COMMISSION STAFF WORKING DOCUMENT Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowances trading within the Community, in view of the implementation by 2020 of an international agreement applying a single global market-based measure to international aviation emissions
Date: 2013-10-16
Institutions: European Commission
Subjects: EU Emissions Trading Scheme, airline, civil aviation, greenhouse gas, international market, international negotiations, reduction of gas emissions













EUR-Lex - 52013SC0430 - EN











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52013SC0430

COMMISSION STAFF WORKING DOCUMENT Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowances trading within the Community, in view of the implementation by 2020 of an international agreement applying a single global market-based measure to international aviation emissions /* SWD/2013/0430 final */









Disclaimer:
This report
commits only the Commission's services involved in its preparation and does not
prejudge the final form of any decision to be taken by the Commission.
Table of content
1........... Procedural issues and consultation of
interested parties. 6
2........... Problem definition. 7
3........... Objectives. 17
4........... Policy options. 17
5........... Assessment of impacts. 22
6........... Comparison of options. 44
7........... Monitoring and evaluation. 49
Annex I – Glossary. 51
Annex II – Consultation of stakeholders in the aviation
sector 53
Annex III – Public on-line consultation. 62
Annex IV – Supporting analysis on environmental impacts. 66
Annex V – Modelling methodology. 71
Annex VI – Estimation of EU-ETS costs under different
options in 2020. 74
Annex VII – Impact on tourism.. 75
Annex VIII – Administrative effort and feasibility. 77
Annex IX – Supporting legal analysis. 83
Annex X – Impact of a possible exemption of flights to
and from "developing" States from the EU ETS  92
Annex XI – Resolution A38-17/2 of the 2013 ICAO Assembly
with regard to MBMs. 96
 Executive Summary Sheet 
 Impact assessment on PROPOSAL FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND COUNCIL for derogating from Directive 2003/87/EC 
 A. Need for action 
 Why? What is the problem being addressed? 
 CO2 emissions from aviation are one of the fastest growing sources of greenhouse gas emissions. As the technological potential for emissions reduction is limited in the aviation sector, it is necessary to use market-based measures (MBM) such that the aviation sector can off-set its strong emission growth through funding emission reductions in other sectors. The EU led the way in implementing MBMs by including aviation in its Emission Trading System (EU ETS). Despite its positive environmental effects at low economic costs, the implementation of the EU ETS has had to face significant international opposition. A number of states have claimed that the EU ETS would cover a too high share of international emissions and that the EU would have no competence to oblige their airlines to participate in the EU ETS. Furthermore, even with the EU ETS in place, a global "gap" in emissions reductions continues to exist. Without a further uptake of MBMs on a global level, the aviation sector will not be able to reach its emission reduction goals. The insufficient uptake of MBMs and the opposition against the EU ETS have been caused by the absence of a global political agreement on the key principles for the implementation of MBMs at the International Civil Aviation Organization (ICAO). 
 What is this initiative expected to achieve? 
 The EU is committed to move forward the ICAO action on MBMs and to work towards the implementation of an ambitious global MBM in 2020 with a view to close the "gap" in the coverage of international aviation emissions and to reach the sector's emission reduction targets. Based on the proposal by the EU Member States, the 2013 ICAO Assembly adopted a roadmap for the decision on the design of a global MBM in 2016 and its implementation by 2020 to cover all international aviation emissions. In response to this progress and to promote further momentum towards the successful establishment of a global MBM, amendments should be made to the aviation activities covered by the EU ETS. 
 What is the value added of action at the EU level? 
 The ETS is the EU's flagship initiative for addressing climate change. The integration of aviation into the EU ETS has been decisive in driving forward the ICAO negotiations. The intensive engagement of the EU in defending its right to regulate while encouraging international negotiations will continue to be crucial in maintaining momentum in ICAO towards a global MBM. 
 B. Solutions 
 What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why? 
 In preparation of the 2013 ICAO Assembly, the EU Member States expressed their openness to limit the scope of the EU ETS in proportion to the distance flown within the EEA (hereafter "hybrid option") in case of substantial progress with regard to the development of a global MBM. This hybrid option means that the EU ETS would continue to fully cover all emissions from flights within the EEA but the coverage of emissions from flights to and from 3rd countries would be limited in proportion to the distance flown within the EEA. Depending on how the sea boundaries of the EEA are defined, this would lead to reduced emissions coverage of 39% to 47% compared to the full-scope EU ETS. Alternative options have also been assessed: coverage of emissions from departing-flights only; coverage of 50 % of emissions from all departing and arriving flights; move to an upstream system with fuel suppliers as ETS participants. Even though these options achieve a higher coverage of up to 62%, they are likely to raise the same international objections as the full-scope EU ETS and to obstruct further negotiations on a global MBM. A full exemption of flights to and from 3rd countries, as under the temporary "stop-the-clock" decision for 2012, would reduce coverage to only 26% which is not a viable long-term solution from an environmental point of view. The hybrid option is the preferred option because it strikes the best balance between environmental effectiveness under the EU ETS and progress on the global MBM. 
 Who supports which option? 
 The aviation industry has recognized the suitability of MBMs and has urged ICAO to decide on a global MBM to be implemented by 2020. The hybrid option has been proposed by the EU Member States in the ICAO negotiations. European low-cost carriers consider that a complete exemption of flights to and from 3rd countries from the EU ETS would unduly favour large network carriers. 
 C. Impacts of the preferred option 
 What are the benefits of the preferred option (if any, otherwise main ones)?                                     
 The expected main benefit from a reduction in the scope of the EU ETS will be to facilitate the transition to a global MBM by 2020 to close the global "emission gap" and double the coverage of international aviation emissions (compared to the full-scope EU ETS that covers around 50% of international aviation emissions). If the scope of the EU ETS were not adjusted the political tensions around the EU ETS would be revived and obstruct the negotiations for the future development of the global MBM. Furthermore, a reduced scope of the EU ETS will increase the aviation sector's overall competitiveness in the period up to 2020: under the hybrid option, demand for aviation services is expected to slightly increase within a range of 0.38% to 0.43% up to 2020. No further direct benefits are expected. 
 What are the costs of the preferred option (if any, otherwise main ones)?                                      
 The main negative impact of a reduced EU ETS scope under the hybrid option will be the lower emissions coverage (38% to 46% compared to full-scope EU ETS) up to 2020 for flights to and from 3rd countries. Furthermore, the implementation of hybrid option will necessitate some adjustments in the monitoring, reporting, and verification (MRV) processes. However, as the hybrid option would keep the current MRV system (based on fuel consumption for the whole flights) and re-calculate the reduced coverage based on so-called "distance factors" (i.e. ex-ante defined percentages that are proportional to the distance flown in the EEA), the additional costs should be minimized for aircraft operators as well as national administrations. No further negative economic or social impacts are expected. 
 How will businesses, SMEs and micro-enterprises be affected? 
 Currently, the EU ETS covers about 2600 "small" non-commercial operators who are only responsible for 1 % of total emissions. Several simplifications (e.g. streamlining of procedures, de-minimis thresholds) are proposed to reduce the compliance costs for these small emitters. 
 Will there be significant impacts on national budgets and administrations? 
 In proportion to the reduced scope, less aviation allowances will be auctioned. The annual auction revenues for Member States are therefore expected to decrease by 39% to 47% (e.g. assuming a carbon price of €10, total revenues would go down from around €320 million to €120 to €150 million). The changes in the MRV may slightly increase administrative costs (as explained above). 
 Will there be other significant impacts? 
 The preferred hybrid option will eliminate some risks for competition distortions that would exist under other options. A level-playing field is ensured for all airlines. See section 5.2.2 of the IA report. 
 D. Follow up 
 When will the policy be reviewed? Maximum 4 lines 
 It will be important to closely follow the ICAO negotiations: Depending on the outcome of the 2016 ICAO Assembly, further adjustments to the EU ETS may become necessary to ensure a full transition to a global MBM in 2020. The Commission shall therefore report to the European Parliament and the Council in 2016, together with proposals as appropriate. 
1.           Procedural
issues and consultation of interested parties
1.1.        Impact assessment steering
group (ISG)
Work on the
impact assessment was carried out by an Inter-Service Steering Group (ISG) set
up by DG CLIMA which met two times. The following Directorates-General (DGs) 
participated in the work of the group: Secretariat-General (SG), Legal Service
(SJ), EEAS, DG ENTR, DG MOVE, and DG TRADE. 
1.2.        Consultation of the Impact
Assessment Board (IAB) 
The IAB gave an
overall positive opinion with recommendations concerning an improved
presentation of the gap in global emission coverage and further issues
regarding the implementation of the EU ETS; a clearer description of the
different scenarios following the 2013 Assembly of the International Civil
Aviation Organisation (ICAO); a strengthened sensitivity analysis; a better
presentation of the results; and an added explanation of the main concerns
voiced by different stakeholder groups.
1.3.        Consultation and expertise

1.1.1.          
External support 

The underlying
econometric modelling and analysis was carried out by Ricardo-AEA Ltd.  Additional
support in relation to small emitters was undertaken by a consortium of Price
Waterhouse Coopers and CE Delft.

1.1.2.          
Stakeholder meetings

Aviation
experts were consulted on the international developments with regard to
market-based measures (MBMs) for aviation on 1 July 2013 (see Annex II for the
minutes) and on 17 September 2013 (minutes to follow). The meetings took place
in the presence of Member States within the framework of the European
Environment Expert Group that has been extablished by the European Civil
Aviation Conference. A stakeholder meeting with regard to simplifications for
small emitters was held on 30 July 2013 (see Annex II for the minutes).

1.1.3.          
Public on-line consultation 

An online public consultation was held from
21 June to 13 September 2013, i.e. 12 weeks.  The public consultation was
carried out using the “General principles and minimum standards for
consultation of interested parties by the Commission”. 
The public consultation confirms strong
support for MBMs from public authorities, NGOs and the airlines. All
respondents favour MBMs for the aviation sector, with one association opposing
regional MBMs in advance of a global MBM. With regard to regional action,
airlines emphasise administrative simplicity and political acceptability, as
well as environmental effectiveness and avoiding discrimination on routes and
between operators. Public authorities and NGOs emphasise covering meaningful
emissions, administrative simplicity and political acceptability.
The results have been presented to the
Impact Assessment Board at the meeting of 18 September 2013 and subsequently
included in Annex III. 
 
2.           Problem
definition
2.1.        The problem 
The EU is strongly committed to achieve
the climate objective of limiting global average temperature increase to less
than 2 degrees Celsius above pre-industrial levels. As the EU emissions will
constitute a smaller share of global emissions in the future, multilateral
efforts will become the most effective means to address climate change. As
arguably strongest proponent of multilateral action, the EU has put
international cooperation and global solution at the fore-front of its
policy-making.
Science tells us that in order to have a likely chance to stay below
2° C, the growth of global GHG emissions will have to be reversed before 2020
and decline thereafter, reaching at least 50 % below 1990 levels by 2050. To
this end, one of the headline targets of the Europe 2020 Strategy for smart,
sustainable and inclusive growth is to reduce greenhouse gas emissions by at
least 20% compared to 1990 levels. As part of the necessary economy-wide
efforts, the limitation of greenhouse gas emissions from aviation is an
essential contribution in line with this commitment.

1.1.4.          
Strong growth of emissions from aviation sector

According to the International Energy Agency, global CO2 emissions
from civil aviation stood at 740 million tonnes per annum in 2010, amounting to
2.5% of global CO2 emissions. Aviation was also one of the fastest
growing sources of greenhouse gas emissions (GHG) in the preceding decade. 
Looking forward, the
International Civil Aviation Organisation (ICAO) forecasts that by 2036
international aviation emissions will increase by between 155% and 300%
compared to 2006, depending on the level of technological and operational improvements
(see Figure 2‑1). The international aviation’s share of total CO2
emissions is projected to reach at least 4% of total emissions by 2050 without
any further mitigation efforts.[1]

1.1.5.          
Limited technological possibilities for emission
reductions in the aviation sector

In the short-term up to
2020, several technological measures or operational measures could achieve 10
to 15 % emissions reduction (e.g. through improved air traffic management and
more efficient operation of the aircraft in the air and on the ground). In the
longer term until 2025 and beyond, investment in new aircraft could reduce
emissions by another 20 to 30%. Finally, the use of sustainable biofuels could
be a further source for emission reductions; however considerable uncertainty
exists over their availability and sustainability (see Annex IV for more details on technological
and operational measures).
Even under the most
optimistic scenario about the effectiveness of technological measures, aviation
CO2 emissions in 2036 are still expected to be 2.5 times higher than
2006 emissions due to the forecast strong increase in demand for aviation. Although
technological improvements and biofuels are highly important, they are not
sufficient to limit the increase of aviation emissions. Furthermore, the
economic viability of biofuels has not yet been proven. 
The emissions growth
forecasts are at odds with both the EU and US goals of stabilising
international aviation emissions at or below 2005 levels by 2020, and the reduction
goals in the International Civil Aviation Organization (ICAO) 2010 Assembly Resolution. 
The ICAO goals are for a global annual fuel efficiency improvement of 2%
through to 2020 and an aspirational goal of 2% per annum from 2021 to 2050. The
2010 ICAO Assembly also agreed a medium term aspirational goal of maintaining
global net CO2 emissions at 2020 levels, and cites the aviation
industry target to halve emissions by 2050 compared to 2005 levels (endorsed by
the International Air Transport Association (IATA)). In view of the strong
emission growth under even the most optimistic scenarios[2] (see Figure 2-1), technological
measures on their own are insufficient to stabilize emissions at 2020 levels or
to even achieve a 50% reduction of aviation emissions in 2050 compared to 2005
levels. 
Figure 2‑1 Global
aviation CO2 emissions projections (in percentage relative to base
year 2006)
Source:
ICAO Global Aviation CO2 Emissions Projections to 2050 

1.1.6.          
Insufficient uptake of market-based measures to achieve the aviation sector's emission reduction goals

As the technological
abatement of emissions is more limited and more costly in the aviation sector
than in other sectors, an economic rationale exists therefore to fund emission
reductions outside the aviation sector.[3] The use market-based measures (MBM) enables the aviation sector to
off-set its strong emission growth through the acquisition of emission units
from other sectors. The aviation sector will therefore be able to contribute
its fair share to global emission reductions without compromising growth. As
abatement costs are lower in other sectors, MBMs are an effective means to
reduce environmental costs for the aviation industry, whilst still incentivising
the introduction of new technologies and energy-efficiency measures.
The suitability of MBMs
for international aviation has long been recognised.  ICAO endorsed the
application of open emissions trading systems to aviation in 2004. More
recently the aviation industry has urged ICAO to decide on the development of a
global MBM (see also section 2.4.1). However, no multilateral agreement has
been up to now reached by States working through ICAO to develop such a global
MBM.
The EU led the way in
implementing MBMs by including aviation activities in its Emission Trading
System (EU ETS). The EU decided in 2008 to integrate aviation activities into
the EU ETS and started the implementation in 2010. Despite the extensive public
consultations prior to 2008, the integration of aviation into the EU ETS has
had to face significant international opposition from airlines and other states
(see section 2.3.2.). A number of states have opposed the EU ETS alleging that
it would cover a too high share of international emissions and that the EU
would have no competence to oblige their operators to participate in the EU
ETS.
Irrespective of the
international opposition, the EU ETS, although it delivers a significant
contribution to the reduction of aviation emissions, will not be sufficient to
stop the strong global growth of aviation emissions ahead. Indeed, the EU ETS
only covers about 35 % of global emissions (i.e. emissions from domestic and
international flights) and about 50 % of emissions from international aviation.
Without further MBMs, not even the target of stabilisation at 2020 levels would
be reached because 50 % of the emission growth would not be addressed (see Annex IV for more details on the
"emission gap" with and without MBMs).
Therefore, even with
the EU ETS in place, the problem of insufficient uptake of MBMs persists on a global
level (see Figure 2‑2). This global "gap" in coverage
exists because no other regions apart from the EU have implemented or plan to
implement MBMs and there has also not yet been agreement for a single global
MBM as proposed by the industry itself. 
Figure 2‑2 Global emission "gap" with EU ETS in place (schematic
view of development of CO2 emissions relative to base year 2005)
Based
on David S. Lee (2013) Bridging the aviation CO2 emissions gap: why emissions
trading is needed (see Annex IV) 
2.2.        Problem driver
The problem drivers for the strong emission growth are, apart from
the limited technical possibilities for in-sector emission reductions, of
political nature. The insufficient uptake of MBMs and the strong opposition
against the EU ETS have been caused by the absence of a global political
agreement: It has neither been possible up to now to establish a clear
commitment to the development of global MBM at ICAO nor to find an agreement on
generally accepted principles for the implementation of regional MBMs, such as
the EU ETS.
The negotiations to
develop and implement a single MBM, which would cover all global emissions from
international aviation, have been complicated by the divergent views on how to
reconcile the principle of non-discrimination in the Chicago Convention on
International Civil Aviation (Article 11 - all regulations are to apply equally
to aircraft of all countries, without distinction as to nationality) and the
principle of common but differentiated responsibilities and respective
capabilities of states (CBDR RC) under the UNFCCC. The spill-overs from the
UNFCCC negotiations have complicated the ICAO negotiations.
Furthermore, there has
been no agreement within ICAO on a framework that would facilitate the
application of MBMs by states or regions. The EU ETS is consistent with the 15
principles for MBMs in the 2010 ICAO Resolution, but international agreement on
the geographical scope of MBMs has yet to be found (i.e. to which extent a
state or region can cover international flights under its own MBM).
Furthermore, it has been claimed that non-discriminatory application of any
national or regional MBM to an airline registered in another State should be
dependent on permission of the states in which an airline is based. The EU does
not accept the claim as having any basis in international law and which would
make implementing an effective and non-discriminatory MBM impossible.
To overcome these political
tensions and to work towards a global MBM, the EU has already sought to move
forward multilateral action at ICAO (see section 2.4). The next ICAO Assembly
of September 2013 is expected to agree on the development of a single global
MBM, which should cover all emissions from international aviation from 2020
onwards, and a framework for regional and national MBMs – like the EU ETS –
that should apply until 2020.
As stated in the
"stop-the-clock" decision No. 377/2013/EC (see section 2.3.3), the EU
will consider whether changes to the EU ETS for aviation are required to allow
for an optimal interaction between the EU ETS and the 2013 ICAO Assembly
outcome with a view to facilitate and to accelerate the implementation of MBMs
on a global level. 
To address the problem
of the global "gap" in emission coverage, any amendments to the EU ETS
for aviation should aim to further facilitate the transition to a global MBM and
to remove the political obstacles at the international level without
compromising on the environmental integrity and the principle of
non-discrimination. 
2.3.        EU
action in a difficult international environment

1.1.7.          
Integration of aviation into EU Emission Trading
System (EU ETS)

In view of the 2004
ICAO Assembly's decision not to develop a single global MBM but to favour
inclusion of aviation into open regional systems, the EU proposed in 2006 to
integrate aviation into the EU ETS. Directive 2008/101/EC amended the EU ETS
Directive 2003/87/EC and included aviation activities within the scope of the
ETS: 
-         
All Member states from the European Economic
Area (EEA) – including Iceland, Norway, and Liechtenstein – participate in the
EU ETS. 
-         
Total emissions are covered from flights that
depart and arrive at EEA aerodromes (hereafter "intra-EEA flights"),
from flights that depart from EEA aerodromes to destinations in third
countries, and from flights that arrive at an EEA aerodrome from third
countries (the flights to and from third countries are hereafter referred to as
"extra-EEA flights"). 
-         
The emission cap from 2013 onwards has been set
at 95 % of the average historic aviation emissions for the period from 2004 to
2006. 
-         
Aircraft operators have been obliged to start
emissions reporting in 2010 and full compliance – including surrendering of
allowances – in 2012.
The inclusion of
aviation into the EU ETS was based on the 2006 Impact assessment[4] that covered in detail the
environmental, economic, and social impacts. It was based on an extensive
public consultation. It concluded that the broadest possible geographic scope
of all departing and arriving flights would give the highest environmental
benefits without neither significantly affecting the demand for aviation
services nor the competitive position of individual airlines.

1.1.8.          
International reactions

The inclusion of
aviation in the EU ETS led to unsuccessful legal challenge from US commercial airlines,
as well as diplomatic objections from a number of countries including China,
India, and the US. 
·       
Legal challenge by US airlines
The Air Transport
Association of America (ATA) and major US airlines challenged the legality of
the EU ETS arguing, among others, that it would be contrary to customary
international law to apply the EU ETS to those parts of a flight that took
place outside the airspace of the EEA countries. The European Court of Justice
(ECJ) rejected those claims and confirmed that the EU had the competence to
extend the EU ETS to the full distance of flights which depart or arrive at EU
airports[5]
(see also Annex IX).
Furthermore, the ECJ confirmed that the EU ETS was in line with the
non-discrimination principle and did not constitute a tax in violation of the EU-US
Open Skies Agreement, including provisions similar to those in the Chicago
Convention.
·       
Joint declarations by opposing States ("coalition
of unwilling")
Representatives from around
20 to 25 states – including Belarus, China, Cuba, India, Russia, and USA –
signed declarations on 30 September 2011 in New Delhi and 23 February 2012 in
Moscow opposing the EU ETS. They alleged that the EU ETS would be contrary to
international law and should not apply to aircraft operators registered in their
countries, and saying they would consider initiating proceedings under the
Chicago Convention or barring the participation of aircraft operators in the EU
ETS. On 2 November 2011, the ICAO Council endorsed a statement by 26 of its 36
Member States that had repeated parts of the New Delhi declaration.
·       
Non-compliance by most Chinese and Indian
operators since 2011
Chinese mainland
airlines and most Indian airlines have not complied with the EU ETS requirements.
Claims have been made that the EU action to reduce emissions through the EU ETS
is in violation of the UNFCCC's principle of common but differentiated responsibilities
and respective capabilities (CBDRRC). 
·       
US "Thune bill"
In 2012, the US
Congress passed the Emissions Trading Scheme Prohibition Act ("Thune Bill")
which would allow the US Administration, following public consultation, to
issue an order that US-registered airlines should not comply with the EU ETS. No
such order has been proposed so far. The bill also states that the US Administration
should act to advance global action to tackle emissions from aviation. 

1.1.9.          
"Stop-the-clock" decision No.
377/2013/EC

The EU has a strong history of multilateralism and has continuously
sought to move forward the ICAO action on MBMs. To prepare for the 2013 ICAO
Assembly Resolution with regard to MBMs, the ICAO Council decided on 9 November 2012 to set up the High-level
Group on Climate Change (HGCC) that would develop
guidance for the implementation of a single MBM covering all international
aviation emissions (hereafter "global MBM") as well as for a
framework for national and regional MBMs (hereafter "MBM Framework").
To encourage these positive developments at ICAO, the EU adopted the "stop-the-clock"
decision to temporarily defer the enforcement of the EU ETS compliance
obligations for flights to and from most third countries for 2012.  
The EU "stopped
the clock" in order to provide time for the 2013 ICAO Assembly to agree on
a global MBM with a realistic timetable for further development and
implementation, and the adoption of a framework for facilitating States'
application of MBMs to international aviation pending the global measure's
application. While many countries welcomed the "stop-the-clock" legislation,
it raised complaints from EU airlines, in particular low cost carriers,
claiming that it favoured airlines operating routes to third countries compared
to airlines that operated flights mainly within Europe.
The vast majority of commercial operators – also from States whose
representatives had previously signed declarations against the EU ETS – fully
complied with their obligations for 2012 emissions. This was notably the case
for the US where the US "Thune bill" was not put into effect and all
US airlines complied with the "stop-the-clock" decision. China and
India were the only two States from where no airline complied in 2012. 
2.4.        Recent developments in the
run-up to the 2013 ICAO Assembly
The establishing of the
HGCC in ICAO and the EU's "stop-the-clock" decision have created positive
momentum for the 2013 ICAO Assembly to move forward on the development of a
global MBM and an agreement on a MBM Framework which would apply until a global
MBM will be implemented in 2020.

1.1.10.      
Global MBM

There is a broad
agreement – including within the aviation industry – on the necessity and
desirability of a global MBM to apply from 2020 in order to cap CO2
emissions. 
·       
EU Proposal for roadmap to global MBM
EU Member States in the
HGCC have proposed[6]
that the 2013 ICAO Assembly should decide on a binding roadmap for the
development of a global MBM: the work on the various design elements for a
global MBM shall be completed by the next ICAO Assembly in 2016 and a global
MBM would be implemented no later than by 2020. 
It is important to note
that this decision by the 2013 ICAO Assembly would only be the start of the
negotiations on the key elements of a global MBM to be finally decided by the
2016 ICAO Assembly. Issues such as agreement on detailed architecture of the
system; a common set of monitoring, reporting, and verification (MRV) standards;
and the types of emissions units allowed into the system should also be
developed as a matter of priority. The EU recognises that States have different
circumstances and capabilities, and believes this can be taken into account in
a non-discriminatory way, for example through phased-in route coverage and temporary
exemption of certain routes.
·       
Proposal for global MBM by IATA
The International Air
Transport Association's (IATA) Annual General Meeting on 3 June 2013 approved a
resolution with an overwhelming majority in favour of a global market-based
measure, albeit with opposition from Chinese and Indian airlines. IATA
encourages governments to adopt, at the ICAO Assembly in September 2013, a commonly
agreed, single global MBM to be applied from 2020 to offset the industry’s
growth in emissions from then on, leading to emissions 50% below 2005 levels by
2050. The EU welcomes the industry’s support for action which contains a number
of useful elements for the design of a global MBM (e.g. common MRV standards).

