair Routes Under all 2017-2020 options, intra-EEA flights are covered by the EU ETS, whereas flights outside the EEA are exempt. Consequently, distortions in border regions are theoretically conceivable, as traffic might shift from within the EEA towards nearby airports outside the EEA in response to an increase in relative prices for intra-EEA traffic. Under the post-2020 options, the potential for competitive distortions on city-pair routes near EEA region borders would no longer exist under the full convergence Option 3, where GMBM applies to all flights, both within and outside the EEA (with the exception of the foreseen exemptions from GMBM for small states and domestic flights). As said above, Option 3 encompasses a more relevant risk of distortion if it is not properly implemented and enforced by third countries responsible for the administration of their airlines, as highlighted above. In theory, the potential of distortions remain under the other options, although given the limited economic impact (price per RTK, as explained in section 5.2.1) it is considered to be highly unlikely that companies modify their established routes due to this. 5.2.2.2.Competition between One Stop Services The 2006 Impact assessment already 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. It is not expected that allowances prices will reach those levels in the period up to 2030. Under a reversion to the full ETS scope (Option 0), the option with the highest costs per RTK, allowance costs in 2020 would be a mere 0.3% of total operational costs for flights between the EEA and third countries, thus adding only €1 to the cost of a flight with an operating cost of €300 per passenger. The magnitude of distortions under the other options would be even lower due to their lower operating costs. As all 2017-2020 policy options fully cover intra-EEA flights, possible competition distortions are avoided for intra-European travel. However, 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 hypothetical potential for distortion through the use of hubs outside the EEA in order to limit the quantity of emissions covered by the EU ETS. Similarly to the pre-2021 options, there is some potential for theoretical competitive distortions in all post-2021 options. In options 1 and 2 this would relate to the implementation of the EU ETS to intra-EEA routes, while the GMBM applies to routes out of the EEA. In any case, in the light of the much reduced cost impacts, this risk can be considered as negligible. Under Option 3 this type of risk disappears, but, as explained above, there is a more relevant risk of competitive distortions (including on intra-EEA flights) if the system is not properly implemented by third countries on their operators. Again, given the limited economic impact (price per RTK) it is considered to be highly unlikely that companies modify their established routes due to this. In case of flights covered by the GMBM under all options 1, 2, and 3, the risk will depend on which routes are finally covered by the ICAO measure, but this is out of the remit of this assessment. 5.2.2.3.Competition between Tourist Destinations In theory, distortions between tourist destinations are conceivable as illustrated in table 5-8 for the 2017-2020 period and in table 5-9 for the post-2020 period: Table 5-8: potential distortion of competition between tourist destinations in the period 2017-2020 Tourist located within EEA Tourist located outside of EEA Option 0 No distortion between tourist destinations within the EEA and outside the EEA, as all flights departing and arriving in the EEA are covered. Potential preference for not travelling to tourist destinations within the EEA, as flights to and from those destinations are covered. Option 1 Potential preference for travelling to tourist destinations in outermost regions or outside of the EEA, as all other flights to and from tourist destinations within the EEA are covered. No distortion for travelling to tourist destinations in the EEA, as flights between the EEA and third countries are not covered. Option 2 Potential preference for travelling to tourist destinations outside of the EEA as only one way is covered, as opposed to both ways for destinations in the EEA. Potential preference for not travelling to tourist destinations within the EEA, as the return flight is covered.





