Volcanic Ash - consequences for EU ETS

30 April 2010

Introduction

The eruption of the Eyjafjallajökull volcano in Iceland and the accompanying cloud of volcanic ash caused unprecedented traffic chaos over much of European airspace. While airlines are currently counting the cost of lost revenues and passenger claims, the disruption may also have unforeseen financial consequences in the context of the EU’s Emissions Trading Scheme (EU ETS). 2010 serves as the monitoring year for the scheme which will determine the number of Aviation Allowances (EUAAs) allocated for free to aircraft operators. Where an airline has had to ground flights, it will receive fewer EUAA’s than would otherwise have been available due to a reduction in its “revenue tonne kilometre” data for that period. This problem will be felt particularly strongly by airlines operating in those parts of the EU that were hardest hit by the disruption. There is no clear means under the current legislation to correct such anomalies.

Aviation and the EU ETS

The EU ETS is a cap and trade scheme in respect of greenhouse gas emissions. The scheme works by setting a cap on emissions for certain sectors and allocating tradeable allowances to operators within that cap.

Following the adoption of legislation in 2008 (Aviation Directive)¹, aircraft operators are now included in the EU ETS. The legislation applies to all operators flying into or from airports in the EU, regardless of the place of their incorporation. An operator caught by the rules is obliged to surrender a sufficient number of allowances to cover its greenhouse gas emissions. A proportion of allowances will initially be freely allocated to airlines and any shortfall can be made up through the purchase of additional allowances through auctions or via the secondary markets (on carbon trading exchanges or by way of over-the-counter (OTC) transactions). Aviation was included in the scheme in 2008, though initial obligations came into force in 2009, and the first full compliance year is 2012.

EUAAs will be calculated on the basis of a common European tonne-kilometre benchmark, with 85% of EUAA’s being freely issued and allocated to operators until 2020. The total number of allowances to be allocated will be determined at the EU level by reference to average aviation emissions in the period 2004-2006. In the first period (the 2012 calendar year), the total allowances will be equivalent to 97% of these historical emissions. This will decrease to 95% for the period 2013 - 2020.

The amount of free EUAAs which are to be allocated to each aircraft operator, as its share of the total free EUAAs available, will be determined on the basis of revenue tonne-kilometre over the course of the monitoring year. For 2012, the relevant monitoring year is 2010. Aircraft operators are currently collecting relevant benchmarking data to be submitted to the Administering Member State. Any fall in an airline’s revenue tonne-kilometre data during this year will impact on the number of free EUAA’s which will be allocated to that airline.

 

¹ DIRECTIVE 2008/101/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community.

Consequences

The 2010 monitoring year is intended to be illustrative of an airline’s activities in any given year and for this reason, the Aviation Directive does not foresee any procedure to cover circumstances during which an airline is unable to operate “as normal”. The legislation makes it clear that only flights actually performed and for which the aircraft operator is responsible are to be taken into account for that operator's application for free allowances².

 

² Aviation Directive, Annex V, Part B, 16.

Commission reaction

Aircraft operators seeking relief from the Commission have been left disappointed by the apparently hard line taken by the Commission³. This statement recognises that the reduced activity over the past week could in principle affect the distribution of free allowances between aircraft operators. However, the Commission believes that any distributional impacts are likely to be small as most operators have been impacted by the flight restrictions. The Commission also takes the view that, as many airlines will be much busier over the coming weeks carrying very high amounts of passengers and freight as travel patterns return to normal, this will go some way towards compensating for the cancelled flights.

 

³ EU Press Release “Volcanic ash cloud crisis: Commission outlines response to tackle the impact on air transport” 27 April 2010.

What can Aircraft Operators do?

There is no clear solution for affected airlines, as the exceptional circumstances encountered in relation to volcanic ash are not dealt with in the Aviation Directive. Although each airline is administered by a particular Member State, any challenge to the rules would need to be made at an EU level. In the absence of any grounds of challenge in the legislation, an airline would have to rely on general principles of EU law to argue its case before the Commission. As the impact of the closure of European airspace was felt disproportionately by certain carriers, it could be argued that the principle of equal treatment (a fundamental principle of EU law) would require the Commission to compensate affected airlines.

The Commission has however indicated that it considers that Member States can rapidly implement measures in favour of the airline industry which do not constitute State aid, notably loans and guarantees granted at market conditions. In order to comply with EU rules any such support must be provided on the basis of uniform criteria in order to avoid any unfair assistance to certain companies. This indicates that the Commission, instead of handing out additional EUAAs for “free”, is initially looking to Member States to compensate affected aircraft operators.

Contacts

Michael Juergen Werner - Head of Brussels

Duncan Batchelor - Partner

Andrew Hedges - Partner

Tim Baines - Senior Advisor on Climate Change & clean Energy

Gabrielle Somers - Consultant