1.1.11.      
Framework for regional and national MBMs

The MBM Framework
should provide guidance to ensure the consistent application of national and
regional MBMs. In particular, the objective of a framework would be to avoid
double counting emissions through different regional or national MBMs. Ideally,
when a global MBM system is applied, the MBM Framework will no longer be
needed.
·       
"Mutual agreement"
Some states still claim
that – regardless of the establishment of a framework – any MBM must be subject
to permission from states whose airlines fly in States applying an MBM.
However, the very reason for having a MBM Framework is to enable some
meaningful action to take place now, to prevent a fragmented outcome based on
numerous different bilateral agreements, and to encourage action beyond what is
already catered for by the existing international agreements such as the
Chicago Convention. The EU and a considerable number of other States therefore do
not agree with this claim.
·       
Geographic scope of a regional or national
MBM
Another key issue relates to the coverage of international aviation
emissions under a national or regional MBM. In the context of a MBM framework,
the EU would have favoured a departing-flights approach which, as shown by a
submission by EU Member States to the HGCC[7], would
enable international aviation emission to be comprehensively addressed if and
when all States act. Compared to the full scope EU ETS, emissions from all
flights that depart from and arrive at an EEA airport would remain fully
covered together with emissions from departing flights to non-EEA countries. The
flights arriving in the EEA from 3rd countries would consequently be
covered by the state of origin.
However, a large number
of ICAO Member states oppose the departing-flights approach for a MBM framework
because it would include emissions over the territory of other states (while
not ruling it out for administration of a global MBM). Many ICAO Member states
would prefer a framework to limit a regional MBM to emissions within the region
in question. In a spirit of compromise and provided the level of ambition on
the global MBM is high and the 2013 Assembly Resolution does not purport to require
"mutual agreement" for non-discriminatory coverage of flights, the EU
Member States would be ready to accept the following approach in advance of the
application of the global MBM in 2020:
-         
Full coverage of emissions from all flights that
arrive and depart within a group of States, plus
-         
A proportion of the emissions from flights that
arrive from or depart to third countries outside the group of States, in relation
to the total distance travelled across areas associated with the group of
States (e.g. for a flight between Paris and Beijing, the EU ETS would cover the
distance over EEA states to and from the border with a third country, in this
case Russia).
The ICAO Council
meeting of 4 September 2013 adopted a proposal for the MBM Framework along
these lines for submission to the Assembly. Furthermore, the ICAO Council also
proposed de minimis exemptions for developing countries to take account of
special circumstances and respective capabilities (see Annex X). 
2.5.        Outcome of the 2013 ICAO Assembly
The ICAO Assembly
adopted the proposed roadmap to a global MBM in 2020. However, no consensus
could be found on guidance for regional MBMs to be applied in the meantime. The
MBM Framework submitted by the ICAO Council was not adopted but a text proposed
by Russia stating that "mutual agreement" would be needed for the
implementation of national and regional MBMs. As at previous ICAO Assemblies,
the EU Member States – together with other major aviation States – rejected
this claim and made reservation with regard to the requirement of "mutual
agreement". See Annex XI for the final resolution text.    
2.6.        Further
issues regarding the implementation of the EU ETS for aviation
The EU ETS Directive
foresees in Article 30 (4) that the Commission shall review the functioning of
the Directive and give consideration to on-going improvements and refinements. The
Commission has launched in early 2013 a study to investigate the costs and
benefits of the inclusion of small emitters in the EU ETS.
Currently, the EU ETS
covers about 300 "large" aircraft operators – with annual emissions higher
than 25,000 tons CO2 – who are responsible for about 99 % of emissions and
around 2600 non-commercial small emitters[8] (e.g.
business jets) who are responsible for only 1 % of emissions.[9]
The study by PWC et al.
shows that the obligations with regard to Monitoring, Reporting, and
Verification (MRV) generate relatively higher administrative costs for small than
large operators (see explanations in Annex II). Compared to the level of EU ETS
revenues raised from a small emitter, the administrative cost can be up to 4
times higher. 
In view of the low
level of emissions compared to the high administrative burden, the
administrative efficiency of the inclusion of non-commercial small emitters
into the EU ETS can be questioned.
Concerning the
transposition of the EU ETS in national law, the Commission is currently
carrying out a study on the implementation by the different Member States.
1.2.                
EU's right to act
The EU ETS Directive
2003/87/EU, as amended by Directive 2008/101/EC, is based on Article 192(1) of
the Treaty on the Functioning of the European Union.
The Commission will
have to report on the results achieved at the 2013 ICAO Assembly to European
Parliament and Council (according to Article 5 of the "stop-the-clock"
decision. Furthermore, the "stop-the-clock" decision proposes in its recital
10 that the EU could consider further steps to facilitate the optimal
interaction between the outcome of the 2013 ICAO Assembly and the EU ETS.
2.8.        Baseline scenario – full-scope
EU ETS
The full scope EU ETS for aviation is the
baseline against which the other policy options will be assessed.  The key
features of the EU ETS that are applicable for aviation from 2013 as specified
in Directive 2003/87/EC and amended by Directive 2008/101/EC are summarised
below.
Table 2‑1 Key features of the EU ETS for aviation
 EU ETS feature || Description 
 Geographical coverage || European Economic Area (EEA) which includes the 28 EU Member States, Iceland, Norway and Liechtenstein). Territories of Member States are treated as follows: - The 13 territories that are part of the EU are included in the EU ETS for aviation: Guadeloupe, French Guiana, Martinique, Reunion, the Azores, Madeira, the Canary Islands, Aland Islands, Akrotiri, Dhekelia, Ceuta, Melilla and Gibraltar - All other territories of Member States that are not part of the EU are outside of the scope of EU ETS for aviation (e.g.  Greenland or Channel Islands) 
 Flights covered || All flights landing at or departing from EEA airports. 
 Emissions coverage || All CO2 emissions released during the whole flight. 
 Open or closed system || Aviation is regulated under the same rules as the general EU ETS i.e. as an open system, but allowances are specific to the aviation sector (i.e. they cannot be used by other EU ETS operators). 
 Quantity of allowances || §         Total number of allowances (cap): §         Free allowances: §         Allowances to be auctioned: §         Special reserve:                                              || 210,349,264 per annum from 2013 172,486,396 per annum from 2013   31,552,390 per annum from 2013   50,483,824 
 Allocation of allowances || 82% of allowances are allocated for free to operator based on a benchmark in line with their activity levels in 2010. In addition, 15% of allowances can be purchased through auctions.  The special reserve shall ensure access to the market for new aircraft operators and to assist aircraft operators which increase sharply the number of tonne-kilometres that they perform. 
 International credits || Aircraft operators may use Certified Emission Reductions and Emission Reduction Units for up to 1.5 % of the number of allowances they are required to surrender. 
 Exclusions || Commercial airlines that operate fewer than 243 flights per period for three consecutive four-month periods or flights with total annual emissions lower than 10,000 tonnes per year. Other types of special purpose aircrafts are also excluded (e.g. military flights, medical / rescue / scientific research flights or flights performed in the framework of public service obligations on routes within outermost regions or on routes where the capacity offered does not exceed 30,000 seats per year). A full list is in Annex I to the Directive. 
 MRV approach || CO2 emissions are based on applying an agreed emission factor (tCO2/km) to fuel consumption measured by considering tank levels at specific points in time as well as fuel uplift at the airport. A simplified approach is available for small emitters with emissions estimated using a standardised distance flown based on Great Circle Distance. 
Regarding the environmental impact, the
full-scope EU ETS puts a cap of around 210 million tons CO2 emissions on
flights to and from the EEA. As the technological and operational measures are
not sufficient to bring the aviation emissions below this level, the aviation
sector needs to acquire general EU allowances and international credits to
fulfil its emission target in the EU ETS. The aviation sector is expected to be
short of 20 to 30 million allowances in 2013 under the full-scope EU ETS.
Depending on the assumed growth of aviation sector, the shortage is projected
to be in a range of 40 million to 140 million allowances by 2020 (see section 5.1.3). 

As shown by the 2006 Impact assessment and
confirmed by this study, the full-scope EU ETS does not have a significant
negative impact on the aviation sector's competitiveness: According to the
updated calculations, the EU ETS is expected to slightly decrease demand for
aviation services in the magnitude of 0.12% by 2016 and 0.86% by 2030. 
Empirical evidence on ticket prices for
consumers confirms the minor economic impact: Based on a sample of EU and US
airlines, the EU ETS seems to lead to price increases between 0.43 % and 0.94 %
for passenger tickets (excluding taxes and charges).[10] Ryanair has been one of the
most transparent airlines by publishing figures of the cost to passengers of
climate change measures. These are cited as being €0.25 for passengers flying
from continental Europe[11],
and £0.25 for passengers buying tickets in the UK. Concerning transatlantic
flights, US airlines have included fees around $3 to cover for EU ETS costs in
their ticket prices.[12]
This price top-up due to the EU ETS is much lower than most airport taxes and
charges (e.g. US charges of $16 for passengers to arrive and to depart). 
Even though the EU ETS only puts small
costs on the aircraft operators and the ECJ has unequivocally confirmed the
legality of the coverage of all departing and arriving flights, it cannot be
expected that international opposition would cease if the EU ETS were continued
in its full scope. In particular, Indian and Chinese operators would probably
continue their non-compliance with the EU ETS and the US government would be
pushed to activate the "Thune bill". Furthermore, a full coverage of
departing and arriving flights is currently not among the options that are
considered for the 2013 ICAO Assembly. An application of the EU ETS in its full
scope from 2013 onwards may therefore risk obstructing future ICAO negotiations
on the development and implementation of MBMs (in particular if the 2013 ICAO
Assembly endorses a MBM Framework with a reduced geographic scope). 
Negative spill-over to sectors outside
aviation have not been observed up to now. However, if the EU ETS were
continued and the US activated the "Thune bill", negative impacts on
the on-going trade negotiations with the US would seem likely. 
3.           Objectives
3.1.        General
objectives 
The general objective – to ensure
the contribution of the aviation sector to reducing the
impacts of climate change – has not changed since the integration of
aviation into the EU ETS through Directive 2008/101/EC. Furthermore, the EU
continues to strive for achieving effective multilateral solutions to address
climate change. 
3.2.        Specific
objectives 
The specific objectives are twofold with
regard to amendments to the EU ETS for aviation following the 2013 ICAO
Assembly:
-         
Facilitation of the development and
implementation by 2020 of a global MBM covering all emissions from
international aviation;
-         
Continuation of the EU ETS to cover emissions
from all flights departing and arriving in the EEA, pending the implementation
of a global MBM in 2020.
The results of the public consultation confirm
that all stakeholders – industry, public authorities, and NGOs – strongly agree
to the use of MBMs in the aviation sector.
3.3.        Operational
objectives 
As stated in the "stop-the-clock"
decision, in case that the 2013 ICAO Assembly achieves a meaningful outcome,
the EU will consider whether changes to the EU ETS are required to allow for an
optimal interaction between the EU ETS and the ICAO Assembly outcome. Any
amendments of the EU ETS after the 2013 ICAO Assembly should deliver on the
following operational objectives:
-         
Maintain environmental effectiveness (compared
to emission coverage under full-scope EU ETS) 
-         
Maintain competitiveness of aviation sector (compared
to EU ETS costs for airlines and level of demand under full-scope EU ETS)  
-         
Maintain level playing field in the internal
market for aviation
-         
Limit additional administrative costs for
aircraft operators and Member States' administrations
-         
Ensure coherence with international law and with
non-binding ICAO Assembly resolutions, insofar as consistent with EU statements
on such resolutions.
The environmental effectiveness, low
administrative costs, and political acceptability are the main considerations
that stakeholders have put forward in the public consultation. 
4.           Policy
options
To respond to the positive outcome of the
2013 ICAO Assembly with regard to the devleopment of a global MBM and to
provide further positive momentum to this process, the EU can consider further
steps to adjust its EU ETS:
In particular, the draft text on the MBM
Framework as poposed by the ICAO Council of 4 September (see section 2.4.2),
but finally not adopted by the ICAO Assembly, can serve as a base for further
policy development: It will be possible to maintain the full coverage of
emissions from intra-EEA flights but the coverage of emissions from extra-EEA
flights will have to be cut back in proportion the distance travelled within
the EEA (hereafter "hybrid option"). The reduced coverage will be
effective until the implementation of the global MBM in 2020. If the 2016 ICAO
Assembly fails to agree on a global MBM the EU ETS will return back to its full
scope.
Besides the hybrid
option, alternative options have been discussed to adjust  the EU ETS coverage
of extra-EEA flights : 
-         
Departing-flights option: All intra-EEA flights
are covered but only the departing flights to third countries. This approach
was the EU's initial proposition for the geographic scope of the MBM Framework
but rejected by a large number of ICAO Member states (see section 2.4.2).
-         
50/50 option: As shown by the public
consultation, the majority of environmental NGOs have also proposed to limit
the EU ETS coverage to 50 % of the departing and arriving flights for extra-EEA
flights. However, this option has never been discussed at ICAO. 
-         
A general exemption of extra-EEA flights
(similar to the "stop-the-clock" decision) would only leave intra-EEA
flights covered.
-         
Upstream option: A switch to an upstream system
would make fuel suppliers the compliance entity instead of aircraft operators.
This option would have similar emission coverage to the departing-flights
option because fuel suppliers would surrender allowances corresponding to fuel
sold to EEA airports.
Any changes to the EU
ETS would not be expected to prejudge the development of the global MBM because
regional MBMs and development of a global MBM are considered as two different
tracks under the ICAO negotiations. Only changes with regard to exemptions for
developing states may risk setting a precedent for the global MBM.
The different options
will be explained in more detail in the following sub-sections: 
4.1.        No
policy change – full-scope EU ETS
In case that the EU will not decide to
amend the EU ETS in response to the 2013 ICAO Assembly, the EU ETS will apply
in its full scope from 2013 onwards. This means that aircraft operators remain
responsible for emissions for all flights departing from or arriving at EEA
airports.
4.2.        Hybrid
option 
It will be possible to maintain the full
coverage of emissions from intra-EEA flights but the coverage of emissions from
extra-EEA flights will have to be cut back in proportion the distance travelled
within the EEA. While the emissions of a flight between London and Stockholm are
fully covered, but the emissions of a flight between London and Dubai are only
covered in proportion to the distance travelled within the EEA. 
To determine distances
travelled within the EEA, the land borders to non-EEA countries are clearly
defined. However, various approaches exist with regard to the coverage of
distances travelled over the sea. The impact of the territorial sea boundary,
which extends to 12 nautical miles (nm), and of the exclusive economic zone
(EEZ), which extends to 200 nm, will be assessed in more detail. Other
boundaries could be considered[13], although third country concerns might be anticipated if the
coverage included areas that third countries are associated with.
Figure 4‑1 Hybrid option coverage (12 nm and 200 nm being assessed)
The emission coverage would be adjusted on
the routes to non-EEA destinations in proportion to the distance travelled up
to the defined area borders. The route-based approach of the EU ETS is
therefore maintained and over-flights – which do not depart or arrive at EEA
airports – are consequently not covered. This approach is therefore not an
"airspace" approach, which has been recognized as impracticable by ICAO,
but an approximated scale-down of the EU ETS coverage which corresponds to the
distance travelled within the EEA on routes to non-EEA countries. The amount of
allowances to be auctioned and free allowances has to be adjusted accordingly. 
With regard to MRV, two options will be
considered:
-         
On-board measurement of fuel consumption:
Aircraft operators would have to use on-board equipment to report fuel
consumption. 
-         
Approximated fuel consumption: Fuel consumption
for the full flight would be measured in the same way as it has been done since
2010 but compliance obligations for extra-EEA flights would be limited based on
a distance-factor (i.e. the % of the total flight which takes place within the EEA).
4.3.        Alternative options

1.2.1.          
Departing-flights
option

As explained above, the EU members of the
HGCC have put forward the departing-flights option as the most practicable form
for a regional or national MBM[14].
However, this option has not been considered further by the ICAO Council due to
the strong opposition by other States. Applied to the EU ETS, all emissions
from intra-EEA flights and from departing flights to third countries are
covered while emissions from incoming flights from third countries are
excluded.
The total cap as well as the quantity of
the free allowances and the allowances to be auctioned is adjusted in proportion
to the emissions coverage.  The MRV approach is the same as under the full
scope EU ETS.

1.2.2.          
50/50 option

Environmental NGOs have proposed to share
the responsibility for emissions coverage for departing and arriving flights by
50/50 between the State of arrival and the State of departure. They consider
that the concept of states sharing responsibility for emission reductions may
be more attractive to those countries that have opposed the EU ETS than
covering the whole trajectory of a flight as under the full-scope EU ETS or the
departing flight option.
The emission coverage of this option is
broadly similar to the departing-flight option, so the economic and
environmental impacts will be the same. The 50/50 option does therefore not need
to be modelled separately but the results from the departing-flights option will
be relevant. Furthermore, it should be noted that third countries have not
raised the 50/50 option in the HGCC or in other ICAO fora. Opponents to the EU
ETS would bring forward the same sovereignty objections as with the
departing-flights option.
The MRV approach would be similar to the
full-scope EU ETS and the departing-flights option.

1.2.3.          
Coverage limited to flights within EEA and
closely connected areas (as under the "stop-the-clock" decision)

The "stop-the-clock" decision
provides for the most significant cut-back in coverage of extra-EEA flights. As
explained in section 2.3.3, the "stop-the-clock" decision was adopted
as a one-year measure to facilitate a meaningful outcome at the 2013 ICAO Assembly.
The effective coverage of the EU ETS was in 2012 limited
to intra-EEA flights and flights between aerodromes in the EEA and closely
connected or associated areas such as Switzerland, Croatia and EEA Member
states' dependencies and territories. The enforcement of compliance obligations
was deferred for all other flights to non-EEA destinations.
The amounts of allowances to be auctioned
and free allowances were adjusted accordingly.  The same MRV approach as under
the full-scope EU ETS was used.

1.2.4.          
Upstream option

Under this option, aviation fuel suppliers will become the compliance entity under the
EU-ETS, instead of aircraft operators. This is the same
approach as the Waxman-Markey bill that passed the US House of Representatives
(H.R. 2454[15])
but was finally not adopted in the US Senate, which would have covered fuel
supply to international flights on a non-discriminatory basis.
This option will have a similar coverage to
the departing-flights option because fuel suppliers will surrender allowances corresponding
to fuel sold to EEA airports. However, it will have different economic impacts
because, with a view to avoid windfall profits for the fuel suppliers, free
allowances are not given out but all allowances are auctioned. As several
studies[16]
have discussed, the pricing behaviour on energy markets may facilitate a full
pass-through of the EU ETS costs and consequently lead to windfall profits for
those suppliers who have received free allowances. 
The upstream option will therefore lead to
higher fuel prices for the airlines that are eventually passed on through
higher passenger and cargo prices. To counter these price increases, it would
still be possible to continue the allocation of free allowances to the
airlines. The upstream option would then not only have the same environmental
but also the same economic effects as the departing-flights or 50/50 option.
As explained in detail in section 5.4.4, the
upstream option would require the most significant changes to the MRV system.
4.4.        Cross-cutting
simplifications to MRV and registry
As explained in section 2.6, the MRV costs
are strongly driven by the high number of small aircraft operators included in the
EU ETS. There are three main options identified which could further simplify
MRV for small emitters:
-              
Possible introduction of de-minimis threshold
for non-commercial operators, to remove any obligations for small emitters
below this threshold.
-              
Streamlining of administrative processes by
allowing Member States to apply simplified procedures for small emitters (e.g. removing
the requirement for independent verification for those small emitters who are
using the Eurocontrol ETS Support Facility combined with either credit card
payment or CRCO-billing);
-              
MRV compliance could be performed centrally by
one representative or consultant for a large group of small aircraft operators;
Such simplifications would reduce the administrative
requirements for aircraft operators as well as for national administrations und
all options described above. 
Performing the MRV compliance centrally by
one representative or consultant for a large group of small aircraft operators
will not be considered further as this would require not only changes to the
legislation and the reporting templates, but would mean that aircraft operators
could indirectly change their administering Member State by choosing the
representative/consultant.
The first two options can also be used in a
complementary way (e.g. to exempt small emitters  from EU ETS up to a certain threshold
and to allow them to use simplified administrative procedures above this
threshold).
5.           Assessment
of impacts
The quantitative
assessment of the impacts is based on the AERO Modelling System (AERO-MS)[17]. The AERO-MS model is highly relevant to
this project: it was developed as a tool for evaluating economic, regulatory,
operational, technical and market-based measures to reduce the impacts of
aviation on the atmosphere. It has already been applied for the initial impact
assessment concerning the integration of aviation into the EU ETS in 2006 and
has also been used to the analysis of policies at ICAO. A key aspect of the
AERO-MS method is that it models the effects of policies on supply-side costs
and, as they are passed through, on demand for air travel, in a feedback approach.
As a result, it generates a balanced view of the effects of policies on
economics and the environment. The methodology is explained in more detail in Annex V.
5.1.        Environmental
impacts
The most important environmental impacts
from the options relate to CO2 emissions as the reduction of CO2
emissions is the driving objective of public intervention. Impacts on NOx have
also been analysed and are reported in Annex IV.

1.2.5.          
Emissions’ coverage of policy options compared
to the full EU ETS

The effectiveness of the options is
measured in terms of their emissions coverage compared to the full-scope EU
ETS. This is presented in Table
5‑1 as percentages of the EU ETS emissions
covered by each option, by world region for 2020. Figures for 2012, 2016 and
2030 are provided in Annex IV.
The percentages are related to the flights to and from a certain world region.
Table 5‑1 Percentage of emissions covered in 2020 compared to
full-scope EU ETS
 Departure / arrival region || Departing Flights || Hybrid – 200nm || Hybrid – 12nm || "Stop-the-Clock" 
 EEA || 100.0% || 100.0% || 100.0% || 100.0% 
 Africa || 50.1% || 37.6% || 22.5% || 0.0% 
 Europe (non-EEA) || 49.4% || 72.3% || 54.4% || 0.0% 
 Far East || 51.1% || 19.3% || 14.8% || 0.0% 
 Middle America || 49.4% || 15.4% || 7.0% || 0.0% 
 Middle East || 50.0% || 53.6% || 31.0% || 0.0% 
 North America || 48.1% || 20.9% || 9.0% || 0.0% 
 South America || 49.0% || 15.2% || 7.8% || 0.0% 
 Total || 62.4% || 46.5% || 38.5% || 25.3% 
All options fully cover intra-EEA flights. As
the departing-flights option covers 50% of emissions from extra-EEA flights and
maintains a full coverage of all intra-EEA flights, it will still cover 63 % of
emissions compared to the full-scope EU ETS. The upstream and 50/50 options
would achieve the same coverage.
The hybrid-options reach coverage between
38.5% (for 12nm) and 46.5% (for 200nm) of the full-scope EU ETS. Both options cover
a larger proportion of emissions from shorter extra-EEA flights (e.g. to the
Middle East and the rest of Europe) than longer extra-EEA flights (e.g. to
South East Asia or the Americas). For instance, the hybrid option with a border
of 200nm would cover less than half the emissions from and to North America compared
to the departing-flights option. As the "stop-the-clock" option only covers
intra-EEA flights and flights to and from closely connected areas but not flights
to other non-EEA countries, it only achieves 26% of the full-scope EU ETS’
emissions coverage. 
It is important to note that the emission coverage
under the alternative options is reduced over time by 2 to 5 percentage points compared
to the full-scope EU ETS: The sharpest drop is recorded by "stop-the-clock"
option with a reduction from 27 % in 2012 to 22 % in 2030, reflecting the role
of extra-EEA travel in driving emissions in the future. The departing-flights
option, which covers the highest share of extra-EEA traffic, would only
experience a drop of 2 percentage points from 63 % in 2012 to 61 % in 2030 (see
Annex IV). 
As mentioned earlier, the model is based on
the policy options applied to EEA countries. However, there is consideration of
full including Switzerland in the EU ETS[18]
for 2016 and it is worth considering the impact it would have on the
effectiveness of the policies. The full inclusion of Switzerland would increase
emissions coverage by 2% under the full-scope EU ETS to around 0.5% for the
hybrid options.

1.2.6.          
Increase in CO2 aviation emissions (in-sector reductions)

As the coverage and consequently the EU ETS
costs are reduced for the extra-EEA flights, airlines will have less incentive
to curtail their activity and CO2 emissions will therefore be higher
than under the full scope EU ETS. The following table shows the relative
changes in CO2 emissions compared to the emissions under the full-scope
EU ETS. The absolute numbers for the reported change in emitted CO2 are in a
range of less than 10 million tons.
Table 5‑2 Change in emitted CO2 compared to full-scope
EU ETS
   || 2016 || 2020 || 2030 
 Hybrid (12nm) || +0.24% || +0.44% || +1.77% 
 Hybrid (200nm) || +0.21% || +0.39% || +1.54% 
 Departing Flights || +0.15% || +0.27% || +1.07% 
 "Stop the Clock" || +0.29% || +0.52% || +2.12% 
 Upstream || -0.18% || -0.18% || +0.19% 
The departing-flights, "stop-the-clock",
and hybrid options to higher CO2 emissions compared to the full-scope
EU ETS. In line with the level of emission coverage under the different
options, the departing-flights option only records a 1% rise by 2030 while the "stop-the-clock"
option has the highest increase of 2%.
The upstream option will lead first to a
decrease in CO2 emission because the cancellation of free allowances imposes
higher costs on airlines than the full-scope EU ETS. However, in the longer
term, emissions will also increase because of the lower coverage on extra-EEA
routes.

1.2.7.          
Decrease in demand for general EU ETS allowances
and international credits (out-of-sector reductions)

As already discussed in section 2.8, the
aviation sector needs to acquire general EU allowances and international credits
to comply with the emission cap under the full-scope EU ETS. The technological
and operational measures are not sufficient to cancel out the strong growth of
the aviation sector. The aviation sector will remain a buyer of general EU
allowances and international credits under all options but the demand will
decrease in line with the reduced coverage. This means that relative to the
full-scope EU ETS, the demand for general EU allowances and international
credits is reduced by between 35 % and 75 % depending on the option chosen.
Table 5‑3 Estimated demand for general EU allowances from the
aviation sector in 2020, in absolute terms (mt CO2) and relative to full-scope EU ETS 
   || Demand for general EU allowances and international credits (= emissions over cap) || Demand for general EU allowances and international credits relative to full-scope EU ETS 
   || High estimate (based on AERO-MS)   || Low estimate (based on PRIMES) ||   
 Full-scope EU ETS || 136.4 || 36.9 || 100% 
 Departing Flights || 86.1 || 23.2 || 63% 
 Upstream || 85.0 || 22.9 || 62% 
 Hybrid (200nm) || 69.1 || 17.3 || 47% 
 Hybrid (12nm) || 53.7 || 14.4 || 39% 
 "Stop the Clock" || 33.6 || 9.2 || 25% 
The AERO-MS is based on
the traffic data projections from the CAEP-ICAO studies (see also Annex V).
While this data is commonly used for studies in the aviation sector, it does
not take account of the recent economic downturn. It may therefore overestimate
the emission growth in the short-term (e.g. up to 2020) while still providing
correct estimates for the long-term growth. Depending on how quickly the EU
economy will pick up again, the demand from the aviation sector for EU
allowances may therefore be lower in the short-term than projected by AERO MS.
To have a more conservative estimate, the shortfall for the aviation sector has
also been estimated based on emission growth projections for aviation
extrapolated from the PRIMES model. Contrary to the AERO-MS, which assumes an
annual growth rate of 5.4%, the PRIMES model is based on a significantly lower
growth rate of 1.1% for the period up to 2020. Due to the significant
difference in assumed growth rates, the absolute values for the shortfall in
2020 are between 3.5 and 4 times higher from the AERO MS than the PRIMES model.