Table 5-9: potential distortion of competition between tourist destinations in the period 2017-2020 Tourist located within EEA Tourist located outside of EEA Option 0 No distortion between tourist destinations within the EEA and outside the EEA, as all flights departing and arriving in the EEA are covered. Potential preference for not travelling to tourist destinations within the EEA, as flights to and from those destinations are covered. Option 1 Potential preference for travelling to tourist destinations outside the EEA, as flights are covered by GMBM (if at all) as opposed to the EU measure. No distortion for travelling to tourist destinations in the EEA and international destinations in countries not exempted from the GMBM, as GMBM applies to those international flights. Potential preference for domestic destinations or destinations in countries to which the GMBM does not apply. Option 2 Potential preference for travelling to tourist destinations outside the EEA, as flights are only covered by GMBM (if at all) as opposed to the EU measure. No distortion for travelling to tourist destinations in the EEA and international destinations in countries not exempted from the GMBM, as GMBM applies to those international flights. Potential preference for domestic destinations or destinations in countries to which the GMBM does not apply. Option 3 No distortion of competition between international destinations in countries not exempted from the GMBM, if GMBM is applied to those international flights. Potential preference for domestic destinations or destinations in countries to which the GMBM does not apply, as domestic flights are not covered. No distortion of competition between international destinations in countries not exempted from the GMBM, if GMBM is applied to those international flights. Potential preference for domestic destinations or destinations in countries to which the GMBM does not apply, as domestic flights are not covered. The impact of different ETS policy options on tourist destinations was analysed in detail within a separate annex in the previous impact assessment in 2013. The overall finding was that wherever impacts could be expected due to competitive distortions between different destinations or the general rise in fuel costs, these would be negligible due to the low allowance costs. A review of the current options confirms that this is still the case. For example, when presuming a 2020 ETS price of €15/tonne CO2, on the popular tourist route London Gatwick to Crete, the allowance costs per RTK are estimated at around 0.6 cents(€). Over the 2,700km flight route, this means a cost of around €17 per revenue tonne, or ~€1.70 per passenger, which is unlikely to distort competition to non-EEA Mediterranean tourist destinations, such as nearby Turkey (e.g. Antalya) under Options 1 or 2, under which no allowance costs, or only allowance costs for the departing flights would respectively arise for flights to Turkey. Equally, the insignificant amounts by which overall flight costs increase are not expected to have an impact on overall tourism receipts, e.g. by reducing the number of tourist flights, or tourists spending less on accommodation and leisure activities at their destination, in order to compensate for higher flight costs. The forecast allowance prices for the year 2030 result in an increase of around €67 per revenue tonne on the 2,700km flight route from London Gatwick to Crete under the baseline option 0, around €6.70 per passenger. Because the same rules apply for intra-EEA and extra-EEA flights under option 0, no negative impacts would occur (on the contrary, the 2,900km London Gatwick to Antalya flight route would result in slightly higher prices due to the additional 200km). Option 1 applies more stringent rules to intra-EEA flights (EU ETS), whilst extra-EEA flights only face GMBM international credits prices, which are expected to be lower. Despite this difference, the London Gatwick to Crete route would only create extra costs of around €100 per revenue tonne, or €10 per passenger, whereas the London Gatwick to Antalya flight route would only face GMBM allowance prices of €16 per revenue tonne, or about €1.60 per passenger. Thus, the difference between the most extreme options would be a net decrease in emissions-related charges of just over €8 per passenger compared to Crete. It is unlikely that such a small difference in flight costs would have a tangible distorting impact on tourism in Crete. Under all other options, the gap in allowance costs is even lower. 5.2.3.Impact on Member States' Budgets (Auction Revenues) Impacts on Member States' budgets are associated to proceeds from the auctions of allowances under the EU ETS. All options that foresee allocation of allowances encompass some sort of revenue generation for Member States. 5.2.3.1.2017-2020 Options All 2017-2020 policy options generate auction revenues for public authorities. Since the number of auctioned allowances depends on the geographical scope of the ETS for aviation, the auction revenues in 2020 vary between the policy options as shown below. Table 5-10: Auctioning amounts and revenues for EU Member States in 2020 Option 0 Option 1 Option 2 Auctioned allowances (Mio. EUAAs) 31.6 8.2 19.8 EUAA price (EUR/EUAA) 15 15 15 Auctioning revenues (Mio. EUR) 474 124 298 5.2.3.2.Post-2020 Options As opposed to the pre-2021 policy options, not all of the post-2020 options will generate auction revenues for public authorities. Under option 0, the auction revenue in 2030 would amount to €1,034.2 million and under option 1 to €302.3 million. Options 2 and 3 would not generate any auctioning revenues, as option 2 does not foresee allocation through auctions and the GMBM does not have any revenue generation mechanism. Table 5-11: Auctioning amounts and revenues for EU Member States in 2030 Option 0 Option 1 Option 2 Option 3 Auctioned allowances (Mio. EUAAs) 24.6 7.2 0.0 0.0 EUAA price (EUR/EUAA) 42 42 - - Auctioning revenues (Mio. EUR) 1,034 302 - -

5.2.4.Administrative Effort The administrative effort to implement the various policy options under consideration takes into account the key administrative tasks under the EU ETS and the GMBM that must be performed by the aircraft operators and the competent Member States authorities. These are mostly related to MRV obligations by aircraft operators and compliance activities by competent authorities. The key administrative tasks associated with the 2017-2020 options are outlined in Table 5-12 below.



Entity Tasks Operators submission of 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 purchase and surrender allowances Competent Member States authority approval of monitoring plan for each aircraft operator and subsequent updates to the monitoring plan approval of annual emissions reports as verified by accredited verifiers; administer registry calculate the allocation of free allowances guidance, training, helpdesk for airline operators accrediting verifiers monitoring compliance and enforcing in case of non-compliance European Commission prepare legislation and guidance documents administer the EUTL registry approves allocations of free allowances updates aviation operator list



The tasks will generate costs, which can be distinguished between one-off costs or on-going costs. Table 5-13 illustrates the type of cost created by the individual tasks. Table 5-13: Type of costs incurred under the key administrative tasks One-off Costs On-going Costs Aircraft operators initial preparation (i.e; interpreting legislation, training employees) setting up of a system to comply with legislation elaborate monitoring plan provision of data for free allocation monitoring and reporting of emissions verification (fees for third party verifiers) effort of purchasing allowances Government administrators initial preparation (i.e. legislation, guidance documents) setting up of a system to comply with legislation approval of monitoring plans allocation of allowances/defining individual share help desk checking emission report and verification statement updating EU ETL for aviation sector compliance As assessed under the impact assessment accompanying Commission Regulation 600/2012 (on verification and accreditation under the EU ETS) and 601/2012 (on the monitoring and reporting of GHG under the EU ETS) the aim of minimising costs for Competent Authorities and operators has always been one of the main elements of the EU ETS MRV. Several measures have been taken to reduce costs associated to monitoring, reporting and verifying emissions, both by aircraft operators and by the Commission and national competent authorities. These include the development of IT systems supporting data delivery (e.g. reporting in web-based application), review of data (e.g. through automated checks) and data management (easier updating of documents, storage and tracking of data). Large aircraft operators have well-developed data management systems. This is not always the case for smaller ones. However, operators emitting less than 25.000 CO2 to