Finally, it is
important to note that a reduction in demand due to lower coverage under the
hybrid and alternative options will further increase the surplus on the market
for general EU allowances. In case that aviation emissions will grow strongly
(as predicted by AERO MS), the cumulated demand from the aviation sector under
full-scope coverage would be estimated at around 600 million general EU
allowances for the period from 2013 to 2020. A reduction in the coverage down
to 25 % to 63 % - depending on the option chosen – would lower cumulated demand
for general EU allowance from 600 million to around 150 to 400 million for the
period from 2013 to 2020 and increase the surplus accordingly. Based on a
low-growth scenario (following the PRIMES model), the cumulated demand from the
aviation sector would be reduced from around 230 million to around 60 to 145
million for the period from 2013 to 2020 and have a less significant impact on
the surplus of general EU allowances. 
5.2.           Economic
impacts
Aviation plays a central role in the EEA
and global economies both as a sector which creates value and employment and as
a support service which enables trade in other sectors. A change in the cost of air transport may therefore have
repercussions on a range of economic agents. 

1.2.8.          
Impacts on airlines’ competitiveness

The EU ETS has the effect to increase the
competitiveness of fuel-efficient carriers compared to their competitors.
Operational measures and investments to increase full efficiency are rewarded
through lower EU ETS costs. However, as aviation is an essential mode of
transport, attention must also be paid to its overall competitiveness of the
sector. The reduction of the EU ETS scope will reduce the competitive advantage
of the more fuel-efficient operators but increase the overall competitiveness
of the sector through lower costs and a corresponding increase in demand.
·       
Impact on costs
The requirement to reduce emissions placed
on the aviation industry by the EU ETS and the policy options entails
compliance costs for operators. Airlines will be required to purchase
allowances (through auctions or on the secondary market) or international
credits and meet the MRV obligations. 
The cost impact of the policy options is
modelled by applying the cost of acquired allowances (i.e. auctioned
allowances, general allowances, and international credits) as an additional
fuel cost for the aircraft operators. The average EU ETS costs is calculated
off model based on the required number of emission allowances (which equals
emissions less free allowances) and the prices for EU allowances (as shown in Table 5‑4) and international credits . The number of allowances required on a
route is adjusted in proportion to the reduced coverage under the different options
in comparison to the full-scope EU ETS. The average EU ETS costs are then integrated
into AERO-MS as a mark-up on fuel prices.
Table 5‑4 Price assumptions for EU allowances (€)
   || 2016 || 2020 || 2030 
 EU ETS || 6 || 10 || 35 
The absolute level of EU ETS costs will be lowered
in proportion to each option's reduced coverage (e.g. up to 61.5 % of the
hybrid options). As Annex VI show
e.g. for 2020, the absolute level of EU ETS costs would be reduced from
estimated € 1 633 million for the full-scope EU ETS to € 1 025 million for the departing-flights
option and to around € 700 million for the hybrid options. The
"stop-the-clock" would in line with its reduced coverage of only 25 %
cut the EU ETS costs down to around € 400 million. 
Table 5‑5 shows these reductions in percentage of total costs and over time:
Due to the minor share of EU ETS costs in total costs, the substantial
reductions in absolute levels will only lead to minor relative changes in total
costs in the range of -0.01 % to -0.15 %.[19]  
Table 5‑5 Aggregated cost impacts compared to full-scope EU ETS
(% change)
 Impact on total costs || 2016 || 2020 || 2030 
 Hybrid 12nm || -0.01% || -0.03% || -0.13% 
 Hybrid 200nm || -0.01% || -0.02% || -0.11% 
 Departing flights || -0.01% || -0.01% || -0.07% 
 "Stop-the-clock" || -0.02% || -0.03% || -0.15% 
 Upstream || 0.01% || 0.01% || 0% 
·       
Impact on prices and demand 
The
impact on the price for passenger tickets and freight rates will depend on the
extent of cost pass-through in the aviation sectors. Some commentators[20] have suggested that the airlines would
increase prices in line with their marginal EU ETS costs and consequently
benefit from a windfall profit in proportion to the free allowances.
However, the research on cost pass-through
rates has up to now focused on energy-intensive industries.[21] The market structure and the
pricing behaviour in the aviation sector may be quite different from these
product markets. In particular, the price pressure from low-cost airlines may
not allow all operators to fully pass on costs. The empirical evidence[22] on the announced price top-ups
to cover EU ETS also suggests that the airlines would pass on their incurred EU
ETS costs only and consumer benefit from the free allowances. 
To not overestimate the effect of reduced
EU ETS coverage on demand, it is therefore assumed that prices are reduced in
proportion to the reductions in incurred EU ETS costs (i.e. expenses for acquired
allowances and international credits).
According to the AERO-MS estimates, a
reduction of the EU ETS coverage for extra-EEA flights will result in a drop in
average ticket prices for economy seats (excluding taxes and charges) of -1.1%
to -0.1% compared to the full-scope EU ETS in 2020, depending on the remaining
coverage on the routes to non-EEA destinations. The prices for intra-EEA
traffic will remain unaffected except for the upstream option which will
increase prices for intra-EEA flights. 
The reduced ticket prices will increase
passenger demand between 0.14% and 2.04% for extra-EEA flights in the period
between 2016 and 2030, as summarised in Table 5‑6.
 
Table 5‑6 Change in passenger demand for extra-EEA flights (%
change compared to full-scope EU ETS)
   || 2016 || 2020 || 2030 
 Hybrid 12nm || 0.23% || 0.43% || 1.72% 
 Hybrid 200nm || 0.21% || 0.38% || 1.51% 
 Departing flights || 0.14% || 0.25% || 1.01% 
 "Stop-the-clock" || 0.28% || 0.51% || 2.04% 
 Upstream || -0.07% || -0.04% || 0.41% 
The freight rates will also be lower than
under the full scope, experiencing a reduction between -1.8% to -0.1%,
depending on the coverage of the routes to the different non-EEA destinations.
If this decrease in freight rates is passed down the supply chain, the price of
some consumer products may also marginally decrease depending on pass-through
behaviour by manufacturers and retailers.
The reduced freight rates will increase
cargo demand between 0.29% and 3.45% for extra-EEA flights in the period
between 2016 and 2030, as shown in Table 5‑7.
 
Table 5‑7 Change in extra-EEA cargo demand (% compared to full-scope
EU ETS)
   || 2016 || 2020 || 2030 
 Hybrid 12nm || 0.41% || 0.74% || 2.87% 
 Hybrid 200nm || 0.35% || 0.64% || 2.47% 
 Departing flights || 0.29% || 0.51% || 1.97% 
 "Stop-the-clock" || 0.49% || 0.88% || 3.45% 
 Upstream || 0.01% || 0.13% || 1.16% 
A reduced coverage will therefore lead to an
increase in passenger and cargo traffic on extra-EEA routes. However, the overall aggregated impact of the EU ETS – whether in
full or reduced scope – will remain small compared to other
cost drivers (e.g. fuel prices) or macro-economic drivers (GDP and income
growth) that have a much more significant impact on the
aviation sector.
The low impact of the EU ETS is also confirmed
by a sensitivity analysis with regard to the level of the price of EU
allowances. Even if the assumed prices for the EU allowances were increased by
50 % (e.g. € 15 for 2016 and € 70 for 2030 instead of the prices in Table 5‑4)
the changes in demand would remain small compared to full scope. The demand
increase for the hybrid option (for 200 nm) would go down from 0.38 % to 0.23 %
in 2020 and from 1.51 % to 0.98 % in 2030.

1.2.9.          
Impacts on level playing field for competition

Competition distortion occurs when a policy
applies dissimilar conditions to different trading parties on equivalent
transactions. The EU ETS is designed to be neutral with regard to competition:
it should not favour certain types of operators (e.g. based on their
nationality, their network size, or any other characteristics) and maintain a
level playing field. 
At the international level, the Chicago
Convention (Article 11), Open Skies Agreement between the US and Europe
(Article 2) and a number of bilateral Air Service Agreements (ASA) build on the
non-discrimination principle to avoid distortions of competition through
favouring national operators over foreign operators. 
·       
Competition on direct city-pair routes
City- or airport-pairs are usually taken as
the relevant market definition to explore  competition impacts because of the
absence of widespread demand-side substitution[23],
i.e. if the price of travel between Brussels and New York changes, it will not
significantly affect demand for flights between Brussels and Miami, although
this can vary depending on routes, as well as purpose and direction of travel. 
In the European Court of Justice (ECJ) Case
366/10 Air Transport Association of America and Others, the ECJ
confirmed that a public measure – like the EU ETS – does not distort
competition in favour of certain operators if it is equally applied to all
operators active on a certain route. The principle of non-discrimination, as
contained in the Chicago Convention, the Open Skies Agreement and the bilateral
ASAs, is therefore not violated by the EU ETS.
As all policy options continue to apply
uniformly to all operators – irrespective of their nationality or any other
characteristics – on a given city-pair, they would remain in line with the
principle of non-discrimination and allow operators to compete fairly.
·       
Competition with one-stop services
In certain cases, one-stop services may be
included besides non-stop services in the same relevant market because the
connecting one-stop services offer competitive alternative to non-stop carriers
in city-pair markets. Depending on the city-pair, a one-stop service may be a
suitable alternative for non-premium passengers in long-haul markets where the
passengers may be willing to accept a longer time in transit to obtain a lower
fare. This approach will be less attractive to business travellers.
As all policy options fully cover intra-EEA
flights, possible competition distortions are avoided. As the policy options -
depending on different geographical scopes - may not cover non-stop services in
the same way as one-stop services, there could be some potential for distortion
through the use of hubs outside the EEA in order to limit the quantity of
emissions covered by the EU ETS. 
For instance, under the full-scope EU ETS,
it may be more advantageous to take a flight via a non-EEA hub than a direct
flight to a non-EEA destination (e.g. to stop-over in Dubai on a London to Hong
Kong flight instead of flying directly) because only the first flight until the
non-EEA hub would be covered. This may reduce the attractiveness of EEA hubs
and favour airlines which use hubs outside Europe.
The 2006 Impact assessment explored the
risk of route change to use extra-EU hubs under the full-scope EU ETS but found
that the likelihood of such a distortion would only become positive at a carbon
price of €75 per tonne CO2. This means that at the assumed carbon price
up to 2030, there would be no risk for competition distortions. The same is theoretically
also possible under the departing flights, 50/50 and upstream options
but even less likely because of the more limited coverage of extra-EEA flights.
The "stop-the-clock" option
reduces potential competitive advantages for non-EEA hubs because all extra-EEA
flights – irrespective of their final destination – are exempted from the EU
ETS. However, individual airlines claim that stop-the-clock would nevertheless
create "serious distortions of competition in the
intercontinental air travel business at the expense of the EU airlines"
because a feeder flight to an EEA hub (e.g. from Brussels to Frankfurt) is
subject to the EU ETS while a feeder flight to the foreign hub (e.g. from
Brussels to Abu Dhabi) is exempt. Given that feeder flights within the EEA will
tend to account for a small proportion of the total distance flown to overseas
destinations and given the low level of current carbon prices, there exists no
significant risk for such a distortion.[24]
By relating the scope of the EU ETS to the
distance flown within the EEA rather than to the distance to the final destination,
the hybrid options eliminate any potential risk of distortions in favour
of non-EEA hubs because all flights are treated equally irrespective of their
final destination. Non-stop flights and one-stop flights have to pay the same
EU ETS costs for their distances flown within the EEA. The only potential
source for distortions could come from one-stop flights using hubs in
Switzerland due to its specific geographic position in the middle of Europe: As
flights from Switzerland to non-EEA countries are currently not included in
Switzerland's own ETS, and are not covered under the EU ETS, one-stop flights
over Swiss hubs could potentially benefit from an advantage over their
competitors. The ETS linking agreement with Switzerland – which is currently
negotiated – will remove this potential distortion. 
Therefore, while the incentive to use non-EEA
hubs will exist to different degrees depending on the policy option considered
(see Table 5‑8 for a summary) it is very unlikely that any policy options would
generate significant competition distortion in favour of airlines operating
from non-EEA hubs or incentivise airlines to relocate their hubs, especially at
current carbon prices. 
Table 5‑8 Summary of competition
impacts on aviation markets
   || Competition on city-pair markets || Competition on markets with one-stop services 
 Potential distortions || Significance 
 Full-scope EU ETS, departing-flights, 50/50, and upstream options || No risk of distortion || Airlines using hubs outside the EEA could benefit from lower emission coverage under EU ETS compared to non-stop flights to the same destination. The risk is lower than under the full scope EU ETS however. || None at current carbon prices   
 "Stop-the-clock" option || Reduced risk because all flights to 3rd countries are exempted from EU ETS. 
 Hybrid option || No risk of distortion || No risk of distortion because emission coverage is independent of final destination || None 
·       
Competition between tourist destinations
As mentioned in the Section 5.2.1.2, the
policy options (except upstream) are expected to result in reductions in ticket
prices compared to the full scope EU ETS. This means that tourism will benefit
from a reduced scope of the EU ETS even though only to a marginal extent (see
also Annex VII for the price
elasticity in the tourism sector). 
With regards to a level playing-field
between different tourists destinations, all intra-EEA destinations – including
outermost regions (e.g. Azores, Canary Islands, Madeira, and the French
overseas departments) – continue to be covered so no destination will gain a
comparative advantage over others. As already discussed in the 2006 Impact
assessment, in case that aid may be justified in favour of inhabitants of
outermost regions to facilitate the access to aviation services, such aid
should be granted through specific public service obligations (PSO) and not
through exemptions to the EU ETS.
With regards to non-EEA destinations, stakeholders
have raised a potential risk for distortions under the "stop-the-clock"
option in particular with regard to the Mediterranean
area. This is because higher demand substitutability may exist between tourist
destinations in this area than in other aviation markets. For instance, if
flights to North-Africa or Turkey were completely exempted from the EU ETS, as
under the "stop-the-clock" option, compared to flights to EEA
destinations in the Mediterranean area, a potential advantage in favour of
non-EEA destinations may exist. However, given the low carbon prices, it is
unlikely that such risks would materialize in any significant shifts in demand.
With regards to competition with other
international destinations, located farther away, the potential distortion
across tourist destinations are not a concern in view of the lower price
elasticity for long-haul flights and the smaller proportion of the EU ETS costs
in relation to total costs. 

1.2.10.       Impact on auction revenues for public authorities

15 % of the total aviation allowances are
auctioned and the revenues are distributed to the Member States. In proportion
to the reduced scope, less aviation allowances will be auctioned. The annual
auction revenues are therefore expected to decrease from €316 million under the
full-scope EU ETS to €122 to €147 million under the hybrid options at assumed
carbon prices of €10. The reductions are always in proportion to the reduced coverage.
Except for the upstream option, the auction revenues will increase strongly
because allowances are not any more given out for free and all allowances are
auctioned. See also Annex VI.
Table 5‑9 Estimated auction revenues from aviation allowances
in 2020 (at assumed price of €10)
   || Estimated auction revenues from aviation allowances (€m) || Percentages relative to full scope 
 EU ETS full scope || 316 || 100% 
 Departing Flights || 197 || 62% 
 Hybrid 200nm || 147 || 46% 
 Hybrid 12nm || 122 || 39% 
 "Stop-the-Clock" || 80 || 25% 
 Upstream || 1280 || 333% 
              
5.3.        Social impacts
The social
impacts of a policy are the impacts on people, their employment prospects, and
rights, access to services, quality of life, income, health and safety. It
focuses on distributional impacts i.e. across and within different social and
economic groups, identifying ‘winners’ and ‘losers’ and assessing whether it is
likely to improve or aggravate existing inequalities. For this study, the main
areas of interest are the potential impacts of the policy options on lower
income social groups by potentially reducing access to air travel, and on
employment if jobs are lost / created as a result of the policy options.

1.2.11.      
Impact on lower income groups

The minor impact on ticket prices and
overall passenger demand has already been established in Section 5.2.1.2. This
section investigates whether there is a risk that lower income groups may be
disproportionately affected by the policy options.
Access to air travel is closely linked to
income levels. This is despite the fact that the growth in Low Cost Airlines
(LCAs) is often claimed to have contributed to the democratisation of air-based
travel by bringing it within the reach of lower income groups.
LCAs have indeed generated a spectacular
growth in air travel since 2000. Between 2006 and 2012 alone, the number of
passengers of LCAs has, according to the European Low Fares Airline Association
(ELFAA), almost doubled from 105.7m to 202.4m. However, this rapid growth is
due to a range of drivers which do not include attracting low income customers.
The main ones are: a continued rise in incomes; and the
opening of numerous new routes which have captured latent demand. The introduction
of low-cost flights has resulted in two main trends: more short trips are made
as people take advantage of the cheaper tickets to take weekend breaks or city
breaks; and an incentive to buy a secondary home abroad was created.[25]
In other words, the main effect of LCAs has been to
draw new people to air travel by reaching new markets and increasing the
frequency of travel. However this has mostly benefited middle and high income
groups rather than low income groups. 
As the ticket prices will remain stable for
intra-EEA flights and even decrease for extra-EEA flights with reduced
coverage, low income groups will not be negatively impacted and there will not
be a risk to increase inequalities in Europe. 

1.2.12.      
Impact on employment

Employment impacts may occur from a rise or
fall in airlines’ activity as a result of the policy options. AERO-MS estimates
that by 2020, the full-scope EU ETS is expected to generate a drop of -0.6% in
aviation employment at EU level compared to a situation with no EU ETS. By
reducing the scope of the scheme, the drop in employment would slightly decrease
compared to the full-scope EU ETS (between 0.13% under "stop-the-clock"
option and 0.07% under departing-flights option). 
5.4.        Administrative
effort and feasibility
This section provides analysis on the
administrative effort and feasibility to implement the policy options with
regard to monitoring, reporting and verifying emissions (MRV). Annex VIII provides additional information on
the costs and the implementation timeline for each option.
The main challenge will be to adapt the EU
ETS in very short time and to keep to a minimum the necessary legal changes and
additional MRV costs for aircraft operators and national administrations. The
current MRV system should therefore be maintained as far as possible and not be
changed in its principles. Any changes should be simple and easily
implementable. 

1.2.13.      
Full-scope EU ETS

At the core of the
current MRV system for the EU ETS is the monitoring plan, which aircraft
operators submit in advance of the start of the trading period, and which is
subject to the approval of the competent authority. The plan includes
information on how you obtain, process, record and monitor emissions.  The monitoring
plan sets out detailed, complete and transparent documentation concerning the
methodology of an aircraft operator and is subject to regular update to respond
to the verifier’s findings and on the basis of the aircraft operator’s own
initiative. Currently, the main responsibility for the implementation of the
monitoring methodology in the plan as specified by requirements in EU
legislation remains with the aircraft operator.
On the basis of
the monitoring plan, each aircraft operator must report annual emissions by
submitting an annual emissions report to the competent authority which must be
verified in accordance with EU legislation by an independent accredited
verifier prior to submission.  The competent authority reviews and approves
such reports. In general, emissions are based on an agreed emission factor
applied to fuel consumption measured based on methodologies included in the
monitoring plan. A simplified approach is available for small emitters whereby
emissions are calculated using a standardised distance flown based on Great
Circle Distance (GCD) multiplied by the emission factor. 
The administrative tasks involved in the
monitoring, reporting and verification (MRV) of emissions under the current EU
ETS are broadly summarised in Table
5‑10.
Table 5‑10 Key administrative tasks under the EU ETS 
 Operators || Competent authorities in Member States || European Commission 
 Application for monitoring plan; notifying changes to monitoring plan; setting up monitoring and report systems; collect, and archive data; prepare annual emission report; ensure that annual emission reports are verified by accredited independent verifiers; submit annual emissions report to competent authority; || Approves monitoring plan for each aircraft operator and subsequent updates to the monitoring plan; approves annual emissions reports as verified by accredited verifiers; monitor compliance and enforce in case of non-compliance || Establish and maintain implementing provisions related to monitoring, reporting and verification of emissions, create central templates for reporting of emissions and monitoring plans, subject to approval through comitology process; Issue guidance; update aviation operator list; administer allocations of free allowances 
The most relevant factors in terms of
administrative effort under this system are the large number of aviation
operators covered by the EU ETS, the review of the monitoring plan for each and
the amount of data reported annually through the annual emissions reports. 

1.2.14.       Hybrid option

The MRV system would need to change under
each of the hybrid options in order to reflect the proportion of emissions or
distance covered within a defined area. There are three
possible approaches for an adapted MRV process:
-         
MRV Option 1 (on-board measurement of fuel
consumption), using on-board equipment on all
aircraft to monitor actual fuel flows to the engines combined with GPS data. 
-         
MRV Option 2 (approximated fuel consumption) which applies a distance factor to total fuel consumption, as reported
under the current MRV system. 
-         
MRV Option 3 (modelled fuel consumption), modelling emissions using Eurocontrol’s Advanced Emissions Model.
This may significantly reduce costs for operators but it would likely reduce
accuracy and more importantly it would all but remove incentives for improving
fuel efficiency and reducing emissions levels. Modelling is not deemed appropriate as a monitoring approach and is not
considered further.
·       
MRV Option 1 – On-board measurement of fuel
consumption
Under this option, the fuel consumption for
the distance travelled within the EEA would be monitored with on-board devices
tracking fuel flow measurements to the engines combined with GPS data. The fuel
flow occurring between fuel uplift for the flight and reaching the EEA border
is summed up and considered to be the fuel consumption for that part of the
flight. 
In order to monitor fuel consumption and
geographical position in flight, aircraft operators could use the data recorded
by either the Digital Flight Data Recorder (FDR) or, if installed, Quick Access
Recorder (QAR). The recorded data on fuel flows in the engines and GPS
positions provides a high level of accuracy and as data is digitally logged a
detailed verification of the fuel flow data can be performed.  
In terms of monitoring, the applicability
of this option depends on the extent to which these devices are present on
aircraft and the number of operators who would need to invest in such
equipment. Regulation and data on aircraft fleet suggest that QAR and FDR
systems are available on most commercial airlines. Where FDRs or QARs are not
available, this option places potentially significant costs on operators. These
include the purchase of new equipment for each aircraft in a fleet and
adjusting the relevant flight permit after installation: new QAR equipment can
cost between 7,000€ and 10,000€ for the hardware and possibly up to 50,000€-80,000€
for the software.
However, the cost effectiveness of this
option is uncertain as a substantial amount of post-flight processing would
need to be undertaken.  As this option results in a much greater quantity of
data collected, significant additional effort in reporting and verification,
both for operators and MS' competent authorities, may be required.  As a first
step, a reporting entity would need to be identified and agreed (e.g. reporting
to competent authority directly by the operator or, alternatively, by a central
reporting entity (such as Eurocontrol)). Furthermore, depending on how the
boundaries of the EEA are defined, there would be additional work to encode the
boundaries (e.g. 12nm or 200nm boundaries) into flight management data bases.[26]  In general, it is the reporting element of this approach, rather
than the monitoring element, which results in the greatest share of added
administrative burden.  
Finally, this MRV approach may also be
subject to legal constraints. The requirement for on-board equipment may be
challenged under the Chicago Convention. According to Article 33 of the Chicago
Convention, if a certificate of airworthiness is issued by the state where the
aircraft is registered, the EU MSs will be obliged to recognise it, provided
that the requirements under which such certificate was issued meet or exceed
ICAO standards. Therefore, as long as the required on-board equipment is not
recognized as an international standard, it may be difficult to legally oblige
all aircraft operators to install it through EU legislation. 
In conclusion, MRV Option 1 might be feasible
for medium-sized and large aircraft operators, who have already installed the
necessary equipment on board, but will increase the administrative costs with
regard to the reporting element, not alone because of the significant increase
in the amount of data to be reported and the post-flight data processing
required by the operator, verifier and/or Member State competent authority. 
Smaller operators and those without this
equipment would face additional investment costs for the installation of the
equipment per aircraft. Operators may face higher independent verification
costs and MS' competent authorities would likely have to bear higher costs in
validating emission reports because of the added complexity and may further
face initial costs related to establishing the required system. 
In terms of implementing such an approach,
there would be time-consuming steps including the installation of the necessary
equipment on aircraft where this equipment is not yet available, and the
revision of MRV legislation by the Commission. It is estimated that this option
would take at least 2 - 2.5 years to implement, while the precise costs for
airlines are not fully known. Though such a system would potentially result in
a very high level of accuracy, considering that such an MRV system would
potentially only be in place until the implementation of a global MBM in 2020,
and in view of the additional effort and cost for parties involved, the risk of
legal challenge under the Chicago Convention, and the implementation time,
on-board measurement is not considered to be the preferred solution.
·       
 MRV Option 2 – Approximated fuel consumption
With this method, emissions would be
determined using a pro rata calculation (proxy) to the fuel consumption by
applying a “distance factor” proportional to the distance travelled within the
EEA to the total fuel consumption of a flight. Hence, the current MRV system
would largely be maintained. This approach maintains the incentive to reduce
emissions from aviation, and does so for the whole flight route. In addition,
it does not encourage alterations in flight paths merely to avoid covered
areas, because the distance factor is set once for the period (phase 3 EU ETS,
2013-2020) and would not change during the period. This approach is not applied
as a traditional "airspace" approach, which previous ICAO analysis
has considered being "impracticable" but rather a proxy to limit the
coverage for extra-EEA flights to the distance flown within the EEA based on
best available data. Under this approach, a premium is placed on workability
and simplicity.
The distance factors could be
pre-determined based on the proportion of the Great Circle Distance (GCD)
between city- or country-pairs (e.g. determining the share of GCD within the
EEA as a percentage of the total GCD). Alternatively, the distance factor could
be pre-determined using flight plans.
-         
Reporting based on country-pairs would be in
line with existing monitoring legislation and would use the existing reporting
template applicable since 2010. It would also require significantly fewer distance
factors to be calculated and applied by each aircraft operator as far fewer
country-pairs exist relative to city-pairs. This may facilitate earlier implementation
of any change. However, defining the GCD for a country-pair may become
controversial because of potential claims by some operators will benefit and
some will lose out. A loss of accuracy may be claimed compared to more precise
calculations such as city-pairs though it is possible that this loss of
accuracy would be small, especially with a 12nm boundary, as this represents a small
part of the total flight.
-         
The determination of distance factors based on
city-pairs would imply more administrative effort than determining distance
factors based on country-pairs.  Nonetheless, the administrative effort
required to pre-determine distance factors under either approach are considered
to be moderate because the existing Eurocontrol Support Facility can facilitate
this process. A city-pair approach to the calculation of distance factors would
likely require changes to the current MRV legislation. Additional costs from
implementing this method would stem primarily from required changes to aircraft
operators’ or competent authorities' monitoring and reporting systems to allow
them to apply relevant distance factors in their annual emissions reports. However,
once the required changes have been implemented and the distance factors have
been calculated and published, additional reporting effort by the operator
would be minimal. 
-         
The approximation based on GCD would have
limitations in terms of accuracy because actual flight trajectories can vary
considerably from the GCD (because of weather conditions, operators choose
flight routes which minimise headwind and maximise tailwind); hence, these
approaches do not reflect real fuel consumption patterns. To achieve a higher
level of accuracy, the distance factor could possibly be pre-determined based
on Eurocontrol’s Advanced Emissions Model which uses flight plans as a basis.
It should be noted that distance factors pre-determined using this model will
nonetheless not represent real time flight data.[27] 
As regards the development of distance
factors and implementing required changes to reporting systems, it is estimated
that this would take 0.75-1.5 years to implement.
·       
Conclusions
The final choice of approach for the hybrid
option will depend on the preferred trade-off between efficiency and accuracy: MRV
Option 1 – on-board measurement – would provide the greatest level of accuracy at
potentially significant costs to the aviation industry, complex implementation
and risk of legal challenge. MRV Option 2 – approximated fuel consumption – is
likely to be less accurate but has efficiency gains as implementation of such
an approach is relatively straight forward, does not increase the annual MRV
costs once it is implemented, and maintains the incentive for efficient flight
operations. Furthermore, it will be important to develop a coherent system for
intra and extra-EEA flights as most major aircraft operator, operate at both
levels. Only MRV Option 2 can apply consistently to intra-EEA and extra-EEA
flights. 

1.2.15.      
Alternative options (except upstream option) 

The departing-flights option would use
exactly the same approach to MRV as the existing EU ETS.  Monitoring plans and
templates would not need to be resubmitted nor reviewed to accommodate such a
change. The primary difference is that the current MRV approach would be
applied to fewer flights (i.e. all intra-EEA flights and departing extra-EEA flights)
upon the application of such an approach. As a result this option may generate
some savings compared to the full scope EU ETS: for operators as fewer flights
would need to be monitored, reported and subject to verification; for Member
States as they would may have fewer annual emissions report to review and
approve. However these cost impacts are likely to be minor.
The 50/50 option would also follow the same
approach as the existing EU ETS, applied to the same number of flights (i.e.
incoming and departing). The annual emissions figure
would be established by monitoring emissions on the entire route, as is
currently the case, and then subsequently applying a factor of 50% to the total
emissions figure. Hence, the 50/50 approach would result in the same costs as
full scope EU ETS. 
Under the "stop-the-clock"
option, the current approach to MRV would similarly be maintained, but applied
to fewer flights (i.e. intra-EEA flights only). 
All three of the above options are
technically feasible with similar costs and effectiveness in relation to the
current system. These could be implemented without delay. 

1.2.16.       Upstream option

This option would place the responsibility
with the suppliers of aviation-related fuels (i.e. refineries) instead of the
aviation operators. MRV would rely on invoices and metering data in the same
manner as MRV is conducted for fixed installations under the full EU ETS. It is
estimated that only around 100 to 200 installations would be covered by this
option, reducing the number of compliance entities significantly compared to
the other policy options and offering opportunities for cost savings. However,
this option raises a number of issues with regards to MRV in terms of the
complexity involved in tracking fuel trade.
In terms of cost, the option will require
the identification of fuel suppliers and amendments to the MRV process in order
to reflect the change in compliance entities. More importantly however, it will
result in large sunk costs: while the other policy options build on the
existing MRV system, the upstream approach will need to start from the
beginning. As a new MRV process would have to be set
up, the estimated timeframes for this option are considerably longer than for
the other options. The longer timescales stem from the need to revise legal
requirements, including the need to change Directive 2003/87/EC, and to set-up
a dedicated system to track fuel trade and certify verifiers.
In particular, if ICAO successfully
implements a global MBM by 2020, it would mean that an EU ETS based on fuel
suppliers would only be in place for 8 years and then would again switch back
to aircraft operators.

1.2.17.      
Comparison of options

Table 5‑11 briefly summarises how the MRV approaches fare in terms of
accuracy, costs and timescale.
Table 5‑11 Accuracy and costs of MRV options compared to
full-scope EU ETS
 MRV Option || Accuracy || Costs || Time required for implementation 
 Hybrid option ||   ||   ||   
 On-board measurement || = || ++ Additional investment costs and increased annual MRV costs for operators and national administrations  || 2-2.5 years 
 Approximated fuel consumption || - (lower accuracy for  country- than city-pairs) || + One-time costs for adaptation of distance factors (lower for country-pairs) but no significant increase of annual MRV costs || 0.75-1.5 years 
 Alternative options (departing flights, 50/50, and "stop-the-clock" options) || = || = || No time required: already in place 
 Upstream option || = || ++ Significant costs for complete MRV change || 3-3.25 years 
While on-board
measurement and a switch to the upstream option would require costly and
time-consuming changes to the MRV system, the other options can be implemented
at low costs.  

1.2.18.      
Impact on MRV costs from simplifications for
small emitters

The MRV costs under all options could be
reduced through simplifications for small emitters without compromising the
environmental effectiveness of the EU ETS. 
An in-depth study on small emitters is
being carried out by PWC which provides further analysis on the cost placed on
small emitters by the EU ETS for aviation and estimates the savings to
non-commercial aircraft operators from various options. It also raises other
issues relevant to small emitters including streamlining of the simplified MRV
and registry requirements (see also the minutes of the stakeholder meeting on
small emitters in Annex II for
more details). 
·       
De minimis threshold for non-commercial
aircraft operators
Introducing a de-minimis threshold for
non-commercial aircraft operators to remove any compliance obligation would
reduce the costs significantly: PwC in its study estimates e.g. a 33%
cost-saving potential by including a threshold of 100t-threshold (compared to
the current costs for covered aircraft operators emitting less than 25,000t).
This threshold would exempt 1002 small aircraft operators.  
Table 5‑12 Cost savings based on different threshold levels for
exemption of small emitters
 tCO2 || < 10 || < 100 || < 500 || < 1,000 || < 10,000 || < 25,000 
 Exempted non-commercial operators || 191 || 1,002 || 1,882 || 2,201 || 2,513 || 2,530 
 Estimated cost saving potential || 1% || 33% || 72% || 84% || 99% || 100% 
·       
Streamlining processes
The German Emissions Trading Authority
(DEHSt) estimated that administrative simplifications (e.g. removing the
requirement for independent verification for those small emitters who are using
the Eurocontrol ETS Support Facility combined with either credit card payment
or CRCO-billing) would reduce costs by at least €1.800 per small emitter.  
5.5.        Legal
impact
This
section reviews the key issues under international law and considers the
relevance of claims by airlines about the EU law principle of equal treatment.

1.2.19.      
International law considerations

The analysis on international law is based
on a review of customary international law, the Chicago Convention (and ICAO
resolutions), Air Service Agreements (“ASAs” - including the EU-US Open skies
agreement and other ASAs[28]),
World Trade Organisation (WTO) law and the UNFCCC and Kyoto Protocol (and
related COP decisions). 
The conclusions on international law are under
the following four headings: 
-         
Geographic scope of a MBM – as derived from
customary international law, the Chicago Convention and ASAs
-         
Restrictions on taxes and charges – from the
Chicago Convention, ASAs and WTO 
-         
Non-discrimination of regulated entities – from
the Chicago Convention, ASAs and WTO
-         
Environmental regulation of international
aviation – from UNFCCC text and decisions and ICAO resolutions/discussions (as
incorporated by ASAs). 
After an assessment of the judgement in
Case 366/10, the following sections summarise conclusions by considering the
core principles relating to each heading, the conclusion reached by the ECJ in
relation to the full-scope EU ETS and the application of international law to the
other policy options. Supporting legal analysis is provided in Annex IX.  
It is also important to note that there has
been political pressure on the EU which is more fundamental than the detailed
arguments discussed below. The 'coalition of the unwilling' (see section 2.2.2)
claimed that the EU Member States could not regulate flights on a
non-discriminatory basis within the territory of the EU, basing this claim on a
variety of justifications including 2007 ICAO Resolution A36-22, on which the
EU placed a reservation[29]
despite it being non-binding, recalling that there is no provision in the Chicago Convention
which may be construed as imposing upon the Contracting Parties the obligation
to obtain the consent of other Contracting Parties before applying market-based
measures to operators registered in other States in respect of air services to,
from or within their territory. On the contrary, the Chicago Convention
recognises expressly the right of each Contracting Party to apply on a
non-discriminatory basis its own air laws and regulations to the aircraft of
all States. Some have gone so far as to claim that
Member States may not regulate flights within a Member States on a
non-discriminatory basis, notwithstanding that ICAO’s
mandate under the Chicago Convention does not extend to domestic aviation[30]. This political pressure has come from a variety of State and
non-State actors and goes well beyond legal issues.

1.2.20.      
ECJ Judgment in Case C-366/10 - overview

The starting point for any consideration is
the ECJ judgment in Case C-366/10 Air Transport Association of America and
Others. The ECJ found that the amendments in Directive 2008/101/EC were valid,
rejecting all of the arguments brought by airlines including their claims on sovereignty,
imposition of prohibited taxes and charges, non-discrimination and
environmental regulation. 
·       
Geographic scope of a MBM 
Principles
It is clear that the competence of states
to regulate aviation activities is not unlimited. In
particular, customary international law stipulates three relevant principles as
follows: (1) Each State has complete and exclusive
sovereignty over its airspace; (2) No State may subject the high seas to its
sovereignty; and (3) There is freedom to fly over the high seas.  These
principles have been codified in Article 1 of the Chicago Convention which
states that every state has complete and exclusive
sovereignty over the airspace above its territory, and
Articles 87(1) and 89 of the UN Convention on the Law of the Sea (UNCLOS).
Findings of ECJ in C-366/10
The ECJ considered and rejected airline
claims relating to sovereignty in the context of customary international law
and the EU-US Open Skies Agreement.  The ECJ found the EU ETS not to infringe
the principles of customary international law of sovereignty and freedom to fly
over the high seas, nor the equivalent provisions in the EU-US Open Skies
Agreement. The Directive extended the EU ETS to “all flights which arrive or
depart from an aerodrome situated in the territory of a Member State”. The
applicability of the Directive was founded on the fact that the operators of
aircraft chose to operate a route arriving at or departing from an aerodrome
situated in the territory of a Member State, and that the EU was free to apply
environmental regulations as decided by the European Parliament and Council to
such activities. The ECJ found that the fact that pollution may originate in
part outside EU Member States does not affect the validity of the approach.  
Application to Options
The reasoning of the ECJ with regard to the
geographic scope of the EU ETS can be applied to all policy options as flights
arrive and/or depart from EEA aerodromes. Therefore where an aircraft operator
chooses to operate a flight to and/or from EEA aerodromes, it is subject to the
EU ETS.  If an upstream approach were taken it would not either raise
jurisdictional issues as it would apply to fuel sold within the European countries
to flights departing from European aerodromes.
With regards to the legal issue of applying
different limitations on emission coverage for flights to and from the EEA
under the hybrid options, the territorial-sea border of 12 nm and the
exclusive-economic-zone border of 200 nm are possible coverage limits (see last
section of Annex IX for
detailed descriptions).  It is clear that calculating the portion of flights
with reference to the territorial sea of up to 12 nautical miles[31]
would provide additional arguments to counter critics of the EU ETS that
emphasise that, under the Chicago Convention, states enjoy complete and
exclusive sovereignty within the limits of this airspace, in addition to the EU
ETS continuing to only regulate flights arriving or
departing from a Member State. 
Applying a limitation on emission coverage
for flights by reference to exclusive economic zones (200nm) could be justified
by reference to the spirit of provisions of UNCLOS. According to UNCLOS, coastal
states have some sovereign rights and jurisdiction in the exclusive economic
zone: sovereign rights for the purpose of exploring and exploiting, conserving
and managing the natural resources, whether living or non-living and
jurisdiction as provided for in the Convention with regard to the protection
and preservation of the marine environment. In regards pollution from vessels[32],
UNCLOS authorises the coastal states to adopt laws and regulations for the
prevention, reduction and control of pollution from vessels giving effect to
generally accepted international rules and standards.  However, this
justification would be by reference to the spirit only, as UNCLOS does not formally
extend this principle to aircraft and Article 212 on pollution from or through
the atmosphere is limited to airspace of 12 nm and to aircraft of a state’s own
registry. 
Another justification for taking into
account distances in the territorial sea or in exclusive economic zones of
Member States is that these areas are, by definition, not areas which are the
territory of a third country, nor the exclusive economic zone of a third
country. This thereby responding to those criticisms made of the EU ETS
regarding third countries having complete and exclusive sovereignty over their own
airspace. The geographic scope principle from ICAO Assembly Resolution A37/19
is also respected, as there would not be duplication of coverage between the EU
ETS and third country measures, and there would be a greater environmental
outcome as highlighted in the submission by EU Member States to the HGCC. Other
limits to responsibility for flights could also be determined, as long as they
are objectively justified and within the margin of discretion of the EU
legislator.
·       
Taxes and charges[33]
Principles
Various provisions of the Chicago
Convention and ASAs impose restrictions on taxes and charges by States.  In
particular: 
·       
Article 15 of the Chicago Convention relates to
charges imposed for the use of airports and air navigation facilities,
requiring non-discriminatory treatment in regards to the charges between the
national aircraft and aircraft of any other contracting state. Similar
provision on the user charges can be found from the ASAs (Article 12 of the
Open Skies Agreement). 
·       
Article 24 of the Chicago Convention exempts
aircraft and fuel which is already on board an aircraft on arrival from customs
duties and similar national or local duties and charges. It does not exempt
fuel supply from taxation, but the Open Skies Agreement (Article 11(1)) and many
other ASAs go further than this by including provisions exempting fuel from
taxes and charges that is introduced into or supplied in the territory of a
party (Article 11(2) of the Open Skies Agreement). 
Findings of ECJ in C-366/10
In relation to the claim that prohibited
taxes and charges were being applied, the ECJ found in Case 366/10 that ETS is
a MBM, not a duty, tax, fee or charge on fuel load. In reaching this conclusion
in relation to taxation on fuel, a key argument which the Court considered was
that there was “no direct and inseverable link” between the fuel held or
consumed and the burden on the operator, for reasons including costs relating
to the initial allocation of allowances, allowance prices being set by the
market as well the potential use of biofuels (noting that an operator might
even make a profit by selling its original allocation). Unlike a duty, tax, fee
or charge on fuel consumption, ETS does not in any way enable the
establishment, applying a basis of assessment and a rate defined in advance, of
an amount that must be payable per tonne of fuel consumed for flights.
Similarly, for the reasons above the ECJ neither found that the scheme can be
regarded as an airport charge, and the EU ETS does not
infringe the relevant provisions of the Open Skies Agreement. 
Application to Options
The ECJ’s reasoning in Case 366/10 can be fully
followed in the case of all policy options (except for the upstream option). These
options are therefore in conformity with the provisions of the Chicago Convention
and the ASAs on taxes and charges. 
However, changing to an upstream system would
risk a renewed claim that the EU ETS is a tax on fuel. As free allowances would
not any more given out under this option, the link between the fuel used and
the EU ETS costs to an operator would be more direct. Whilst the upstream
option would still be different in other aspects from a fixed levy, the legal
risk exists that the ECJ might be asked to look at this again.
·       
Non-discrimination
Principles
Article 11 of the Chicago Convention
prohibits discrimination of airlines on grounds of nationality. Similar non-discrimination clause on grounds of nationality is
stipulated in Article 2 of the Open Skies Agreement and the other ASAs. Article
2 of the Open Skies Agreement requires parties to allow “fair and equal
opportunity for the airlines of both Parties to compete”; more traditional ASAs
stipulate that the designated airlines of both contracting parties shall have
“fair and equal opportunities in operating the agreed services”.
Findings of ECJ in C-366/10
In Case 366/10 the ECJ found that the
amendments in Directive 2008/101/EC were not invalid in the light of Article
15(3) of the Open Skies Agreement, read in conjunction with Articles 2 and 3(4)
thereof, inasmuch as it provided in particular for application of the ETS in a
non-discriminatory manner to aircraft operators established in the EU and in
third states. 
Application to Options
All alternative options for the EU ETS
provide a uniform application to all airlines regardless of the countries in
which they are registered, therefore according an equal treatment to all
airlines in accordance with the Chicago Convention and the ASAs. 
The upstream option does not set limits on
operation of an aircraft or its admittance or departure from the territory of a
state, and does not conflict Article 11 of the Chicago Convention on equal
treatment, and the measure accords airlines with equal
opportunities as the basis of assessment of an amount
payable by the fuel supplier per tonne of fuel consumed. 
·       
Environmental regulation
Principles
According to Article 15(3) of the Open
Skies Agreement, when environmental measures are established, the aviation
environmental standards adopted by the ICAO in Annexes to the Chicago
Convention shall be followed except where differences have been filed. Standards and Recommended Practices (SARPS) are adopted by the ICAO
Council and its subsidiary bodies and incorporated as Annexes to the Chicago
Convention. Annex 16 to the Convention, titled “Environmental Protection”
contains two volumes: Volume I on aircraft noise and Volume II on aircraft
engine emissions. Volume II however contains standards relating to vented fuel
and emissions certification applicable to the classes of aircraft engines, but
does not regulate reduction of carbon dioxide. These standards have legal
force, unlike Resolutions from ICAO Assemblies which are not legally binding.
The parties to the UNFCCC have adopted the
Kyoto Protocol, Article 2(2) of which calls on Parties included in Annex I to pursue
limitation or reduction of emissions of greenhouse gases not controlled by the
Montreal Protocol from aviation working through the ICAO.
In the run-up to the 38th ICAO
Assembly, the HGCC has assessed different options on which the geographical
scope for a MBM Framework could be based. Building on the work of the HGCC, the
ICAO Council Secretariat is currently preparing a draft Assembly resolution.
Findings of ECJ in C 366/10
In terms of compatibility with
environmental regulation of aviation, the ECJ concluded that there was no evidence of the ETS infringing an environmental standard adopted
by ICAO; and furthermore in as much as ICAO Resolution A37-19 laid down guiding
principles for the design and implementation of MBMs, it did not indicate that
the ETS was contrary to aviation environmental standards. 
In terms of international climate law, the
ECJ did not consider Article 2(2) of the Kyoto Protocol (which the applicants
claimed gave exclusive jurisdiction to ICAO to regulate emissions from
international aviation) was unconditional and sufficiently precise as to allow
the applicants to bring a legal challenge on those grounds.
Application to Options
Annex 16 to the Chicago Convention does not
regulate the reduction of carbon dioxide; the policy options are therefore not
incompatible with the Annex 16 and also with first sentence of Article 15(3) of
the Open Skies Agreement. 
At the current state of the discussions,
where only the hybrid option is likely to be included as an option for the MBM
Framework in the 2013 ICAO Assembly resolution. On that basis, it seems that
the hybrid option could be the most compatible, recognising that resolutions
are in any case not legally binding[34].
The content of Assembly resolutions is binding
on a state if and when implemented as national law. Even if not implemented in
national law, resolutions however form an important element of regional and
national aviation policy as states tend to work within ICAO guidance. It will
therefore be politically important to consider the Assembly resolutions on MBMs
when designing any amendments to propose to the EU ETS.

1.2.21.      
Potential claims of unequal treatment under EU
law

Following any scaling down of the EU ETS,
European airlines that mostly fly within Europe may complain of unequal
treatment, as some airlines have done following the "stop-the-clock"
decision. Such a complaint could be raised under all options because emissions
from intra-EEA flights remain fully covered while the coverage for extra-EEA
flights will be less than 100%. 
In EU law, according to the settled
case-law, the principle of non-discrimination requires that comparable
situations must not be treated differently and that different situations must
not be treated in the same way, unless such treatment is objectively justified[35]. A breach of the principle as a result of different treatment
presumes that the situations concerned are comparable, having regard to all the
elements which characterise them[36]. The comparability of the situations must be determined and assessed
in the light of the subject-matter and purpose of the EU act which makes the
distinction in question. The principles and objectives of the field to which
the act relates must also be taken into account[37]. 
The ultimate objective of Directive 2003/87/EC
is the protection of the environment and human health, including by means of
reduction of greenhouse gas emissions produced by aviation sector[38]. In the light of the objective, it is suggested that all flights to
and from the EU are in comparable positions[39].
Therefore, according intra-EEA flights and extra-EEA flights differential
treatment might be claimed to be discriminatory treatment contrary to EU law.
Firstly, it must be recalled that no direct
competition exists between operators of intra- and extra-EEA flights because
the relevant market consists of direct flights on a city-pair route and
possibly one-stop services to the same city (which is either located within or
outside the EEA). A change in the coverage of extra-EEA flights will therefore not
affect the competitive conditions for intra-EEA flights. It could therefore be
argued that operators of intra- and extra-EEA flights are in situations that
are not comparable. However, it must also be recognised that the ECJ, when
agreeing that it was legal for the ETS to cover steel plants while not covering
chemical plants, found that different sectors – e.g. steel and chemical sectors
– are in a comparable situation with regard to the EU ETS even though they are
not in direct competition with each other[40].
Secondly, it has to be recalled that the
principle of equal treatment will not be infringed if the different treatment
is justified[41].
A difference in treatment is justified if it is based on an objective and
reasonable criterion, that is, if the difference relates to a legally permitted
aim pursued by the legislation in question, and it is proportionate to the aim
pursued by the treatment[42].
Since a Union legislative act is concerned, it is for the EU legislature to
demonstrate the existence of objective criteria put forward as justification[43].

It must also be borne in mind that the
legislature has wide discretionary powers as to how it shapes the Union’s
environment policy[44].
According to Article 191(1) TFEU, the Union policy on the environment shall –
besides the preserving, protecting and improving the quality of the
environment, protecting human health, prudent and rational utilisation of
natural resources – also promote measures at international level to deal with
regional or worldwide environmental problems, and in particular combating
climate change. In  Decision No 377/2013/EC, in recital 1 the strong
international character of the aviation sector EU is acknowledged; and it is
emphasised that a global approach to addressing the rapidly growing emissions
from international aviation would be the preferred and it would also be the
most effective way of reducing aviation emissions.
Different coverage of emissions from extra-
and intra-EEA flights can be justified by the EU efforts to promote
international measures to combat climate change – as it has been done with the Decision
No 377/2013/EC. An ICAO Assembly Resolution encouraging certain application of
regional or national MBMs would be another objective reason that could justify
differential treatment.
6.           Comparison
of options
The strengths
and weaknesses of the options are compared to the full-scope EU ETS in terms of effectiveness, efficiency and consistency:
Table 6‑1 Criteria for comparison of options
 General criteria || Specific criteria for this Impact assessment 
 Effectiveness || Coverage of emissions 
 Efficiency || Competitiveness 
 Level-playing field for competition 
 Effort and accuracy of Monitoring, Reporting, and Verification (MRV) 
 Consistency || Consistency with international aviation law 
6.1.        Effectiveness
6.2.        Environmental impact
The hybrid and alternative options cover
fewer emissions than the full-scope EU ETS:
-         
The hybrid option covers emissions between 39% and
47% of emissions compared to the full-scope EU ETS depending on whether the
territorial-sea boundary of 12nm or the exclusive-economic-zone boundary of
200nm is used.
-         
The departing-flights option covers 62% of the
emissions compared to the full-scope EU ETS. The 50/50 option as well as the upstream
option, by focusing on fuel sold at EEA airports, would have the same
coverage.  
-         
Under the "stop-the-clock" option,
environmental effectiveness is lowest: only 25% of the emissions will be
covered because extra-EEA flights are generally excluded. 
6.3.        Efficiency
The efficiency criteria relates to the
costs of a policy measure compared to the benefits it generates. 

1.2.22.      
Competitiveness

The hybrid and
alternative options improve the overall competitiveness of the aviation sector
compared to the full-scope EU ETS. The passenger prices and freight rates would
decrease on extra-EEA flights due to the reduced coverage. Passenger and cargo
demand are estimated to increase between 0.25% and 0.51% in the period up to
2020 (depending on the respective reduction of coverage for extra-EEA flights
under the different options). 
However, the costs
of the EU ETS – whether in full or reduced scope – only have a minor impact on
the competitiveness of the aviation sector. Other cost drivers (e.g. fuel
prices) and macro-economic drivers (GDP and income growth) have a much more
significant impact.

1.2.23.      
Level-playing field for
competition

All policy options maintain
a level-playing field on the relevant city-pair markets because all operators
are treated the same, regardless of nationality or any other characteristics. 
The departing-flights, 50/50, and upstream options
could potentially – as the full-scope EU ETS – offer an advantage to airlines
which stop over at non-EEA hubs because only the flights to the non-EEA hub are
subjected to the EU ETS while the non-stop flights are charged for the whole
flight to the final destination. However, at current
carbon prices, the likelihood of such distortions is negligible. 
The hybrid options avoid these potential
distortion risks between non-stop flights and one-stop flights using non-EEA
hubs because the emissions coverage only depends on the distance flown in the
EEA and not on the location of the final destination. The
"stop-the-clock" option also reduces these potential distortion risks
because extra-EEA flights are generally exempted.   

1.2.24.      
Efforts and accuracy of MRV

The hybrid option
can be implemented based on the current MRV system. In order to achieve the
highest accuracy, on-board measurement of fuel consumption would be necessary.
However, this could place significant costs on operators who need to purchase
on-board equipment. For a consistent and more affordable approach across all
operators, an approximated calculation based on actual fuel consumption for the
whole flight (as currently reported) will be more appropriate. So-called
"distance factors" (i.e. percentage of the total flight distance of
extra-EEA flights covered under EU ETS) can be determined on the level of city-
or country-pairs depending on the level of accuracy and simplicity desired. It
should be possible to implement the necessary changes within a year. While the
introduction of these changes will involve some adjustment costs (e.g. update
of the reporting template with country-pair percentages), the annual MRV costs should
not be higher than under the current system.
The departing flights, 50/50, and "stop-the-clock"
options do not require any changes to the current MRV
system because they are based on the same approach as
the full-scope EU ETS.
A move to the upstream option would involve
significant changes because fuel suppliers would become responsible entities
instead of aircraft operators and the monitoring processes would have to be
adapted. Significant delays in its implementation would have to be expected.
6.4.        Consistency
The ECJ dismissed
the claim that the EU ETS would violate the sovereignty of other states and
confirmed the competence of the EU to apply the ETS to the total emissions of
flights that arrive and depart at aerodromes situated in in the territory of a
Member State. As all options continue to apply to arriving and departing
flights only and do not include over-flights, all options are in conformity
with the principles of customary international law, the Chicago Convention and
Air Service Agreements.
The departing-flights and 50/50 options do
not differ significantly from the current EU ETS because both options continue
to cover emissions from those parts of a flight that take place over the
territory of non-EEA countries. These options will therefore not give any new
arguments against those who claim the ETS violates the sovereignty of their
state.
On the contrary, the hybrid options would
provide additional arguments to counter critics of the EU ETS: 
-         
A limitation of coverage by reference to Exclusive
Economic Zone boundaries (200nm) would be given justification by the fact that
no other State has territorial claims or claims to an EEZ in that area, as well
as by reference to the provisions of the UN Convention on the Law of the Sea
(UNCLOS) that coastal states have some sovereign rights and jurisdiction in the
EEZ. 
-         
A limitation of coverage to the territorial seas
border of 12nm would rebut claims made against the EU ETS even more fully, as
not only would the distance not correspond to any third countries' territory,
but it would only relate to the territorial sea of Member States and, if so
decided, areas associated with them such as dependencies and territories. 
Furthermore, as the
hybrid option is based on the draft MBM Framework, as proposed by the ICAO
Council of 4 September 2013 (see section 2.4.2) but finally not adopted by the
ICAO Assembly, it seems that the hybrid option could achieve a high
acceptability with third countries.
The
"stop-the-clock" option has already proven in practice to be accepted
by large majority of international partners, which has been a significant step
forward compared to the claims previously made against the EU ETS by the "coalition
of the unwilling".
The key issue with regards to the upstream
option is whether it would be judged to constitute a fuel tax or charge under
the Chicago Convention and the Air Service Agreements. As
free allowances would not any more given out under this option, the link
between the fuel used and the EU ETS costs to an operator would be more direct.
Whilst the upstream option would still be different in other aspects from a
fixed levy, the legal risk exists that ECJ might be asked to look at this again.
6.5.        Conclusions
Depending on the outcome of the ICAO
Assembly, the EU will have to consider whether to amend the EU ETS with a view
to adapt to a possible MBM Framework and to further facilitate the development
and implementation in 2020 of a global MBM. In the choice between the different
options, the EU will have to balance the changes in the effectiveness of the EU
ETS (i.e. emission coverage), the costs of possible changes in the MRV system,
and the consistency of options with international law and the (non-binding)
ICAO Assembly resolutions. The economic impacts do not differ so substantially
between the options as to change the cost-benefit balance.
-         
The hybrid options lead to a significantly lower
coverage of 39 to 47 % compared to the full-scope EU ETS and would entail some
costs for changes in the MRV system. On the benefit side, more limited emission
coverage can provide additional arguments to defend the EU ETS against claims
about sovereignty violations. It also reduces any potential distortions
regarding one-stop flights operating alongside direct flights.  
-         
The departing-flights or 50/50 options offer
coverage of 62 % of emissions compared to the full-scope EU ETS and do not
involve any substantial changes to the MRV cost. However, these options will
not be supported by a majority of the ICAO Assembly. Therefore, compared to full
scope, they will not bring new legal arguments in addition to the ECJ judgment
to defend the EU ETS.
-         
The "stop-the-clock" option shows the
lowest coverage of only 25 %. It has been accepted in 2012 by most
international partners, as a step forward from any of those countries compared
to their earlier positions. However, complete exemption of extra-EEA flights is
not a viable long-term solution in view of the EU's environmental objectives
and the need for aviation to contribute in the same way as other sectors of the
economy. 
-          
The upstream option achieves the same emission
coverage as the departing-flights option but has a negative impact on
competitiveness compared to other options because of the cancellation of free
allowances for airlines. Furthermore it would involve a complete change of MRV with
significant delays for its implementation. It is also the only option that is
not consistent with a global MBM to be implemented from 2020 onwards because it
is based on fuel suppliers and not aircraft operators. Finally, it would risk
new legal challenges because the ECJ may hear arguments that it is a charge or
a tax in the meaning of the Chicago Convention.
   || Full-scope EU ETS || Hybrid option || Departing-flights option; 50/50 option || "Stop-the-clock" option || Upstream option ||   || Comments 
   ||   
 Environmental effectiveness || 100% || 39 to 47 % || 62% || 25% || 62% ||   || Reduced coverage of emissions relative to full-scope EU ETS (i.e. all departing and arriving flights at EEA aerodromes) 
 Competitiveness || Minor impact on costs and demand || + || + || + || - ||   || Competitiveness increases in proportion to reduced coverage; cost increase under upstream option because free allowances are cancelled 
 Level-playing field for competition || No distortions at current carbon prices || ++ || = || + || = ||   || Hybrid option eliminates distortion risks and maintain level-playing field also at very high carbon prices 
 Effort and accuracy of MRV || Based on fuel consumption || - || = || = || -- ||   || Hybrid option can be implemented based on current MRV system (at low additional costs); upstream option would imply complete change of MRV 
 Coherence with international aviation law || Legality confirmed by ECJ || = || = || = || - ||   || All options are in line with the ECJ judgement because they apply to flights arriving and departing at EEA airports. The upstream option may risk new legal challenges. 
 International political acceptability || Strong international oppostion || ++ || = || ++ || = ||   || The hybrid and "stop-the-clock" options are expected to achieve highest international acceptability because of limited emission coverage within regional airspace 
+  positive impact compared to full-scope
EU ETS
-  negative impact compared to full-scope
EU ETS
=  unchanged compared to full-scope EU ETS
7.           Monitoring
and evaluation
Core progress indicators
and monitoring arrangements are identified with regard to the specific
objectives: 
Facilitation
of the development and implementation by 2020 of a global MBM
It will be important to closely follow the
ICAO negotiations on the global MBM that should start after the 2013 ICAO
Assembly and deliver a global MBM to be agreed by the next ICAO Assembly in
2016 and implemented by 2020. Depending on the outcome of the 2016 ICAO
Assembly, further adjustments to the EU ETS may become necessary to ensure a
transition to a global MBM in 2020. It is therefore suggested that, following
the 2016 ICAO Assembly, the Commission shall report to the Parliament and the
Council on the actions to implement the global MBM to apply from 2020, together
with proposals as appropriate.
Emission
reductions under the EU ETS pending the implementation of a global MBM
The general
concept of ETS inherently incorporates high level of transparency and stringent
monitoring mechanisms: The level of compliance is annually monitored and the
data on the reported emissions and surrendered allowances is published.
Furthermore, based on Article 30 of Directive 2003/87/EC, the Commission is
requested to prepare regular reports on the functioning of the EU ETS. 
The emission
reductions under the EU ETS will therefore be monitored annually.
ANNEX
              Annex I – Glossary
 ASA || Air Service Agreement 
 CBDRRC || Common But Differentiated Responsibilities and Respective Capabilities 
 ECJ || European Court of Justice 
 EEA || European Economic Area; comprises of: EU Member States, Iceland, Liechtenstein and Norway. 
 ETS || Emissions Trading System 
 Extra-EEA flights || Flights that depart and arrive at EEA aerodromes 
 FIR || Flight Information Region 
 GCD || Great Circle Distance 
 GDP || Gross Domestic Product 
 Global MBM || Single MBM to cover all international aviation emission (to be decided by ICAO Assembly) 
 HGCC || High-level Group on Climate Change at ICAO 
 IATA || International Air Transport Association 
 ICAO || International Civil Aviation Authority 
 Intra-EEA flights || Flights, which depart from EEA aerodromes to destinations in third countries, and flights that arrive at an EEA aerodrome from third countries 
 LCA || Low Cost Airline 
 MBM || Market-Based Measure 
 MBM Framework || Framework for regional and national MBMs (to be decided by ICAO Assembly) 
 MRV || Monitoring, Reporting and Verification 
 MS || Member State 
 Small emitter || 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 25 000 tonnes CO2 per year. 
 UNFCCC || United Nations Framework Convention on Climate Change 
 UNCLOS || United Nations Convention on the Law of the Sea 
              Annex
II – Consultation
of stakeholders in the aviation sector
Stakeholder meeting with aviation experts on 1 July 2013:
European Environment Expert Group[45] – Preparations for the ICAO Assembly
Participants
Industry associations and environmental NGOs
Airport Council International (ACI Europe)                      Chrystelle
Damar
Association of European Airlines (AEA)                           Athar
Husain Khan
Lufthansa Group                                                              Regula
Dottling-Ott
Aerospace and Defence Industries (ASD) /AIRBUS        Georgina
Browes
Thierry Nowaczyk
Phillipe de Saint
Aulaire
Olivier Husse
ASD/Rolls Royce                                                             Charlotte
Andsanger
ASD/SNECMA/SAFRAN                                              Francis
Couillard
European Business Aviation Association (EBAA)             Guy Visele,
Gabriel Destremaut
European Express Association (EEA)                               Dave
Tompkins
European Low Fares Airlines Association (ELFAA)         John Hanlon
European Regions Airlines (ERA)                                     Leonardo
Massetti
International Air Carrier Association (IACA)                    Koen
Vermeir
International Emission Trading Association (IETA)            Jeff
Swartz
Transport and Environment (T&E)                                    Bill
Hemmings
Representatives of Member States
Austria                                     Dieter Beisteiner
Denmark                                  Jens Erik Ditlevsen
Finland                                     Anna Sotaniemi
France                                      Claire Berge
Germany                                  Frauke Pleines-Schmidt
Italy                                          Daniela Ercolani
Malta                                       Lara Buttigieg (videoconference)
Netherlands                              Michael Lunter, Jeroen van
Bochove
Norway                                    Trond Krakenes, Benedikte
Wiig Sørensen
Poland                          Piotr Lipka
Portugal                                    Ana Daam (videoconference),
Carlos Gomes
Spain                                        Africa Abajas Bermejillo
Sweden                                    Therése Sjöberg
Switzerland                               Urs Ziegler
Turkey                                     Ayten Kisacik
Ukraine                                    Aleksandra Grasko
United-Kingdom                       Sara Harrison
Organisations
EASA                                      Ivan de Lepinay, Willem
Franken
EUROCONTROL                   Rachel Burbidge
European Civil Aviation Conference
Béatrice Adoléhoumé, Peter Kirk
Commission
Timothy Fenoulhet, Philip Good, Christian Holzleitner, Sylvie
Grand-Perret, Koen de Vos
Points discussed
Update by Commission on ICAO process and
European priorities
The Commission reported on the latest
developments in ICAO and asked stakeholders for their views on the following
key issues:
·              
Commitment by ICAO Assembly to development of a
global MBM scheme (e.g. roadmap for development until next 2016 Assembly and
implementation by 2020), 
·              
Framework for regional and national MBMs pending
the implementation of a global MBM, and 
·              
Recognition of special circumstances and
respective capabilities (SCRC) of states  in the design of MBMs.  
The Commission also referred to the
on-going public consultation on the ICAO negotiations and simplifications for
small emitters. 
Views from stakeholders
Need for market-based measures
The stakeholders expressed unanimous
support for market-based measures (MBMs) and recognized that non-market based
measures would not be sufficient to reach the goals for emission reductions:
·              
AEA announced that Air Transport Action Group
(ATAG) would submit a paper to the ICAO Assembly in line with the industry
proposal, which had been endorsed at this year's IATA Assembly, for a global
MBM. The outlook for the ICAO Assembly would be more positive than some months
ago because of the industry initiative through IATA. 
·              
IACA also endorsed the IATA proposal but was critical
about the grandfathering of emission rights.  
·              
ELFAA did not support the IATA proposal because
of the grandfathering of emission rights. The IATA proposal would not provide
an appropriate reward for investments into emission reductions up to 2020. 
With regard to non-market based measures,
ASD, AEA, and LH strongly called for a commitment by the Commission and the
Member States to emission savings from the Single European Sky.
Non-discriminatory application of SCRC
for global MBM
IACA and ELFAA would be rather sceptical
about taking account of SCRC if this meant that the revenues from a global MBM
were redistributed to less developed countries. 
LH and EEA would be more open to taking
account of SCRC and expressed readiness to accept temporary exemptions on
routes to less developed countries if such concessions were necessary to gain
political support for the global MBM. The Commission confirmed that only few
emissions were generated on such routes and exemptions would therefore not
compromise the environmental effectiveness of a global MBM.
T&E proposed that auction revenues from
the EU ETS (in particular from flights to and from third countries) should be
used to support environmental action in developing countries.
Possible adjustment of EU-ETS following
ICAO Assembly
Stakeholders expressed a large interest on
possible Commission proposals amending the EU Emission Trading System (ETS)
following the 2013 ICAO Assembly. In particular, stakeholders were interested
to know how the Commission would react in case that the ICAO Assembly would
decide on a MBM Framework or alternatively would not agree on a MBM Framework.
T&E proposed that the EU ETS should
cover 50 % of emissions from incoming and outgoing flights to third countries.
Such a 50/50 system would provide a higher environmental effectiveness than
approaches covering emissions within a European regional airspace. 
ELFAA criticised the current stop-the-clock
system as disadvantaging European low-cost carriers compared to major network
carriers who would have benefited from the temporary exemption of flights to
and from third countries. To avoid such a situation, the EU ETS should go back
to its full scope (i.e. coverage of all incoming and outgoing flights) or be
completely abandoned. 
The Commission emphasized that, as stated
in the stop-the-clock decision, it would evaluate the ICAO outcome – on global
MBM, Framework for MBMs, non-MBMs – as a package and propose appropriate
further actions if necessary.
Transparency for ICAO process
T&E strongly called for reforms that
would lead to more transparency in ICAO which would currently be failing to
address environmental issues.
Administrative simplicity
EBAA insisted that any reforms of the EU
ETS would need to reduce the administrative burden for business aviation.
Stakeholder meeting on MRV simplifications for small
emitters on 30 July 2013
Participants
 Name || Member State 
 BEISTEINER, Dieter || Austria 
 MERTZ Fanny || Belgium 
 HILCER Ales || Czech Republik 
 JENSEN Kiersten || Denmark 
 Laukia Joonas || Finland 
 GRANDJEAN Quentin || France 
 LESOURD Jerôme || France 
 Hölzer-Schopohl Olaf || Germany 
 NAUMANN Georg || Germany 
 O'LEARY Aoife || Ireland 
 Margrét Helga Guðmundsdóttir || Island 
 KISIELIUS Vaidotas || Lituania 
 VASSALLO Saviour Vassallo || Malta 
 Maliński Paweł || Poland 
 VELOSO Joana || Portugal 
 Gómez Benedí, Cristina || Spain 
 BEDNARZ Louise || Sweden 
 SINTON Mark || United Kingdom 
 WESTON Liz || United Kingdom 
 Name || Company/Organisation 
 CORDES Rick || Aviation Emissions Solutions Ltd 
 JOHNSON Chris || Aviation Emissions Solutions Ltd 
 POZNIAK Andrew || AVOCET 
 CHEYNE Steve || Clean Energy 
 ERDMANN Stefanie || Deutsche Lufthansa AG 
 DESTREMAUT Gabriel || EBAA 
 VICENTE AZUA Pedro || EBAA 
 VISELE Guy || EBAA 
 CARLISLE David || ETS Aviation Ltd 
 HARLING Guido || ETSVerification GmbH 
 DAVEY Brian || GAMA 
 McSTRAVICK || Gulfstream Aerospace 
 FEUCHTINGER Stefan || IETA 
 DOLAN Jeff || JetAviation 
 CLEVEN Gary || VerifAvia 
 DUFOUR Julien || VerifAvia 
 KONIK Tobias || VerifAvia 
 MAYER  Roland Cpt. || Volkswagen AirService 
 DEKKERS Chris || EU ETS Compliance Forum 
 ASTORINO Antonio || EUROCONTROL 
 Dennis Mes || PWC 
 Jeroen Krujd  || PWC 
 MEADOWS Damien || Comission 
 SCHMIDT Yvonne || Comission 
Introduction
The EU ETS Directive foresees in Article 30
(4) that the Commission shall review the functioning of the Directive in
relation to aviation activities and may make proposals to the European
Parliament and the Council as appropriate. The Commission should give
consideration in particular to the implications and impacts of this Directive
as regards the overall functioning of the Community scheme as well as on-going
improvements and refinements. 
In 2008, the co-legislators included
non-commercial aircraft operators under the EU ETS without a specific exemption
threshold similar to that applicable to commercial operators [exemption j)],
which means a large number of small non-commercial aircraft operators are
covered. Over time, various measures have been developed to facilitate their
contribution, including the possibility to mandate actions in the registry and
simplified procedures for monitoring and reporting of emissions by small
aircraft operators. Since 1 January 2013 the threshold level for emissions for
use of simplified procedures has been increased from 10 000 to 25 000 t CO2 per
year. 
The European Commission launched a study in
early 2013 to analyse if further measures might be appropriate, what these
might be, and to obtain an accurate and detailed understanding and empirical
evidence on the coverage of small aircraft operators emitting less than 25 000
tonnes of CO2 per year. This assesses, in particular: 
·              
the costs for aircraft operators that are small
emitters to comply with EU ETS, the fuel savings made, and the cost for Member
States to administer aviation small emitters, 
·              
options for further simplification related to
MRV and registry compliance, 
·              
the impact of exclusion thresholds and potential
alternative means of regulating emissions for aviation small emitters.
PwC engaged with stakeholders, including
Member States, aircraft operators, aviation industry associations (NBAA, EBAA),
service companies, consultants and verifiers through online surveys, bilateral
meetings and stakeholder meetings (Aviation Carbon Conference in London on
19/20 February 2013, meeting with Member States on 26 February 2013, meeting
with aircraft operators and EBAA on 6 March 2013, discussion with Member States
in the Taskforce Aviation on 10 April 2013 and the Climate Change Committee's
Working Group III meeting on 17 April 2013). To present the results of the
study and to give stakeholders the opportunity to further comment and provide
input, the Commission organised a stakeholder meeting on 30 July 2013. The
meeting did not aim to conclude on simplifications or changes to the
legislation. 
3,557 aircraft operators operated flights
in the EU in 2012. Out of these, 2,866 aircraft operators operated covered
flights covered by the EU ETS. 89% of this group is small emitters. These small
emitters represent 0.8% of the total aviation emissions (1.9 MtCO2).
I. Cost Assessment
Cost assessments are being developed taking
into account the results of online surveys filled in by Member States (15
responses from Member States administering approximately 85-90% of aircraft
operators) and aircraft operators and service companies (65 replies
representing 150 aircraft operators out of which 138 are small emitters). The
information requested included the time spent per process and per year, and
out-of-pocket costs. Based on the information so far received, 
·              
costs for Member States to administer small
aviation emitters are mainly driven by  helpdesk functions (64% for 2011 and
62% for 2012),
·              
administration of small emitters takes more time
in comparison to large aviation emitters (71% to 29%), 
·              
large differences exist between Member States
for costs relating to administration of small aviation emitters,
·              
costs for small aviation emitters incurred in
all steps of the compliance cycle but in 2012 the costs for compliance with the
requirements of the Union registry had the highest share of total costs (41%),
·              
costs incurred so far were to a large extend
starting costs, 
·              
where aircraft operators are aware of and choose
to use them, management/ service companies seems to be more cost effective,
·              
no particular method of fuel consumption
calculation seems to be more cost-efficient than others,
·              
increasing the focus on emissions leads to fuel
savings. One participant suggested these  may be in the order of 3%,
·              
the Eurocontrol ETS Support Facility has not
been used much by aircraft operators due to the late availability of the
facility as of February 2011 when many operators had already set up their MRV
system and the fee of €400 is perceived to be too high. In discussion, the
timing of availability was considered to be the main factor, and it was noted
that greater use of the ETS Support Facility would lead to a reduction in its
fee payable per operator.
II. Options for Simplification
The German Emissions Trading Authority
(DEHSt) presented a proposal for simplification for small aviation emitters, by
removing verification for small emitters who are using the Eurocontrol ETS
Support Facility in combination with the competent authority taking necessary
actions as concern registry actions and compliance, with the small aircraft
operator simply paying the relevant amount in respect of its emissions by
credit card. This proposal was welcomed by a number of aircraft operators and
Member States, who encouraged it to be developed. Others have expressed
concerns about potential conflicts of interest and additional burden for
competent authorities. 
PwC explained that they have assessed the
environmental impact, financial impact and competitive distortion of possible
simplifications. 30 options were identified with most options less likely
leading to significant cost improvements (those are mainly related to
communication, tools and templates). Discussed options were:
·              
Centralised communication desk,
·              
Communication in English in addition to local
language,
·              
Allowing delegation/grouping of operators for
MRV purposes in combination with attribution to Member States,
·              
More use of the Eurocontrol ETS Support Facility
and no verification needed where the Facility is used,
·              
Attribution of management/service companies to
Member States
·              
Creation of a virtual Member State for small
emitters
·              
Concentrating the attribution of small emitters
to some larger Member States
In the discussion, the importance of
improving awareness has been emphasised. Participants of the stakeholder
meeting were very supportive of simplifications for small emitters and a number
of people spoke in favour of the following two options:
·              
Simplification to remove separate verification
for those small emitters who are using the Eurocontrol ETS Support Facility
combined with either credit card payment for allowances bought by the
administering Member State or some other organization on behalf of the aircraft
operator or CRCO-billing
·              
Allowing grouping for MRV (noting that concerns
were raised regarding the amount of necessary changes to allow for this).
In discussion it was noted that not all
already available means of simplification are being used for a variety of
reasons. These include a lack of awareness of assistance that is available, an
increased need for Member State guidance, and not all Member States allowing
small non-commercial operators to use the simplifications that are already
provided for in the legislation.
Potential Exclusion Thresholds
PwC presented its analysis on exclusion
thresholds:
·              
Current coverage includes 2,533 small
non-commercial aircraft operators. 
·              
On the exemption for PSO flights, no significant
impact has been assessed due to the very limited number of flights and the low
number of routes.
·              
Relating to the exemption on the basis of
Maximum Take Off Weight (MTOW), exempted flights would be easy to determine.
Taking the case of the UK, as an example presented at the meeting, raising the
threshold to 20t would lead to an exemption of 17% of operators administered by
the UK. Further assessment would be needed to draw conclusions on whether such
a scenario would be similar in other EU Member States. 
·              
Considering an exemption for non-commercial
aircraft operators based on annual emissions, a 100t threshold would exempt
1002 non-commercial small emitters. A 1,000t threshold would exempt 2201
non-commercial small emitters, while 99% of non-commercial operators would be
excluded under a 10,000t threshold.
·              
An exclusion threshold based on a limit of 52
flights per annum for non-commercial aircraft operators would exempt 1967
non-commercial aircraft operators (77%).
The meeting confirmed the need to know
facts before deciding on possible changes to thresholds. While the majority of
participants of the stakeholder meeting did not express any preference for
specific thresholds, there was considerable interest in this and for a tiered
approach combining other simplifications with any threshold, rather than just a
threshold-based approach alone. However, some participants did not consider
there should be any threshold proposed for small non-commercial aviation
emitters. 
Alternative Means of Regulating Emissions  
PwC presented the following options:
·              
Regulation of CO2 via route charging:
determination of CO2 by Eurocontrol based on ETS Support Facility data and
emission-related compliance charge notified and payable through the Eurocontrol
route-charging mechanism;  
·              
Climate fund: collecting financial contributions
from operators based on CO2 emissions, with funds dedicated for CO2 reductions
such as through retirement of allowances (MRV would be still required); 
·              
Upstream regulation (e.g. regulation of fuel
providers);
·              
Off-setting from other sectors;
·              
Opt-out from the EU ETS combined with an
alternative and simpler regulatory approach.
Participants discussed the options, and the
combination of an opt-out to a simpler approach with administration of this through
the existing route charging infrastructure has been received the most interest.
There was not much interest in an upstream approach, and the linkages between
an 'opt out' and the DEHSt proposal were noted. 
Next steps
Once finalised, the study will provide an
empirical basis for further consideration of possible simplifications. Some
simplifications can be made without legislative activity and these could be
taken into effect relatively early. The feedback received during the
stakeholder meeting as well as feedback received until 9 August 2013 will be
taken into account in the study finalisation. Participants of the stakeholder
meeting will receive the presentation from PwC and a short meeting summary. 
              Annex
III – Public
on-line consultation
1. Summary of the received contributions
43 contributions were submitted to the functional mailbox CLIMA-CONSULTATION-AVIATION-2013@ec.europa.eu. 
The most represented contributors were airlines and professional associations
(61%), followed by non-governmental organizations (16%), EU public authorities
(9%), individuals (7%), professional consultations (5%) and non-EU public
authorities (2%). 
11 contributions were marked confidential or sent by e-mail
that included a standard confidentiality disclaimer, 1 contribution authorized
publication. The table below gives an overview of the contributors, grouped in
accordance to their field of competency:
   || Total number of contributions || Of which answered to F1 || Of which answered to F2 
 Airlines and professional associations || 26 (61%) || 24 || 22 
 EU public authorities || 4 (9%) || 4 || 4 
 Individuals[46] || 3 (7%) || 1 || 2 
 NGOs || 7 (16%) || 7 || 4 
 Non-EU public authorities[47] || 1 (2%) || 0 || 0 
 Professional consultations (verifiers) || 2 (5%) || 0 || 2 
   || 43 || 36 || 34 
2. F1. ICAO Framework for Market-Based
Measures (MBM) and Global MBM scheme
The public consultation confirms the strong
support for MBMs from the aviation industry, public authorities, and NGOs. All
respondents support MBMs for the aviation sector. Only one professional
organization opposes the continuation of the EU ETS as a regional scheme
pending the implementation of a global MBM in 2020.
2. 1.     Major considerations to assess
the different geographical scope options for MBM Framework
What should
be the major considerations to assess the different geographical scope options
for the MBM Framework (as discussed in the HGCC)?
•           Arriving
and departing flights within national airspace
•           Flights
arriving in, departing from and flying over national airspace
•           Flights
within the Flight Information Regions (FIRs), including oceanic FIRs
•           Flights
departing from an aerodrome in a State
From the contributions by airlines and
professional associations, 50 % mention the political acceptability and
administrative complexity of an MBM as an important criterion. 23 % of the
contributions are in favour of the largest possible coverage because of
environmental effectiveness or to avoid discrimination between different
routes.
The EU public authorities consider the
coverage of emissions as the priority, followed by administrative burden, and
political acceptability. 
The NGOs put a clear priority on the
environmental effectiveness and a full coverage of global emissions by regional
MBMs. 86% of NGOs insist on 50-50 option as the only feasible way forward due
to its environmental integrity. The other NGOs advocate the departing flights
approach. Most NGOs consider the airspace approach not feasible due to
enforcement (lack of clarity) and MRV problems.
2.2.      Elements of the "Roadmap
for a Global MBM"
Which
elements of the "Roadmap for a Global MBM" do you consider a
priority, and what would be the optimal timeline for implementation? 
For airlines and professional associations,
the focus is on common standards for MRV, followed by the assessment of, and
agreement to, the most effective means of allocating emissions limits. In
general, the majority of the proposed elements for a global MBM are found
significant. 
2 out of 4 EU public authorities put their
emphasis on the need for a strict timetable with implementation by 2020
(without expressing any specific preferences on the priorities). The 2 other
public authorities consider the allocation of emissions and the taking-account
of special circumstances and respective capabilities as top priorities.
For NGOs, the focus tends to be on agreeing
on the global measure as soon as possible. The use of offsets is a big concern
as it would not lead to actual emission reductions. The contributions provide
detailed assessment of the environmental integrity of different types of offsets
(with varying results). 
In terms of timing of the implementation of
the global MBM, there was a clear difference between NGOs that mostly prefer to
start at 2016 and EU public authorities and airlines/professional association
that mostly list 2020 as a feasible year to start the implementation.
2.3.      Essential requirements for
monitoring, reporting, and verification standards
What
essential requirements should be taken into account for the development of a
common set of monitoring, reporting, and verification standards for measuring
greenhouse gas emissions from international aviation? 
The contributions were very similar in
terms of the requirements for MRV: simplicity, transparency, and consistency,
single point of accountability, common methodology, and minimal administrative
burden for aircraft operators. 40% of airlines and professional associations
found scalability (accommodating both large and small aircraft operators) to be
an essential requirement of the MRV system, 17% of them also listed confidentiality
as a concern. 2 airlines/professional organizations listed the need to use
standard density to decrease administrative burden.
NGOs found it important to collect emission
data from each departing flight, using common methodology and having in place
assistance for airlines with difficulties.
3. F2. Simplifications for small
aircraft operators
3.1.      Decrease of administrative
costs
What could
further decrease the compliance cost (cost for monitoring, reporting,
verification, and registry) significantly for small aircraft operators?
(ranking of the options below)
•      Management companies could be attributed
to Member States for administration;
•      No additional verification would be
required in case of using the Eurocontrol Support Facility; 
•      All Member States would provide IT-tools
for reporting; 
•      Simplified requirements to open an
aircraft operator holding account in the Union Registry for small emitters
(only for receiving and surrendering allowances). 
The contributions to the question above
were similar throughout: 70% of contributors found no additional verification
to be the most promising way to cut compliance costs. Simplified requirements
to open an aircraft operator holding account in the Union Registry for small
emitters was considered second best in its potential to help decreasing the
compliance costs. IT-tools to be provided by the Member States and the use of
management companies were considered to have the least impact as the both are
already available on the market while the use of IT tools provided by the
Member States has the scope to be increased.
 
3.2.      Exemption of non-commercial
aircraft operators from the scope of EU ETS
Would you
be in favour of exempting non-commercial aircraft operators altogether from the
scope of EU ETS (similar to the de minimis exemption of commercial operators)?
   || Yes || No || Cannot decide 
 Airlines and professional associations || 59% || 23% || 14% 
 EU public authorities || 100% || - || - 
 Individuals || - || 50% || 50% 
 NGOs || 25% || 75% || - 
 Professional consultations (verifiers) || - || 100% || - 
 All contributors || 53% || 32% || 12% 
The main argument for introducing the
exemption was the balance between environmental integrity and related costs to
the aircraft operators. The main arguments against an exemption were the
consistent application of the rules to achieve the broadest coverage of
emissions.
NGOs were mostly against the exemption with
only one of them being open to the idea, but requesting to keep the exemption
to minimum by including only the airlines with negligible share of emissions. The
EU public authorities were in favour of the exemption, one of them requesting
the de minimis arrangements to be the same for both commercial and
non-commercial aircraft operators.
3.3.      De minimis threshold for small
aircraft operators
Which
consideration is the most important when choosing a de minimis threshold
for small aircraft operators?
For NGOs and EU public authorities, the
most important considerations listed were the overall environmental
effectiveness and the administrative burden for operators, often suggested to
be considered in combination. In addition to that, several airlines and
professional associations proposed competitive distortion as an equally
important consideration.
Professional
consultations (verifiers) preferred not to introduce the de minimis
threshold for small aircraft operator, one of them proposing to remove it also
from commercial aircraft operators.

              Annex
IV – Supporting
analysis on environmental impacts
              Limited technological
possibilities for emission reductions (section 2.1.2)
The industry’s preferred approach to
tackling emissions has been to rely on technology. However, despite
technological progress, growth in aviation demand has outstripped CO2 emissions
reductions through technological and operational improvements (IPCC, 1999)
leading to a steady increase in emissions.
Reductions in emissions of CO2 have been driven
historically by demands of airlines on manufacturers to make aircraft more
fuel-efficient, since fuel costs are a major fraction of airlines’ operating
costs. By increasing the cost of fuel burn (by putting
a value on CO2 emissions), the EU ETS strengthens the economic incentive for
airlines (and thus aircraft and engine manufacturers whose clients are
airlines) to implement cost-effective fuel saving
measures which will reduce their emissions and the associated cost of
compliance with the EU ETS.
In the short to medium term,
aircraft operators have a range of means for optimising their operations and
fleets taking into account the additional price signal provided by the EU ETS. Abatement options available to directly reduce GHGs from existing
aircraft are mostly operational or Air Traffic Management (ATM) strategies.  It
is thought that operational and ATM improvements could result in around 10-15%
abatement in the current system[48] (CCC,
2008) as illustrated in the table below.  These include, for example:
increasing load factors (up to 9% savings); optimum routing (up to 7% savings);
reducing dead weight (<1% savings); improved air traffic management (3-8%
savings). On the ground, pilots can taxi their aircraft on a single engine or a
tug can tow the aircraft out to a taxiway close to the runway before engine
start (up to 2% savings).
Technical measures for existing aircraft
are rather limited.  Retrofitting new, efficient engines to an existing
airframe can reduce fuel consumption by around 5% to 7.5%[49] but this is usually difficult to justify economically.
In the longer term, investment in new aircraft, composite lightweight materials, new
engine designs and aviation biofuels could help achieve more important
reductions in emissions and noise although this will be
a relatively slow process because aircraft life cycles are long (around 30
years on average). An overview
of potential technical measures for aircraft efficiency and engine development
carried out in 2008 by the UK Committee on Climate Change is provided in Annex
4. It found that new airframe technologies have the potential to lower fuel
consumption by up to 20-30% by 2025 if fully implemented in new aircraft.
Engine technology developments have the potential to reduce fuel consumption by
15-20% by 2025.
Energy savings and year
of introduction for aircraft efficiency measures
 Airframe Measure || Metric || Small Turbofan || Large Turbofan 
 Composites. Composite materials are usually stronger and lighter than conventional aerospace materials || Year || 2012 || 2012 
 Saving, % || 10% - 20% || 10% - 20% 
 Winglets. upturned structures attached to the end of modern aircraft wings, designed to increase the wing’s effective aspect ratio || Year || 2013 || 2013 
 Saving, % || 1% - 2% || 1% - 2% 
 Riblets. small ridges which cover an aircraft skin, which reduce skin friction || Year || 2015 – 2020 || 2015 – 2020 
 Saving, % || 1% - 2% || 1% - 2% 
 Laminar Flow Wings. A laminar (or smooth) flow of air over the surface of an aircraft results in lower drag than a turbulent flow of air || Year || 2020 || 2020 
 Saving, % || 10% - 20% || 10% - 20% 
 Average New Airframe Potential || Year || By 2025 || By 2025 
 Saving, % || 20% - 30% || 20% - 30% 
 Average Retrofit Airframe Potential || Year || 2015 – 2020 || 2015 – 2020 
 Saving, % || 2% - 5% || 2% - 5% 
 Engine Measure || Metric || Small Turbofan || Large Turbofan 
 Pressure Ratio, Materials & Cooling. enabling higher hot end temperatures and hence thermodynamic efficiency gains || Year || Now – 2025 || Now – 2025 
 Saving, % || 3% - 5% || 3% - 5% 
 Compressor & Turbine Aerodynamics. Further advances in the aerodynamic design of the rotating components may also be possible || Year || Now – 2025 || Now – 2025 
 Saving, % || 3% - 5% || 3% - 5% 
 Geared Turbofans. Introducing a gear train into the system allows each component to work closer to its optimal speed, although there is a penalty in engine weight from the gearbox. || Year || Now – 2025 ||   
 Saving, % || 8% - 10% ||   
 Ultra High Bypass. Current high bypass ratio engines are approaching optimum fuel efficiency. Even higher ratios may be possible in larger engines || Year ||   || 2013 - 2025 
 Saving, % ||   || 8% - 10% 
 Unducted Fans. Ducted fans are restricted by the trade-off between increased diameter, weight and drag. || Year || 2015 || 2015 
 Saving, % || 15% || 15% 
 Average New Engine Potential || Year || By 2025 || By 2025 
 Saving, % || 15% - 20% || 15% - 20% 
 Average Retrofit Engine Potential || Year || Now || Now 
 Saving, % || 5% - 7.5% || 5% - 7.5% 
Source: CCC
(2008). Aviation CO2 Emissions: Abatement Potential from Technology Innovation,
The Committee on Climate Change
Some technical measures are incremental
improvements that are already being deployed in new aircraft.  However, more
radical airframe and engine technologies may involve a major departure from
current aircraft designs (for example mounting open rotor engines on top of the
wing), or major changes to the layout of airports (in the case of new designs
such as blended wing body aircraft).  Barriers to the uptake of more radical
designs include delays in gaining certification, the cautious nature of the
industry (due to the need to maintain high safety levels) and the lack of
designs that can be retrofitted to existing aircraft[50].
In combination with the technological
measures described above, the use of sustainable biofuels could be a source
of GHG reductions.  There are two main biofuel production processes being
considered by the industry: hydrotreated renewable jet (HRJ) fuel – also known
as hydrotreated vegetable oil (HVO) with vegetable oil feedstocks - and
biomass-to-liquids (BTL) fuels. Unlike the more common biofuels currently being
deployed in the road transport sector (e.g. fatty acid methyl ether - FAME,
bioethanol etc.), aviation biofuels are expected to be drop-in replacements for
aviation kerosene[51]. Corresponding savings in greenhouse gas emissions will depend on
the performance of the biofuels themselves. For HRJ biofuels the savings are
currently estimated to range from around 20 - 50% for conventional vegetable
oil feedstocks, from 66 - 89% for newer alternative feedstocks, and up to 98%
for algae feedstocks. For BTL biofuels the savings are estimated to be 92 - 95%[52].  However, one of the most significant barriers to the widespread
deployment of biofuels in aviation is the uncertainty over the sustainability
and lifecycle GHG reductions of the fuels.
              "Emission gap"
(see also section 2.1.3)
A recent study by Manchester Metropolitan
University explored the gap between policy ambitions with regards to aviation
emissions and the impact of technological, operational and market-based
measures on the industry’s emissions[53]. 
International aviation
emission projections, 2006 – 2050 for central growth scenario vs 2020 carbon
neutral goal
Source: David S.
Lee (2013) Bridging the aviation CO2 emissions gap: why emissions trading is
needed
It found that technology and operational
improvements alone (even the most ambitious options) will not meet the 2020
carbon-neutral goal for international aviation at any point in time to 2050
(see graph below). Even assuming the most effective technological and
operational improvement reductions combined with “speculative” levels of
biofuels, a "gap" in the range between 489 and 935 tons CO2 would be
left in 2050 that could only be covered by MBMs (i.e. funding of emission
reductions in other sectors). It further shows that the EU ETS alone is not
sufficient to close this gap because 153 to 430 million tons of global CO2
emissions would still remain uncovered in 2050 (depending on assumed
scenarios).  
              Emissions coverage over
time (section 5.1) 
Percentage of EU ETS emissions
covered by policy options over time
Percentage
of EU ETS emissions covered by policy options in 2030, by global region
 Departure/Arrival Region || Full Scope || Hybrid – 12nm || Hybrid – 200nm || Departing Flights || Stop the Clock 
 EEA || 100.0% || 100.0% || 100.0% || 100.0% || 100.0% 
 AFRICA || 100.0% || 22.6% || 37.4% || 50.2% || 0.0% 
 EUROPE (NON-EEA) || 100.0% || 63.7% || 72.0% || 49.3% || 0.0% 
 FAR EAST || 100.0% || 14.8% || 19.4% || 51.2% || 0.0% 
 MIDDLE AMERICA || 100.0% || 7.0% || 15.4% || 49.5% || 0.0% 
 MIDDLE EAST || 100.0% || 31.1% || 53.7% || 50.4% || 0.0% 
 NORTH AMERICA || 100.0% || 9.1% || 20.9% || 48.0% || 0.0% 
 SOUTH AMERICA || 100.0% || 7.6% || 15.2% || 48.9% || 0.0% 
 TOTAL || 100.0% || 36.3% || 44.5% || 61.1% || 22.7% 
Percentage
of EU ETS emissions covered by policy options in 2012, by global region
 Departure/Arrival Region || Full Scope || Hybrid – 12nm || Hybrid – 200nm || Departing Flights || Stop the Clock 
 EEA || 100.0% || 100.0% || 100.0% || 100.0% || 100.0% 
 AFRICA || 100.0% || 22.7% || 37.6% || 50.2% || 0.0% 
 EUROPE (NON-EEA) || 100.0% || 63.6% || 72.1% || 49.4% || 0.0% 
 FAR EAST || 100.0% || 14.7% || 19.3% || 51.0% || 0.0% 
 MIDDLE AMERICA || 100.0% || 6.9% || 15.4% || 49.6% || 0.0% 
 MIDDLE EAST || 100.0% || 31.2% || 54.0% || 49.8% || 0.0% 
 NORTH AMERICA || 100.0% || 9.0% || 20.9% || 48.7% || 0.0% 
 SOUTH AMERICA || 100.0% || 7.7% || 15.4% || 49.2% || 0.0% 
 TOTAL || 100.0% || 40.1% || 47.9% || 63.4% || 27.2% 
              
              Impact on NOx emissions (section 5.1)  
The emissions of NOx are of concern with
regards to local air quality and with regard to climate change as they are
strong precursors for the formation of ozone at altitude (itself a greenhouse
gas). From a Local Air Quality (LAQ) point of view, the most relevant results
are those for NOx emissions on all flights departing from or arriving at EEA
countries, though it should be noted that this captures the full flight
emissions, not just those below 1,000m, as are usually considered in a LAQ
assessment. 
The reductions seen in global NOx emissions
are very closely aligned with the reductions in CO2 emissions,
though the reductions are slightly smaller for NOx than CO2.
Change
of NOx emissions compared to full-scope EU ETS
   || 2016 || 2020 || 2030 
 Departing Flights || +0.13% || +0.25% || +1.02% 
 Stop the Clock || +0.26% || +0.48% || +2.03% 
 Hybrid || +0.22% || +0.41% || +1.71% 
 Upstream || -0.16% || -0.16% || +0.21% 
              Annex
V – Modelling
methodology
The impact of the EU ETS on GHG emissions
from aviation is modelled with the AERO Modelling System (AERO-MS)[54]. The results of this model
also feed into the economic impact assessment. 
The AERO-MS model uses a baseline year of
2006. The air traffic for that baseline year is used together with assumptions
for growth from that year to provide forecasts of traffic in the future year in
a scenario without any additional policies. The effects of the policies to be
considered are then added to provide forecasts.
The traffic data for the baseline year of
2006 are based on over 33 million flights between approximately 123,000 airport
pairs. This number of flights is greater than that used by ICAO in the CAEP/8
analysis work (by about 24%), which was based on the same baseline year of
2006; this increased number of flights has been attributed to the AERO-MS
Unified Database containing a more complete definition of global air traffic
(particularly short-haul flights and smaller aircraft types). The revenue tonne
kilometres (RTK) in the AERO-MS baseline is much closer to the ICAO data (only
approximately 4% higher), supporting the idea that the difference in the number
of flights is largely due to small aircraft and short-haul flights.
The base case against which the impacts of
the EU ETS for aviation are compared is the Central Forecast (Most Likely
Scenario) scenario from the ICAO-CAEP/8 studies. This growth scenario was
produced by the Forecasting and Economics Support Group (FESG) of CAEP for
application in the work programme leading to the CAEP/8 meeting in 2010. This
scenario has been reported widely and used as the basis for a number of studies,
including the recent EU TEAM_Play project. In this latter project, amongst
other model applications, the CAEP/8 scenario was implemented as scenario
definition files in the AERO model, which provided a well-defined and tested
basis for developing the modelling approach in the current study.
The CAEP/8 traffic growth forecasts were
produced by FESG for application in the analyses for the CAEP/8 meeting and
were reported to the CAEP Steering Group meeting in September 2008[55]. As such, they do not include
the effects of the recent global recession and may, therefore, over-estimate
the future air traffic and their emissions. The global growth rates in air
traffic resulting from this forecast (using the Central Forecast (Most Likely
Scenario)) are shown in Table III-1.
Annual global growth rates for
air traffic from FESG CAEP/8 Forecast; Central Forecast
 Years || Passenger Traffic Annual Growth || Freight Traffic Annual Growth 
 2006-2016 || 5.1% || 6.0% 
 2016-2026 || 4.8% || 6.0% 
 2026-2036 || 4.4% || 6.0% 
 
Since the CAEP/8 meeting, the FESG has
produced an updated forecast of the future evolution of air traffic growth,
based on a baseline year of 2010 (the CAEP/8 forecast was based on a baseline
year of 2006, as is AERO-MS). Whilst this updated forecast would provide a more
up-to-date view of the future traffic (and would take account of the effects of
the recent global recession), it has not been published outside of CAEP and
would have presented some difficulties in integrating in AERO-MS in the
timescales of this project, due to the effort involved in defining a completely
new scenario for the model and the different baseline year. Therefore, and
bearing in mind that the key aim of the modelling is to provide comparisons of
the effects of the different policies, it was decided to retain the use of the
CAEP/8-based scenarios.
Other key features of the use of AERO-MS in
this study are:
·       
For the purposes of this study, there was a need
to consider different analysis years to those used in CAEP/8 and for which
scenario definitions had been created in AERO-MS (2016, 2026 and 2036). It was
recognised that the creation of fully established scenario definitions for the
additional future years (2020 and 2030) would be impractical in the timescale
of the project. Therefore, the approach adopted for the study was to create the
scenario definitions for the extra years by simple linear interpolation in the
parameters for the existing definitions and then to model all years (2016,
2020, 2026, 2030 and 2036) to ensure that the results obtained for 2020 and
2030 fitted a smooth variation through the results for the other three years.
This approach was considered to provide confidence that the results obtained
(and reported here) were sufficiently accurate and reliable for the purposes of
the study.
·       
A further year for which environmental output
was required is 2012. It is important to recognise that the output obtained
from a model such as AERO-MS for a past year is a forecast based on a baseline
year of 2006 and an overall scenario which is intended to provide forecasts of
traffic growth out into the future. It is not intended to be an accurate model
of what actually happened in 2012. However, it does provide a reasonable
baseline against which to compare the modelled future scenarios. In attempting to
generate a scenario definition for 2012 for AERO-MS, significant difficulties
were encountered in producing a set of self-consistent data. Therefore,
considering the timescale for this project, it was decided to calculate the
required outputs (fuel burn and emissions) by interpolation between the base
data for 2006 and the calculated forecast for 2016. The interpolation was
performed on the basis of a constant annual percentage growth rates between the
two years.
·       
The results of the total CO2
emissions calculated (global, plus EEA Departures and Arrivals and EEA-Internal
only) are shown below. This shows that the intention of having smooth
variations of calculated parameters through the full set of years calculated
(2006, 2016, 2026 and 2036 for the pre-defined CAEP/8 scenarios plus 2020 and
2030 calculated plus 2012 interpolated) has been achieved. 
Annual
CO2 emissions from AERO-MS Calculations using the Default policy
              Annex
VI – Estimation
of EU-ETS costs under different options in 2020
The following table shows the expected
impact of the different options on the absolute levels of EU ETS costs in 2020:

-       
82 % of the total aviation allowances are
allocated for free and 15 % of aviation allowances are auctioned under the EU
ETS for aviation. These relative proportions are kept unchanged under all
options (except for the upstream option which goes to 100 % auctioning). The
absolute numbers of free allowances and allowances to be auctioned will
therefore be reduced in proportion to the scaled-down coverage. 
-       
International credits can be used for 1.5 % of
the total emissions.
-       
The remaining emissions (= total emissions less
free and auctioned aviation allowances and international credits) are off-set
by general EU allowances.
Impact of policy
options on auction revenues in 2020
The number of
free allowances has been adjusted in proportion with the reduced scope but
without re-benchmarking free allocations. With the "stop-the-clock"
decision, some stakeholders have said they would prefer re-benchmarking free
allocations. As intra-EEA flights are less efficient than extra-EEA flights,
airlines that operate a higher number of intra-EEA flights receive currently a
relatively smaller number of free allowances. A reduction in the coverage of extra-EEA
flights would increase the benchmark and consequently the free allocations for
all airlines. Re-benchmarking would therefore lead to a diminished
environmental outcome by giving relatively more free allowances to operators
than they currently have for activities on the same routes. Re-benchmarking
would lead to an increase of free allowance by 5 to 10 percentage points, with
a commensurate increase in greenhouse gas emissions.
However, it is
important to note that aircraft operators do not have any legal expectations
with regard to a recalculation of the benchmark because they do not suffer a
loss from maintaining existing allocations of free allowances for these routes.
Their situation is either improved because of the lower coverage or remains unchanged
(e.g. if they only operate intra-EEA flights). Furthermore, re-benchmarking all
free allocations would introduce considerable complexity and thereby strengthen
the argument of those who are likely to claim that the EU should delay the EU
ETS until 2020 or such later time as a single global measure might be in place.
              Annex
VII – Impact
on tourism
Tourism is a large and dynamic sector and
the economic importance of international tourism can be
measured by looking at the ratio of international travel receipts relative to
GDP (these data are from balance of payments statistics and include business
travel, as well as travel for pleasure). According to the Eurostat 2012
Yearbook, in 2011 the ratio of travel receipts to GDP was highest in Malta
(14.0 %) and Cyprus (10.2 %), confirming the importance of tourism to
these island nations; an even higher ratio was observed in Croatia
(14.7 %). In absolute terms, the highest international travel receipts in
2011 were recorded in Spain (€43,026 million) and France (€38,682 million),
followed by Italy, Germany and the United Kingdom. 
Air transport is critical in enabling
tourism, especially when it involves international travel and travel to
islands. Tourists may respond to higher prices in air
travel in a number of ways of which some, but not all, will entail a reduction
in overall tourism receipts: 
·       
they may switch to other modes of transport
where this is possible. This will be most relevant for intra-EEA travel but it
is bound to be very limited as the additional time taken to travel by train,
boat or road will in most cases exceed the small increase in ticket prices as a
result of the options under the current carbon prices. For those destinations
where mode switch is a cost and time effective option, there will be no impact
on the overall spend on tourism. 
·       
they may choose to spend less on accommodation
or other expenditures to make up for the change in travel costs which means
lower tourism revenues for the destinations served. 
·       
they may take fewer trips which may benefit some
destinations over others.
Responses of European tourists to the
recession and the need to reduce holiday spend can provide some idea of their
preferred response to an increase in price (equivalent to a reduction in disposable
income).
Ways of cutting back on holiday budget
Source: EC (2009)
Europeans and tourism
As seen above, mode switch is not amongst
the most popular responses. On the other hand, reallocating spend and changing
the number or duration of holidays are popular. The third choice i.e. ‘a
holiday closer to home’ provides some indication that a change in travel
patterns, by choosing cheaper destinations, is also possible.
However, as presented in the Section 5.2.1.2
on passenger market demand, none of the policy options are expected to result
in significant increases in the price of tickets or reductions in travel
demand, whether at aggregated or world-region level. The impact on tourism at
current prices is therefore unlikely to be sizeable.
The 2006 IA reached the same conclusion and
pointed out that historical experiences from past oil price shocks indicate
that an increase corresponding to €30 per tonne of CO2 is
unlikely to have a significant impact on international tourism demand, which
depends much more on the general economic situation and purchasing power than
on fuel costs. 
              Annex
VIII – Administrative
effort and feasibility

Full-scope
EU ETS

The guidelines for the monitoring,
reporting and verification of aviation activities under the current EU ETS are set
out in Annexes XIV and XV of the Commission Decision of 16 April 2009 amending
Decision 2007/589/EC as regards the inclusion of monitoring and reporting
guidelines for emissions and tonne-kilometre data from aviation activities. 
The main components are summarised below.
They relate to the monitoring and reporting of CO2 emissions (as the
basis for compliance) and activity (as the basis for the allocations).
CO2 emissions are calculated by
multiplying fuel consumption by an emission factor. Fuel consumption can be
estimated through two methods, A or B described below.
 METHOD A || METHOD B 
 Actual fuel consumption for each flight (tonnes) = Amount of fuel contained in aircraft tanks once fuel uplift for the flight is complete (tonnes) – Amount of fuel contained in aircraft tanks once fuel uplift for subsequent flight is complete (tonnes) + Fuel uplift for that subsequent flight (tonnes). In case there is no fuel uplift for the flight or subsequent flight, the amount of fuel contained in aircraft tanks shall be determined at block-off for the flight or subsequent flight. || Actual fuel consumption for each flight (tonnes) = Amount of fuel remaining in aircraft tanks at block-on at the end of the previous flight (tonnes) + Fuel uplift for the flight (tonnes) – Amount of fuel contained in tanks at block-on at the end of the flight (tonnes) The moment of block-on may be considered equivalent to the moment of engine shut down. 
Fuel uplift may be determined based on the
measurement by the fuel supplier, as documented in the fuel delivery notes or
invoices for each flight. Alternatively, fuel uplift may also be determined
using aircraft on-board measurement systems and recorded in the mass and
balance documentation, in the aircraft technical log or transmitted
electronically from the aircraft to the aircraft operator.
The operator shall choose the method which
provides for the most complete and timely data combined with the lowest
uncertainty without incurring unreasonable costs. Fuel consumed shall be
monitored for each flight and for each fuel and shall include fuel consumed by
the auxiliary power unit. In the monitoring plan for each aircraft type the
operator defines: 
·       
which calculation formula will be used (method A
or method B); 
·       
the data source which is used for determining
the data on fuel uplift and fuel contained in the tank, and the methods for
transmitting, storing and retrieving that data; 
·       
which method is used to determine density, where
applicable. When density-temperature correlation tables are used the operator
shall specify the source of this data.
A simplified approach is available to small
emitters: emissions are calculated using a standardised distance flown based on
great circle distance multiplied by an emission factor tCO2/km
flown. The small-emitter approach has a considerably lower accuracy than the
approach for non-small emitters, but due to the low share of small-emitters in
total emissions (1%) it is considered proportionate and appropriate.
Aircraft operators shall submit their
monitoring plan to the competent authority for approval at least four months
prior to the start of the first reporting period. The verifier will take into
account: 
·       
completeness
of flight and emissions data compared to air traffic data such as collected by
Eurocontrol, 
·       
consistency
between reported data and mass and balance documentation, 
·       
consistency
between aggregated fuel consumption data and data on fuel purchased or
otherwise supplied to the aircraft performing the aviation activity.
With regards to activity, aircraft
operators shall submit a monitoring plan setting out measures to monitor and
report tonne-kilometre data to the competent authority at least four months
prior to the start of the first reporting period for approval. 
Aircraft operators monitor and report
tonne-kilometre data using a methodology based on the following formula: 
tonne
kilometres (t km) = distance (km) * payload (t) 
Distance is calculated based on Great
Circle Distance which is defined as the shortest distance between any two
points on the surface of the Earth.
Payload is calculated by adding the mass of
freight and mail to the mass of passengers and checked baggage (actual or
modelled using weight factors provided by the Commission). 
Verification of the reported data takes
into account: 
·       
the
completeness of flight and tonne-kilometre data compared to air traffic data
such as collected by Eurocontrol to ascertain that only eligible flights have
been taken into account in the operators report, 
·       
the
consistency between reported data and mass and balance documentation

Departing-flights option

Cost
implications under the departing-flights, 50/50, and "stop-the-clock"
option compared to full-scope EU ETS
 Task || Who bears the administrative burden? || Cost implication Departing Flights Option || Cost implication 50/50 Option 
 Application for monitoring plan || Operator || No change || No change 
 Notify changes to monitoring plan || Operator || No change || No change 
 Review and updating of monitoring plan || Competent authority || No change || No change 
 Initial setting up monitoring and reporting systems || Operator || No change || No change 
 Collection of monitoring data, QA/QC, data archiving, etc. || Operator || - || No change 
 Drafting emission report || Operator || - || No change 
 Verification of monitoring data || Operator || - || No change 
 Reviewing emission reports and verification reports || Competent authority || - || No change 
 Implementing enforcement in case of non-compliance || Competent authority || No change || No change 
 Issuing Guidance and re-allocation of free allowances || EU Commission || + || + 
 Update aviation operator list || EU Commission || No change || No change 

Hybrid
option

              MRV Option 1 – On-board
measurement: Cost implications and timeline
Cost
implications of MRV-option 1 (on-board measurement) compared to full EU ETS
 Task || Who bears the administrative burden? || Cost implication Option 1 
 Application for monitoring plan || Operator || No change 
 Notify changes to monitoring plan || Operator || No change 
 Review and updating of monitoring plan || Competent authority || No change 
 Initial setting up monitoring and reporting systems || Operator || ++ if equipment not available 
 Collection of monitoring data, QA/QC, data archiving, etc. || Operator || ++ higher costs for post-flight processing due to higher data volume 
 Drafting emission report || Operator || + 
 Verification of monitoring data || Operator || + 
 Reviewing emission reports and verification reports || Competent authority || + 
 Implementing enforcement in case of non-compliance || Competent authority || No change 
 Issuing Guidance and re-allocation of free allowances || EU Commission || +++ As on-board measurement cannot be applied to 2010 data on which free allocations are based, it will probably be necessary to additionally use MRV option 2 to recalculate the free allocations for extra-EEA flights. 
 Update aviation operator list || EU Commission || No change 
 Application and obtaining registry account || Operator || No change 
 Costs related to trading (control systems, cost per transaction) || Operator || No change 
Timeline
for implementation of MRV-option 1 (on-board measurement)
 Implementation Steps || Responsible Entity || Duration 
 Revise MRV requirements || EU Commission || 12 months 
 Potentially provide guidance on the adapted monitoring and reporting requirements || EU Commission || 3 months – can partly run in parallel to adapting the monitoring approach 
 Adapt monitoring and reporting systems to new requirements || Operators || 12 -15 months from the issuance of the revised legal requirements 
 Provide software adapted to new MRV requirements || Software providers || 9-12 months from the issuance of the revised legal requirements 
 Update monitoring plans || Competent authorities || 3 months 
 Train competent authority staff on new MRV requirements, updates of monitoring plans and reviewing of emission reports || Competent authorities || In parallel to setting up of monitoring and reporting systems with operators 
 Develop verification approaches for the additional data to be verified || Verifiers || In parallel to setting up of monitoring and reporting systems with operators 
              MRV Option 2 –
Approximated fuel consumption
Overview
of cost related impacts for the MRV-option 2 (approximated fuel consumption) compared
to full scope EU ETS for aviation
 Task || Who bears the administrative burden? || Cost implication 
 Initial setting up monitoring and reporting systems (incl. calculation of distance factors, purchasing updated software, implementing internal processes) || Operator || + 
 Verification of monitoring data || Operator || + 
 Reviewing emission reports and verification reports || Competent authority || + 
 Issuing Guidance and re-allocation of free allowances || EU Commission || + 
Timeline
for implementation of MRV-option 2
   || Responsible Entity || Duration 
 Revise MRV requirements || EU Commission || 8-12 months depending on chosen distance-factor (city-pair vs country-pair) 
 Potentially provide guidance on the adapted monitoring and reporting requirements || EU Commission || 3 months – can partly run in parallel to adapting the monitoring approach 
 Development of distance factors || Eurocontrol || 6-12 months from issuance of revised MRV provisions, depending on specific design options related to distance and fuel consumption chosen – can partly run in parallel to adapting the monitoring approach 
 Adapt monitoring and reporting systems to new requirements || Operators || 3-6 months for internal processes, from issuance of revised MRV provisions 
 Adapt reporting software || Software providers || 6-12 months from issuance of revised MRV provisions depending on chosen distance-factor (city-pair vs country-pair) 
 Develop verification approaches for the additional data reported || Verifiers || 12 months - in parallel to setting up of monitoring and reporting systems with operators 

Upstream option

Cost
impacts of the upstream option compared to EU ETS
 Task || Who bears the administrative burden? || Cost impact 
 Revise MRV requirements ||  Commission || ++ 
 Provide monitoring plan templates || Commission || + 
 Capacity building || Operators, competent authorities, verifiers || ++   
 Identification of operators || Competent authorities || +   
 Application for monitoring plan || Operator || ++ 
 Notify changes to monitoring plan || Operator || - Less frequent changes expected (under EU ETS air operators have to provide notification every time there are changes to their fleet) 
 Review and update of monitoring plan || Competent authority || - Lower number of operators and less frequent updating expected. 
 Initial setting up monitoring and reporting systems || Operator || ++ Completely new system to implement + sunk cost 
 Set-up of overview system allowing to account for exports || Commission || ++   
 Collection of monitoring data, QA/QC, data archiving, etc. || Operator || Effort similar to stationary installations. 
 Drafting emission report || Operator || Effort similar to stationary installations. 
 Accreditation of verifiers for the upstream system || Accreditation body || ++ Sunk costs 
 Verification of monitoring data || Operator || Effort for refineries and importers similar to stationary installations. Higher verification effort assumed regarding exporters. 
 Reviewing emission reports and verification reports || Competent authority || - Smaller effort than under EU ETS to lower numbers of operators 
 Operation of overview system allowing to account for exports || Competent authority / Commission || ++ Additional task, likely to require dedicated staff. 
 Issuing Guidance || Commission || + Dedicated guidance to explain new approach in detail 
 Update aviation operator list || Commission || - List not required anymore 
 Application and operator of registry account || Operator || - No change per operator, but lower overall cost due to lower number of operators 
 Costs related to trading (control systems, cost per transaction) || Operator || - No change per operator, but likely lower overall cost for control systems due to lower number of operators. 
Timeline
for implementation of upstream option
 Tasks || Who || Duration 
 Revise MRV requirements || Commission || 18 -24 months 
 Set-up of overview system allowing to account for exports || Commission || 12-15 months 
 Provide monitoring plan templates || Commission || 3 months from issuance of revised legal requirements 
 Identify compliance entities || Competent authorities || 3 months, from issuance of revised legal requirements 
 Apply for permit and monitoring plan || Compliance entities || 3 months, from issuance of monitoring plan template 
 Review monitoring plan || Competent authorities || 3 months, from submission of monitoring plans 
 Initial set-up of monitoring system || Compliance entities || 6 months from issuance of revised legal requirements 
 Development of verification approaches || Verifiers || 9 months from issuance of revised legal requirements 
 Accreditation of verifiers || Accreditation body || 15 months from issuance of revised legal requirements 
              Annex
IX – Supporting
legal analysis
This section provides a
more detailed review of the following issues under international law:
A.     Geographic
scope of a MBM – as derived from customary international law, Chicago
Convention and bilateral air service agreements (ASAs)
B.     Restrictions
on taxes and charges – from Chicago Convention, ASAs and WTO law
C.     Non-discrimination
of regulated entities – from Chicago Convention, ASAs and WTO law
D.     Environmental
regulation of international aviation –  from UNFCCC texts and decisions and
from ICAO resolutions/discussions (as incorporated by ASAs)
E.      Overview on
possible borders to limit the coverage of a regional MBM
The analysis is
based on the review of the following legal acts:
·       
Chicago
Convention: In Case C-366/10 the ECJ considered that the validity
of the Directive 2008/101 cannot be examined in the light of Chicago Convention
as such as the EU is not bound by the Convention, nor has it to date assumed
the powers exercised by the Member States in the field of application of the
Chicago Convention in their entirety. The provisions of the Convention can however
be invoked against the EU member states, as all the member states are parties
to the Convention. Also, the substantive issues raised by the relevant
provisions of the Chicago Convention are taken into account due to their
inclusion in bilateral air service agreements. 
Article 84 of the Convention stipulates a dispute settlement
procedure where a disagreement between two or more contracting parties relating
to the interpretation or application of the Convention raises. According to the
article, if the disagreement cannot be settled by negotiation, it shall be
decided by the Council. The unsuccessful party may appeal the decision either
to the International Court of Justice or to an ad hoc arbitral tribunal.
·       
Customary International Law: The ECJ in C-366/10 set out the test which needed to be satisfied in
order for customary law to be relied upon by an individual to challenge the
validity of EU legislation.  The tests are that (i) the principles must be
capable of calling into question the competence of the EU to adopt that act and
(ii) the act in question is liable to affect rights which the individual
derives from EU law or create obligations under EU law.  
In respect of these tests, the ECJ found
the three principles of customary international law may be relied upon for the
purpose of assessing the validity of an act of EU: (1) Each State has complete
and exclusive sovereignty over its airspace; (2) No State may validly purport
to subject any part of the high seas to its sovereignty; and (3) The principle
of freedom to fly over the high seas. These principles have been codified inter
alia in Article 1 of the Chicago Convention and Articles 87(1) and 89 of
UNCLOS.
By contrast, the 4th principle asserted by
the applicants in C-366/10 – that aircraft flying over the high seas are
subject to the exclusive jurisdiction of the State where they are registered –
was not accepted by Member States (in particular the UK and Germany). The ECJ
found that “insufficient evidence exists to establish that the principle of customary
international law, recognised as such, that a vessel on the high seas is in
principle governed only by the law of its flag would apply by analogy to
aircraft overflying the high seas.”  
·       
Open Skies Agreement: International air services between countries operate primarily under
the terms of a bilateral air service agreements (ASA) negotiated between two
countries. The globe is covered by a network of approximately 5000 ASAs[56], many of which are concluded
by EU member states with other countries. In 2007, the EC (and its MS) and the
US concluded an air transport agreement which was subsequently amended by a
protocol initialled in 2010.  The Air Transport Agreement as amended by the
Protocol is known as the Open Skies Agreement. 
The ECJ held that the Open Skies Agreement
did form an integral part of the EU legal order.  It then considered whether
the nature and logic of the Agreement permitted the validity of Directive
2008/101 to be examined on its basis and concluded that it did.  The ECJ then
considered whether the provisions of the Open Skies agreement were
unconditional and sufficiently precise so as to enable the Court to examine its
validity and concluded that Articles 7, 11(1) and (2)(c) and Article 15(3) did
pass that test. 
·       
ICAO
Resolutions. ICAO Assembly resolutions have been characterised as “soft
law”. The resolutions however form an important cornerstone of regional and
national aviation policy and the states tend to work within ICAO guidance.
Moreover, there have been significant discussions recently on both the options
for a Global Market Based Measure (MBM) and the so-called Framework on MBMs
(intended to outline guiding principles for states and regions that choose to
implement MBMs prior to a global measure coming into force).  It is therefore
worth considering the extent to which the present EU ETS is compatible with the
possible options preferred by the ICAO. 
·       
UNFCCC
and Kyoto Protocol: The EU is a party to both of the instruments.
Article 2(2) of the Kyoto Protocol provides that the Parties shall pursue
limitation of greenhouse gas emissions from aviation and marine bunker fuels
working through ICAO and IMO respectively.  However, ECJ in Case C-366/10
rejected the applicability of Article 2(2) KP as it was not considered being
unconditional and sufficiently precise so as to confer on individuals the right
to rely on it in legal proceedings.    
·        
WTO
law:
The Case C-366/10 did not address the WTO concerns; should other WTO members
consider the scheme to be inconsistent with the WTO, these members could
challenge the scheme before the WTO dispute settlement body. In the event the
WTO found the scheme to be inconsistent with the WTO, the WTO rules would
require the scheme to be withdrawn or amended to be consistent with the WTO[57].
The General Agreement on Tariffs and Trade (GATT)
aims at substantial reduction of tariffs and other barriers to trade in goods.
The EU ETS for aviation does not directly relate to trade in goods.
Consequently, the GATT is not directly relevant to the options reviewed and so
there are no grounds to find a violation of this agreement. Trade in services
is governed by the General Agreement on Trade in Services (GATS), which covers
measures with an effect on trade in services. However, measures affecting air
transport services are currently excluded from the GATS and so there are no
grounds to find a violation of this agreement. For the upstream option,
fuelling could be considered a ground-handling service, and measures
affecting such services are not necessarily excluded from the coverage of GATS.

Even if the GATT
or GATS applied, the EU ETS is designed as non-discriminatory and neutral in
the manner it applies to flights arriving to or departing from the EU. Finally,
the GATT and GATS have exceptions clauses for environmental measures which
would be available, should this be necessary, as justification for the
application of the EU ETS to aviation.
              Geographic scope of a MBM
              Relevant Principles
Article 1 of the Chicago Convention
stipulates that every state has complete and exclusive sovereignty over the
airspace above its territory. Further, in relation to the geographic scope
considerations, there are three relevant principles of customary
international law: (1) Each State has complete and exclusive sovereignty over
its airspace; (2) No State may validly purport to subject any part of the high
seas to its sovereignty; and (3) The principle of freedom to fly over the high
seas. These principles have been codified inter alia in Article 1 of the
Chicago Convention and Articles 87(1) and 89 of UNCLOS.  
              Findings of ECJ in Case
366/10
The ECJ found in Case C366/10 that the EU
did have competence, in the light of principles of customary international law
to adopt Directive 2008/101 in that it extended the ETS to “all flights which
arrive or depart from an aerodrome situated in the territory of a Member
State”.  The grounds for this were that: 
·       
Directive
2008/101 did not seek to apply to aircraft registered in 3rd Sates
that are flying over third States or the high seas.
·       
The
applicability of the Directive was founded on the fact that the aircraft
performed a flight which departs from or arrives at an aerodrome situated in
the territory of one of the Member States.  The Directive therefore did not
infringe the principle of sovereignty because the aircraft to which the
Directive applies are physically in the territory of the MS of the EU and
subject to the unlimited jurisdiction of the EU.  
·       
Similarly,
the application of the Directive cannot affect the principle of freedom to fly
over the high seas as an aircraft doing so is not subject to the ETS.  Indeed
an aircraft can cross the airspace of a Member State without being subject to
the ETS.  
·       
It
is only the operator of such aircraft which chooses to operate a route
arriving at or departing an EU airport which are subject to the EU ETS.  
·       
The
ECJ went on to consider the fact that the operator of an aircraft must
surrender allowances calculated from the whole of its flight.  Taking into
account the fact that Article 191(2) TFEU seeks to ensure a high level of
protection of the environment, the ECJ concluded that EU legislature may choose
to permit a commercial activity only on condition that it complies with
criteria established by the EU and designed to fulfil the EU’s environmental protection
objectives.  
In addition, the ECJ concluded that Article
7(1) of the Open Skies Agreement did not preclude the application of the EU ETS
since, as established, Directive 2008/101 related to the admission to or
departure from the territory of a MS of aircraft engaged in international air
navigation. 
AG Kokott added in her opinion that there
is also no risk of any conflict with Articles 1, 11 and 12 of the Chicago
Convention:
·        
As
far as Article 1 is concerned, this merely gives expression to the principle of
the sovereignty. Directive 2008/101 does however not contain any
extraterritorial provisions.
·        
Article
11 merely states that the law and regulations of a contracting state are to be
complied with upon entering or departing from or while within the territory of
that state. It is this and only this compliance with rules upon entering and
departing that the EU is requiring from airlines in regards to the EU ETS. 
·        
No
rules of air are contained in the EU ETS to make Article 12 of the Convention
applicable. 
              Taxes
and charges
              Relevant principles
Article 15 of the Chicago Convention
relates to airport and similar charges, stipulating that any charges
that may be imposed or permitted to be imposed by a contracting state for use
of airports and air navigation facilities shall not be higher than those that
would be paid by its national aircraft engaged in similar operations. No fees,
dues or other charges shall be imposed by any contracting state in respect
solely of the right of transit over or entry into or exit from its territory.
The similar provision on user charges can also be found from Article 12 of the
Open Skies Agreement and the other ASAs.
Article 24(a) of the Chicago Convention
stipulates that an aircraft on a flight to, from, or across the territory of
another contracting party shall be admitted temporarily free of duty; also
fuel, on board an aircraft of a contracting state, on arrival in the territory
of another contracting state and retained on board on leaving the territory of
that state shall be exempt from customs duty, inspection fees or similar
national or local duties and charges. Again, similar exemption from customs
duties and charges is stipulated in Article 11(1) of the Open Skies Agreement
and other ASAs.
Further, the ASAs also exempt from taxes
and charges, with the exception of charges based on the cost of the
services provided, fuel that is introduced into or supplied in the
territory of a party for use in an aircraft of an airline of the other party,
even when these supplies are to be used on a part of the journey performed over
the territory of the party in which they are taken on board (Article 11(2) of
the Open Skies agreement).
              Finding of ECJ in Case
366/10
The ECJ had previously ruled in Case
C-346/97 Braathens [1999] ECR I-3419 that a Swedish environmental tax on
domestic aviation, based on aircraft fuel consumption should be considered an
excise duty which was inconsistent with international law.  Therefore, there was
some precedent for the idea that an ETS might be considered a prohibited tax on
fuel.  
However, in Case C-366/10, distinguishing Braathens[58], both Advocate General Kokott
and the ECJ rejected this view for the following reasons:
·       
The
price paid for an allowance is not fixed by the state but depends on market
forces.  A tax is “fixed unilaterally by a public body and laid down according
to certain predetermined criteria” whereas the ETS is a market-based measure
whereby the purchase price paid is “based on the supply and demand according to
free market forces”[59].
The ECJ concluded that unlike in Braathens there was “no direct and
inseverable link” between the quantity of fuel held or consumed by an aircraft
and the cost to the operator.  
·       
The
aims of the prohibition differ[60]:  
international law on duties on fuel stocks carried by airlines aims to avoid
them being treated as imports whereas the EU ETS’ purpose is environmental and
climate protection. 
·       
The
substance of the prohibition differ[61]: 
in international law it relates to the fuel stocks while the ETS relates to the
quantity of fuel actually used.  
·       
The
ECJ held that the ETS is not intended to generate revenue for public
authorities.  
·       
Further,
AG Kokott pointed out that if the ICAO were to class emissions trading schemes
as falling with the prohibition of fees or other charges within the meaning of
Article 15, it would be odd for ICAO to be making recommendations for guiding
principles for the introduction of MBMs.
              Non-discrimination
              Relevant principles
Article 11 of the Chicago Convention
prohibits discrimination of airlines on grounds of nationality; therefore any
kind of obligation may be imposed on air transport operators provided they
apply to air transport operators of all nationalities equally[62]. 
Similar non-discrimination clause on
grounds of nationality is stipulated in Article 2 of the Open Skies Agreement
and other ASAs. Article 2 of the Open Skies Agreement requires parties to allow
“fair and equal opportunity for the airlines of both Parties to compete”; more
traditional ASAs stipulate that the designated airlines of both contracting
parties shall have “fair and equal opportunities in operating the agreed
services”.
              Finding of ECJ in Case
366/10
In Case 366/10 the ECJ found that Directive
2008/101 was not invalid in the light of Article 15(3) of the Open Skies
Agreement, read in conjunction with Articles 2 and 3(4) thereof, inasmuch as it
provided in particular for application of the allowance trading scheme in a
non-discriminatory manner to aircraft operators established both in the EU and
in third states. 
              Environmental
regulation of international aviation
              Relevant principles
According to Article 15(3) of the Open
Skies Agreement, when environmental measures are established, the aviation
environmental standards adopted by the ICAO in Annexes to the Chicago
Convention shall be followed except where differences have been filed. The
parties shall apply any environmental measures affecting air services under the
agreement in accordance with Article 2 and 3(4) of the agreement. Environmental
provisions are not contained in any other ASA looked for the study. 
Standards and Recommended Practices (SARPS)
are adopted by the ICAO Council and its subsidiary bodies and incorporated as
Annexes to the Chicago Convention. Annex 16 to the Convention, titled “Environmental
Protection” contains two volumes, Volume I on aircraft noise and Volume II on
aircraft engine emissions. Volume II however contains standards relating to
vented fuel and emissions certification applicable to the classes of aircraft
engines, but does not regulate reduction of carbon dioxide. These standards
have legal force, unlike Resolutions from ICAO Assemblies which are not legally
binding.
ICAO Assembly Resolution A37-19 is
dedicated to climate change; also addressing the MBMs. In the resolution the
Assembly recognise that some states may take more ambitious actions prior to
2020, which may offset an increase in emissions from the growth of air
transport in developing states. The Assembly also requests council to undertake
work to develop a framework for MBMs in international aviation and urges states
to respect the guiding principles listed in the Annex, when designing new and
implementing existing MBMs for international aviation, and to engage in
constructive bilateral and/or multilateral consultations and negotiations with
other states to reach an agreement. A number of ICAO contracting states however
lodged reservations expressly denying that unilateral measures were permitted[63]. Also the EU states lodged a
reservation in regards that the MBMs may only be implemented on the basis of
mutual agreement between states[64].
              Findings of ECJ in Case
366/10
In case 366/10 the ECJ assessed the
validity of the Directive 2008/101 in the light of Article 15(3) of the Open
Skies Agreement (environment) in conjunction with Articles 2 and 3(4). There
were three elements to the applicants’ case: 
·       
The
Court found that there was no evidence that ETS infringed an environmental
standard adopted by ICAO; and furthermore in as much as ICAO Resolution A37-19
laid down guiding principles for the design and implementation of MBMs, it did
not indicate that the ETS was contrary to aviation environmental standards
adopted by ICAO.  In particular, the Annex to Assembly Resolution A37-19 stated
that MBMs should support the mitigation of GHGs and should not be duplicative:
Directive 2008/101 expressly addressed this point in Article 25a which sought
to ensure optimal interaction between the EU ETS and MBMs adopted by others.
Such an objective corresponds, moreover, to the objective underlying Article
15(7) of the Open Skies Agreement.
·       
The
ECJ found that Article 15(3) did not prevent parties from adopting the measure
that would limit operations when such measures are linked to the protection of
the environment (see specific reference to environment in Article 3(4)).  The
ECJ also noted that ETS did not limit either frequency or regularity of
service.  
              Overview on possible
borders to limit the coverage of a regional MBM
Territorial waters/sea (12 nautical miles)
According to Article 1 of the Chicago
Convention every state has complete and exclusive sovereignty over the airspace
above its territory. For the purposes of the Convention the territory is deemed
to be the land areas and territorial waters adjacent thereto under the
sovereignty, suzerainty, protection or mandate of such state. 
The limits of sovereign airspace under the
Chicago Convention are unclear, as the Convention does not define the width of
territorial waters. The term “territorial waters” used in the Convention also
differs from the term “territorial sea” used in UNCLOS and its predecessors the
Convention on Territorial Sea and the Contiguous Zone and the Convention on the
High Seas. Determining the width of territorial waters is however of critical
importance as it defines the area of which the contracting states have complete
and exclusive sovereignty in terms of the Chicago Convention. 
It is seems that at the time the Chicago
Convention was concluded, the approach towards sovereignty was that it included
airspace above the land areas and territorial seas, as enshrined in the
Convention on Territorial Sea and the Contiguous Zone 1958[65]. In line with the approach it is likely that the same sovereignty
was recognised by the Chicago Convention.  
The law of the sea has however
significantly developed since the adoption of UNCLOS in 1982 and its entry into
force in 1994. In accordance with UNCLOS, there are now different segments of
waters that are under the sovereignty of a costal state, namely internal
waters, in case of an archipelagic state, its archipelagic waters and
territorial sea (which extends up to 12 nm). Thus, international law today
provides states with sovereignty over land areas, internal waters, archipelagic
waters and territorial sea. As Chicago Convention refers ambiguously to
territorial waters, that have not been determined internationally in uniform
way, it can be understood, in the light of recent developments in state’s
sovereignty, that Chicago Convention recognises state’s sovereignty extending
to archipelagic waters and territorial sea of up to 12 nm. The same was
confirmed by a study undertaken by the Secretariat of ICAO in 1984 about UNCLOS.
The study concluded in regards to Article 2 of the Chicago Convention that
“without any need for a textual amendment of the Chicago Convention, its
Article 2 will have to be read as meaning that the territory of a State shall
be the land areas, territorial sea adjacent thereto and its archipelagic waters[66].
In the light of above considerations, a
State’s complete and exclusive sovereignty extends beyond its land territory
and internal waters and, in case of an archipelagic state, its archipelagic
waters, to territorial sea of not exceeding 12 NM in line with the Chicago
Convention and UNCLOS. Nautical mile (nm) is a special unit employed for marine
and aerial navigation to express distance. The value of 1NM=1852m was
recognized by Annex 5 to the Chicago Convention on Units of Measurement to be
used in air and ground operations.
When delineating the boundaries with territorial
seas, due regard must however be given to particulars of territorial seas, for
example Greece also has a 10-mile territorial sea for the purposes of aviation
and the control thereof[67].
 
Exclusive Economic Zone (200 nautical miles)
According to Article 57 of UNCLOS, the EEZ
shall not extend beyond 200 NM from the baselines from which the breadth of the
territorial sea is measured. 
According to Article 58 of UNCLOS, all
states enjoy the freedom of navigation and overflight and other internationally
lawful uses of the sea related to the freedoms, such as those associated with
the operation of aircraft in the EEZ. The exclusive economic zone is however subject
to a specific legal regime under UNCLOS and therefore coastal states retain
some sovereign rights and jurisdiction in the area. According to Article 56(1)
of UNCLOS the coastal state has, for example, sovereign rights for the purpose
of exploring and exploiting, conserving and managing the natural resources,
weather living or non-living, of the waters superjacent to the seabed and of
the seabed and its subsoil, and jurisdiction as provided for in the relevant
provisions of the Convention with regard to the protection and preservation of
the marine environment.
In regards to pollution from or through the
atmosphere, Article 212 of UNCLOS requires states to adopt laws and regulations
to prevent, reduce and control pollution of the marine environment from or
through the atmosphere, applicable to the air space under their sovereignty or
aircraft of their registry. It follows that in EEZ the coastal states clearly
have some jurisdiction, as in relation to pollution through the atmosphere, the
states’ jurisdiction is however limited to aircraft of their registry.
In relation to other forms of pollution, UNCLOS
affords the coastal states wider jurisdiction, like Article 211(5) of UNCLOS
allowing coastal states to adopt laws and regulations in respect of their EEZ
for the prevention, reduction and control of pollution from vessels conforming
to and giving effect to generally accepted international rules and standards[68].
According to Article 74 of the UNCLOS, the
delimitation of the exclusive economic zone between states with opposite or
adjacent coasts shall be effected by agreement on the basis of international
law. If no agreement can be reached, the states concerned shall resort to the
dispute settlement procedures.[69]

Flight Information Regions
Flight Information Regions are established
on the basis of Annex 11 to the Chicago Convention, for provision of flight
information service and alerting service to promote safe, orderly and
expeditious flow of air traffic. The specific objective of the flight
information service is to provide advice and information useful for the safe
and efficient conduct of flights and the objective of the alerting service is
to notify appropriate organisations regarding aircraft in need of search and
rescue aid[70]. 
According to section 2.1.1. of Annex 11 to
the Convention the contracting states determine those portions of airspace for the
territories over which they have jurisdiction where air traffic services will
be provided. By mutual agreement, a state may also delegate to another state
the responsibility for establishing and providing services in flight
information regions extending over the territories of the former[71]. Those portions of the airspace over the high seas or in airspace
of undetermined sovereignty are determined on the basis of regional air
navigation agreements[72], which are approved by the ICAO Council usually on advice of
regional air navigation meetings[73]. It is
recommended that the air traffic services airspaces should be established on
the basis of technical and operational considerations with the aim of ensuring
safety and optimizing efficiency and economy[74],
rather delineating along national boundaries[75].
FIRs have been established for the purposes
of safety and efficient conduct of flights. FIRs may not follow national
boundaries and can be also extended to high seas, where the providing state’s
responsibilities and rights are limited only to technical and operational
functions pertaining to the safety and regularity of the air traffic[76]. FIR are not an extension of the airspace of the involved states,
but rather an extension of their air traffic control services to non-sovereign
areas[77].

It should be added that in EU law the FIR
boundaries are used in legislation relating to Single European Sky that follows
the Chicago Convention and its Annexes limitations on states’ rights in FIRs.
              Annex
X – Impact
of a possible exemption of flights to and from "developing" States
from the EU ETS
1. Exemption for
"developing States" in 2013 ICAO Assembly Resolution A38-17/2
Article 16.b of the 2013 ICAO
Assembly Resolution A38-17/2 reads as follows:
“Resolves that States,
when designing new and implementing existing MBMs for international aviation
should grant exemptions for application of MBMs on routes to and from
developing States whose share of international civil aviation activities is
below the threshold of 1% of total revenue ton kilometres of international
civil aviation activities, until the global scheme is implemented.”
The paragraph 16.b indicates
that exemptions should be granted from national and regional MBMs for
"developing" States that have a share of less than 1 % in
international aviation activity (measured by revenue tonne kilometres (RTK)).
The BRIC countries (Brazil, Russia, India, and China) are also likely to
support this indication. The United States (US) expressed strong opposition to the
reference to “developing States”. This language might lead to calls for an
elaboration for the first time in the ICAO context of "developing
States" in relation to climate change and could be claimed to import the
UNFCCC concept of "common but differentiated responsibilities and
respective capabilities" (CBDR) into ICAO.
2. Different options for the exemption
from the EU ETS of routes to and from "developing" countries
It is important to note that
there exists no universally accepted and consistent definition of
"developed" and "developing" country. Economic criteria
have tended to dominate discussions. One such criterion is income per capita;
countries with high gross domestic
product (GDP) per capita would thus be described as
"developed" countries. International organizations (e.g. UN, World
Bank, or the OECD) publish country listings based on income thresholds which a
periodically revised (see e.g. Annex A for the latest statistics from the World
Bank). Depending on the economic performance of a country, it may be
reclassified into a new income group.   
Option 1: Exemption from the EU ETS for
broadly defined group of "developing" countries  with a share in international
aviation activity below 1 %
Some developing countries
cite the UNFCCC annexes from 1992, to maintain that the determination of
developing states should only include those countries not
included in the UNFCCC Annex I. A related but more dynamic
definition could be based on all countries, which are not high-income countries (see attached map in Annex A for high-income
countries according to the statistics from the World Bank). Using the later
definition combined with the 1 % threshold for international activities, the EU
ETS would only cover routes to and from the following 18 non-EEA countries: 
·       
Canada, Chile, China (incl. associated
territories), India, Israel, Japan, Malaysia, Oman, Qatar, Russia, Saudi
Arabia, Singapore, South Korea, Switzerland, Thailand, Turkey, UAE, US. 
Such a widely defined
exemption would have a substantial impact on the environmental effectiveness of
the EU ETS. It would reduce the coverage of emissions
from the extra-EEA flights by around one third under the hybrid options. The
total coverage – relative to the full-scope EU ETS – would be reduced by almost
7 percentage points (for 200nm) or by about 4 percentage points (for 12nm).
Major countries and EU
trading partners[78]
just below the threshold would include e.g. Brazil, Mexico, and South
Africa. It is also notable that flights to/from States in the common
European aviation area (e.g. Western Balkans, Moldova) and where we have an
open skies approach (pioneered with Morocco) would also be exempt, which may
undermine attempts to build a wider aviation market. 
With regard to the
discussion on fair competition between tourist destinations (see section 5.2.2.
of the Impact Assessment), arguments could be raised about distortions in the
Mediterranean area because flights to the EU Member States and Turkey are
covered but not to the other Mediterranean States. In particular the tourist
destinations in North Africa could potentially benefit from a comparative
advantage by being exempted from the EU ETS.
Table 1 Impact on coverage
from exemptions for "developing" countries
 Total CO2 coverage relative to full EU ETS scope || Hybrid option with 200 nm || Hybrid option with 12 nm 
 Without any exemptions for developing countries || 46.5% || 38.5% 
 Option 2: Exempting flights to/from LDCs || 46.1% || 38.2% 
 Option 3: Exemption for intermediate group of "developing" countries (low and lower-middle income countries) with a share in international aviation activity below 1 % || 44.1% || 37.0% 
 Option 1: Exemption for broadly defined group of "developing" countries with a share in international aviation activity below 1 % || 39.8% || 34.4% 
Option 2: Exemption from the EU  ETS for
narrowly defined group of "developing" countries (Least Developed
Countries (LDC))
As the broadest common 
defintion of "developing" countries includes a large number of
economically advanced countries and some of the EU's main trading partners, it
could be considered to alternatively grant the exemption to the 48 Least
Developed Countries (LDCs), as defined by the United Nations.[79] An exemption limited
to LDCs would only slightly reduce the environmental effectiveness of the EU
ETS and not raise any discrimination issues.
Option 3: Exemption from the EU ETS for
intermediate group of "developing" countries (low and lower-middle
income countries) with a share in international aviation activity below 1 %
To achieve a compromise
between environmental effectiveness and support for a lower effort by
developing countries, the exemption could be limited to routes to and from low
and lower-middle income countries that have a share in international aviation
activity below 1 %. This option would keep the routes to and from the majority of the EU's main
trading partners covered under the EU ETS. However, from the EU's neighbourhood
countries, major countries like Morocco, Egypt, and
Ukraine – which are lower-middle income countries – would still remain exempted
under this option.
The loss in environmental
effectiveness would be limited to about 1.5 to 2 percentage points.
Furthermore, the limitation
to low and lower-middle income countries would be in line with the recent
redesign of the EU’s Generalised Scheme of Preferences (GSP) for trade
in goods with developing countries[80].
The new GSP rules, which will apply from 1 January 2014, exclude upper-middle
and high income countries from reduced tariffs under the GSP to focus on those
countries most in need.
  
Annex A: World Bank classification of Country Income Groups
              Annex
XI – Resolution
A38-17/2 of the 2013 ICAO Assembly with regard to MBMs
1. Resolution text
Framework for regional and national
MBMs
16. Resolves that States, when designing
new and implementing existing MBMs for international aviation should:
a) engage in constructive bilateral and/or multilateral
consultations and negotiations with other States to reach an agreement, 
b) grant exemptions for application of MBMs on routes to and from
developing States whose share of international civil aviation activities is
below the threshold of 1% of total revenue ton kilometres of international
civil aviation activities, until the global scheme is implemented; 
17. Requests the Council to review the de
minimis, including the de minimis threshold of MBMs mentioned in
paragraph 16 b) above, taking into account the specific circumstances of States
and to be presented for consideration by the 39th Session of the Assembly in
2016;
Global MBM
18. Decides to develop a global MBM scheme
for international aviation, taking into account the work called for in paragraph
19;
19. Requests the Council, with the support
of member States, to:
a) finalize the work on the technical aspects, environmental and
economic impacts and modalities of the possible options for a global MBM
scheme, including on its feasibility and practicability;
b) organize seminars, workshops on a global scheme for international
aviation participated by officials and experts of member States as well as
relevant organizations;
c) identify the major issues and problems, including for member
States, and make a recommendation on a global MBM scheme that appropriately
addresses them and key design elements, including a means to take into account
special circumstances and respective capabilities as provided for in paragraphs
20 to 24 below;
d) report the results of the work in sub-paragraphs a), b) and c)
above, for decision by the 39th Session of the Assembly;
20. Resolves that an MBM should take into account the special
circumstances and respective capabilities of States, in particular developing
States, while minimizing market distortion;
21. Also resolves that special circumstances and respective
capabilities of developing States could be accommodated through de minimis
exemptions from, or phased implementation for, the application of an MBM to
particular routes or markets with low levels of international aviation
activity, particularly those serving developing States;
22. Also resolves that, the administrative burden associated with
the implementation of an MBM to States or aircraft operators with very low
levels of international aviation activity should not exceed the benefits from
their participation in the MBM, and that exemptions from the application of the
MBM to such States or aircraft operators should be considered, while
maintaining the environmental integrity of the MBM;
23. Also resolves that adjustments to MBM requirements for aircraft
operators could be on the basis of fast growth, early action to improve fuel
efficiency, and provisions for new entrants;
24. Further resolves that, to the extent that the implementation of
an MBM generates revenues, it should be used in consistency with guiding
principle n) in the Annex;
New guiding principle p) for MBMs
added to the Annex
p) MBMs should take into account the
principle of common but differentiated responsibilities and respective
capabilities, the special circumstances and respective capabilities, and the
principle of non-discrimination and equal and fair opportunities. 
2. Votes and reservations
stated at the Assembly
Vote on Article 16:
Article 16, proposed by Russia in association with several other States (including
Brazil, China India and South Africa), passed by a vote of 97 to 39. A substantial minority of countries voted against Article 16
(including EU Member States and other major aviation countries like US,
Australia, Canada, and Japan).
Reservations on Article 16.a:
Singapore (fearing
the mutual agreement formulation could result in different types of agreements
between states and airlines of different nationalities not being treated equally
and unequal enforcement of national laws), Iran.
Reservations on Article 16.b:
US, Japan, New Zealand, Australia,
Canada, South Korea, Iran; concerns expressed by UAE
and Qatar.
Reservations on entire Article16:
Lithuania on behalf of 44 European
States (regretting that no consensus was found on
market based measures that are applied prior to a global MBM taking effect and
that no agreement could be found on how States should be able exercise their
sovereignty to take early action to reduce aviation emissions).
Reservations on guiding principle p)
Lithuania on behalf of 44 European
States (whilst fully endorsing the ICAO principles
of non-discrimination and equal and fair opportunities, as well as special
circumstances and respective capabilities of States, serious reservations were
expressed about the reference to CBDR); US, Japan, New Zealand, Australia,
Canada and South Korea (on the inclusion of CBDR); Mexico (concerned
about putting non-discriminatory first).
[1]     Lee et al. (2013). Shipping and aviation emissions in the
context of a 2°C emission pathway, Working paper, Manchester Metropolitan
University.
[2]     The scenario calculations were produced by the Committee on
Aviation Environmental Protection (CAEP) that carries out ICAO's environmental
activities. The scenarios do not include the impact of biofuel.
[3]     See for a recent study: Winchester et al. (2012), The impact of
Climate Policy on US aviation, Journal of Transport Economics and Policy 47(1),
p 1-15.
[4]     See http://ec.europa.eu/clima/policies/transport/aviation/docs/sec_2006_1684_en.pdf
[5]     Case C-366/10
[6]     See http://ec.europa.eu/clima/consultations/0022/co2_civil_aviation_en.pdf

[7]     See http://ec.europa.eu/clima/consultations/0022/co2_coverage_en.pdf
[8]     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 25 000 tonnes CO2 per year are
considered as small emitters.
[9]     Contrary to non-commercial operators, commercial aircraft
operators (i.e. airlines offering scheduled flights) benefit from an exemption
from the EU ETS in case that they emit less than 10 000 tonnes CO2 per year. 
[10]    Bloomberg New Energy Finance, Is the EU ETS eating into airline
profits?, 12 January 2012.
[11]    See http://www.ryanair.com/en/news/ryanair-to-introduce-0-25-euro-ets-levy-to-cover-new-eu-eco-looney-tax
[12]  US Congressional Research Service (2012), Aviation and the
European Union’s Emission Trading Scheme report prepared for Members and
Committees of Congress, page 19, http://www.fas.org/sgp/crs/row/R42392.pdf,
Consulted 31/7/2013
[13]    The HGCC discussed an alternative definition based on the Flight
Information Regions (FIR) that are used for air-traffic control purposes.
However, this definition has not been retained for consideration at the 2013
ICAO Assembly. Even though the areas covered by the FIRs of EEA Member States
are not identical to the areas covered by their EEZ, a similar coverage of
emissions is achieved in both cases. More information on the legal definition
of FIRs can be found in the last section of Annex IX.  
[14]    See http://ec.europa.eu/clima/consultations/0022/co2_coverage_en.pdf
[15]    http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.2454:
[16]  See for a recent review of modelling and empirical studies: Tim
Laing, Michael Grubb and Claudia Comberti, Assessing the effectiveness of the EU Emissions
Trading Scheme, Grantham Research Institute on Climate Change and
the Environment Working Paper Series, No. 106, January 2013.
[17]    EASA (2010) Research Project EASA.2009/OP15 Study on Aviation
and Economic modelling (SAVE)
[18]    Flights between airports in Switzerland and EEA countries have
already been included in the full-scope EU ETS and the stop-the-clock decision
for 2012. The additional coverage comes therefore from flights between airports
in Switzerland and non-EEA countries.  
[19]    While the EU ETS and options are
modelled to apply to EEA countries, the model outputs are only provided at
EU-27 level, not the whole EEA.
[20]    See e.g. CE Delft (2012) The costs and benefits of Stop the
Clock
[21]    See e.g. Alexeeva-Talebi V, 2010, “Cost Pass-Through in
Strategic Oligopoly: Sectoral Evidence for the EU ETS”, ZEW Working paper
[22]    Bloomberg New Energy Finance, Is the EU ETS eating into airline
profits?, 12 January 2012.
[23]    European
Commission and United States Department of Transportation, 2010, Transatlantic airline alliances: competitive issues
and regulatory approaches, http://ec.europa.eu/competition/sectors/transport/reports/joint_alliance_report.pdf
[24]    AERO MS estimates EU ETS of 4 cents only for the flight Brussels
to Frankfurt (assuming a carbon price of €6).
[25]    Uittenbogaard A., 2009, A study on the effects of low cost
airlines in planning issues, Royal Institute of Technology, Stockholm.
[26]    Civil Aviation Authority (2013), Practicalities of an Airspace
Based Emissions Trading System, to be published on www.caa.co.uk.
[27]    It should be noted that even if a flight plan provides a more
accurate measurement of the absolute distance flown than the GCD this will not
automatically mean that a distance factor based on a flight plan is more
accurate than a distance factor based on GCD. Take for example, a flight for
which, according to the flight plan, the total route flown is 30 % longer than the
GCD. This does not mean that the distance factors based on flight plan and GCD
will automatically differ by 30 %. They will only be different if the relative
shares of distances travelled within and outside the EEA differ based on GCD or
the flight plan.
[28]    Germany-China, Germany-Russia, UK-India, France-China
[29]    See
http://legacy.icao.int/icao/en/assembl/a36/docs/A36_MIN_P_9_en.pdf
[30]    See http://www.icao.int/environmental-protection/Documents/STATEMENTS/cop4.pdf

[31]  The conventional
value of 1NM=1852m was adopted under the name “international nautical mile” in
1929 by the First International Extraordinary Hydrographic Conference, held
under the Convention on the International Hydrographic Organization. The value
is also recognised by the ICAO in the Annex 5 to the Chicago Convention.
[32]    The Convention does not define “vessels”, but the term is used
in shipping context. Where the provisions apply to aircraft, separately
aircraft is named.
[33]    See http://ec.europa.eu/clima/consultations/0022/co2_coverage_en.pdf.
[34]    See statements at http://legacy.icao.int/icao/en/assembl/A37/Docs/10_reservations_en.pdf,
pg.11.
[35]    See
Case 106/83 Sermide [1984] ECR 4209, paragraph 28; Joined Cases C-133/93,
C-300/93 and C-362/93 Crispoltoni and Others [1994] ECR I-4863, paragraphs 50
and 51; Case C-313/04 Franz Egenberger [2006] ECR I-6331, paragraph 33.
[36]    See
Case C-127/07 Arcelor Atlantique and Lorraine and Others [2008] ECR I-9895,
paragraph 25
[37]    Ibid,
paragraph 26
[38]    Recitals
3 and 14 of the Directive 2008/101
[39]    AG Kokott opinion in Case C-366/10, paragraphs 196-198
[40]    Ibid
[41]    See Case 106/81 Kind v EEC [1982] ECR 2885, paragraph 22
[42]    Ibid, paragraph 47; Case C-292/97 Karlsson and Others [2000] ECR
I-2737, paragraph 45
[43]    Case C-127/07 Arcelor Atlantique and Lorraine and Others [2008]
ECR I-9895, paragraph 48
[44]    Case C-341/95 Bettati [1998] ECR I-4355,
paragraph 41
[45]    The European Environment Expert Group has been established by
the European Civil Aviation Conference (ECAC) for the European preparations for
the ICAO Assembly.
[46] One contribution did not respond to any of the questions listed in
the consultation
[47] Contribution stated that responses to the
questions for the consultation will be provided after the ICAO Assembly in
September 2013
[48]    Committee on Climate Change (CCC), 2008, Aviation CO2 Emissions:
Abatement Potential from Technology Innovation,
 http://www.theccc.org.uk/pdfs/QinetiQ%20aviation%20report%20for%20the%20CCC.pdf
[49]    ibid
[50]    IEA (2011) ETSAP technology brief T11. Energy technology systems
analysis program
[51]    IEA (2011) ETSAP technology brief T11. Energy technology systems
analysis program
[52]    CCC (2009). Meeting the UK Aviation target – options for
reducing emissions to 2050 Chapter 6: Non-CO2 climate effects of aviation
[53]    D.S. Lee, L.L. Lim and B. Owen (2013) Bridging the aviation CO2
emissions gap: why emissions trading is needed
[54] EASA
(2010) Research Project EASA.2009/OP15 Study on Aviation and Economic modelling
(SAVE). In
2009, a programme to update the model was launched:
aircraft operations were updated using data from the
Eurocontrol WISDOM database; airline costs and fare
data were updated using information from ICAO and
IATA; and the definition of aircraft performance
characteristics was changed to use the Eurocontrol BADA
data.
[55] FESG CAEP/8 Traffic and Fleet Forecasts, presented by FESG
Rapporteurs to the CAEP Steering Group meeting in September 2008, paper number CAEP-SG/20082-IP/02
[56]    Elmar M. Giemulla; Ludwig Weber, “International and EU Aviation
Law”, Selected Issues, 2011, page 19
[57]    Joshua Meltzer, “Climate Change and Trade – The EO Aviation
Directive and the WTO”, Journal of International Economic Law 15(1), 122
[58]    On the grounds that on the grounds that (a) the offending
Swedish provision related to two Directives on the harmonisation of excies
duties on mineral oils and needed to be understood in the context of the
“political objective of an internal market (which did not apply to the
international law provisions) and (b) there was a direct and inseverable link
between fuel consumption and the polluting substances by reson of which the
Swedish environmental tax was levied (which did not occur here).  It is also
worth noting that it was clear in Braathens that the offending measure was a
tax, therefore a number of the arguments above around the relevance of
international law set out above could not apply.  
[59]    AG opinion paragraph 214-215
[60]    AG opinion paragraph 229
[61]    AG opinion paragraph 230
[62] http://www.bmu.de/fileadmin/bmu-import/files/pdfs/allgemein/application/pdf/aviation_emission_trading.pdf
[63]    http://legacy.icao.int/icao/en/assembl/A37/Docs/10_reservations_en.pdf
[64]    “It is important also to make clear that in no way can paragraph
14 be construed as requiring that market-based measures may only be implemented
on the basis of mutual agreement between States. The Chicago Convention
contains no provision which might be construed as imposing upon the Contracting
Parties the obligation to obtain the consent of other Contracting Parties
before applying the market based measures referred to in Resolution A37-17/2 to
operators of other States in respect of air services to, from or within their
territory.” http://legacy.icao.int/icao/en/assembl/A37/Docs/10_reservations_en.pdf
[65]    The Convention does not limit the territorial sea in miles; it
is however understood to extend less than 12 NM. The contiguous zone is limited
to 12 NM and is a zone is high seas contiguous to territorial sea.
[66]    See http://legacy.icao.int/icao/en/leb/mtgs/2008/lc33/docs/LC33_wp4_7e.pdf

[67]    See
http://ec.europa.eu/maritimeaffairs/documentation/studies/documents/greece_01_en.pdf
[68] The Convention does not define “vessels”, but the term is used in
shipping context. Where the provisions apply to aircraft, separately aircraft
is named.
[69] E.g. neither Turkey nor Greece have officially claimed an exclusive
economic zone or extended their territorial waters to the full 12 miles in the
Aegean. See further, for example, http://www.lgcnews.com/turkey-and-greece-dispute-territorial-waters/
and http://www.setimes.com/cocoon/setimes/xhtml/en_GB/features/setimes/features/2013/01/23/feature-04
and http://www.todayszaman.com/newsDetail_getNewsById.action?load=detay&newsId=265640

[70]    See Section 2.3.2. of the Annex 11 to the Chicago Convention
[71]    See Section 2.1.1 of the Annex 11 to the Chicago Convention
[72]    See section 2.1.2. of the Annex 11
[73]    See Appendix M to Resolution A37-15
[74]    See section 1 of Appendix M to Resolution A37-15
[75]    See 2.10.1 of Annex 11 to the Chicago Convention
[76]    See section 5 of Appendix M to Resolution A37-15
[77]    Giemulla, Elmar; Weberm Ludwig, International and EU Aviation
Law, page 50
[78] See for a list of EU's 50 main trading partners: EUROSTAT, External
and intra-EU trade - A statistical yearbook - Data 1958 – 2010, section 2, http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-GI-11-001/EN/KS-GI-11-001-EN.PDF.

[79] http://unctad.org/en/Pages/ALDC/Least%20Developed%20Countries/UN-list-of-Least-Developed-Countries.aspx

[80] The EU's Generalised Scheme of Preferences (GSP), created following
UNCTAD recommendations, helps developing countries by making it easier for them
to export their products to the EU. This is done in the form of reduced tariffs
for their goods when entering the EU market. The GSP is subject to WTO law, in
particular to the GATT and the so-called "Enabling Clause" which
allows for an exception to the WTO "most-favoured nation" principle
(i.e. equal treatment should be accorded to all WTO Members). See http://trade.ec.europa.eu/doclib/docs/2012/october/tradoc_150028.pdf.