EU – emissions trading

Aviation in the EU is covered by the EU Emissions Trading System (EU ETS). CO₂ emissions in aviation are therefore assigned a carbon price and their total volume is limited via the trading in emission allowances within the EU ETS. This instrument has not yet been able to achieve its full effect in practice. This is because, firstly, only some of the flights from the EU are covered by the ETS and, secondly, the prices for emission allowances are too low and the supply is too high for the EU ETS alone to be an effective instrument for more climate protection in aviation.

How is aviation covered by the EU ETS?

Aviation has been included in the EU’s Emissions Trading System since 2012. Prior to this, the EU ETS only covered stationary installations from the energy and industry sectors. Originally, all flights taking off and/or landing in European airports were to be included in the EU ETS (so-called “full-scope”). However, various countries – particularly the USA, China and Russia – viewed this as illegal taxation of airlines of countries outside the EU. Thus, the scope of the EU ETS was retroactively limited from the beginning and now only includes intra-European air traffic. Thus, the EU ETS covers only one third of the scope of air transport that was initially envisaged (see Figure 3‑1). The limited scope still applies. As soon as the exact design of CORSIA has been finalized, the scope of the EU ETS will be reviewed and either permanently reduced or returned to full scope.

Scope of aviation covered by EU ETS, current vs. originally planned

All airlines operating flights that are subject to the ETS must monitor the emissions of these flights and report them to the EU by 1 April each year. Allowances equivalent to the emissions must be submitted by 1 May each year.

Currently, air operators receive a high proportion of these allowances free of charge. For emission levels above that, operators must purchase allowances at regularly scheduled auctions or directly from stationary installations covered by the EU ETS. In 2019, aviation emissions under the ETS totalled 68 million tons of CO₂ or nearly 40% of total aviation emissions. For the period of 2012 to 2020, airlines were allocated over 50% of the emission allowances they needed for free.

Between 2013 and 2020, the amount of allowances allocated free of charge to airline operators remained the same. From the start of the fourth trading period in 2021, they decrease by 2.2% per year (corresponding to the Linear Reduction Factor LRF).

Is the EU ETS an effective instrument for more climate protection in aviation?

The EU ETS was the first policy measure implemented to reduce emissions in the aviation sector. It thus had a pioneering function and sent an important signal in the right direction. However, as the EU ETS is currently designed, it does not have a strong impact in terms of increasing climate protection in aviation.

The reasons for this are:

1. Its limited scope:

   As the EU ETS only covers intra-European flights, over 60% of aviation emissions are not currently covered by the GHG inventory.

   

2. Only CO₂ emissions covered rather than all negative climate impacts

   The EU ETS regulates only CO₂ emissions and not the indirect climate impact of flights. This simplification of the climate impact is particularly problematic in aviation. In addition to direct emissions from kerosene combustion, the gases emitted in high layers of the atmosphere lead to cloud formation and other chemical processes. According to current estimates, the GHG impacts of these effects are about one to three times higher than the CO₂ emissions generated by combustion.

3. Goal of overall EU ETS is too low

   The EU ETS limits emissions by setting a so-called cap, i.e., an upper limit of the possible emissions, which the total amount of emissions in the system may not exceed. The cap is calculated roughly from the sum of the freely allocated emission allowances and the allowances (freely allocated or not) that are auctioned. For the period up to 2020, the cap is constant and constitutes 95% of the emissions from 2004 to 2006. Since that time, the emissions have increased significantly. For aviation, the cap is thus significantly lower than actual emissions. Operators must cover the gap between actual and permitted emissions by, for example, purchasing allowances from the stationary installations under the ETS.

   

   However, if an aviation operator purchases allowances from an industrial installation, it does not mean that emissions are actually mitigated.

   The surplus of allowances is currently so high that the allowances needed by aviation have no effect on the overall ETS.

   There is a substantial surplus of allowances in the stationary EU ETS; in 2019 this surplus amounted to over 1000 million European Union Allowances EUAs. Aviation’s demand for approximately 30 million allowances from stationary installations is not significant enough in the current oversupply of allowances that it leads to a mitigation of emissions elsewhere. This situation could change in the future if the EU ETS is reformed. So far, it has been decided that a so-called market stability reserve is introduced to reduce the surplus of allowances. In addition, allowances are to be completely cancelled and the cap for the entire EU ETS is to decrease from 2021 onwards.

   The prices for emission allowances under the EU ETS are too low to make progress with the decarbonization of aviation.

   Only in 2018 did carbon prices in the EU ETS exceeded the limit of €10 per ton of CO₂. By mid-2020, these prices were €30 per ton; they are expected to rise further by 2030. Therefore, only low additional costs arise for aviation operators that purchase allowances to offset their emissions that exceed the cap. Thus, the EU ETS currently offers no incentive to reduce emissions, for example by using aircraft with lower emissions. This is because purchasing allowances is much cheaper than implementing such measures. At the moment, a flight from Berlin to Mallorca is about €3 more expensive if the cost of the allowances is added to the ticket price (with emissions of 0.27 tons of CO₂ per passenger according to Atmosfair calculations, a certificate price of €20 per ton of CO₂ and free allocation of certificates amounting to 43%).

4. Uncertain climate footprint of “sustainable fuels”:

   One option for more sustainable air transport is the use of synthetically produced fuels. In the EU ETS, fuels from renewable sources are in principle assessed as zero emissions if they meet certain criteria in terms of sustainability and mitigated emissions. These follow the criteria of the Renewable Energy Directive (2018/2001) in Articles 25(2), 29(20), 26(1) and 29 (2-7). However, the level of emissions generated by the production of “sustainable aviation fuels” is uncertain for some processes. At present and for the foreseeable future, the prices for emission allowances are significantly lower than the costs for synthetic fuels – so they cannot currently make a significant contribution to more climate protection in aviation.

How could aviation be regulated more effectively under the EU ETS?

The idea of the EU ETS is to limit the total emissions of the system and thus to stimulate trading of allowances between market participants so that emissions are reduced where the costs of doing so are lowest. However, the complex system needs further adjustments to generate sufficient incentive effects. Currently, there are two windows of opportunity to reform the EU ETS and make it more effective. Firstly, the EU ETS needs to be adjusted in the context of the international CORSIA system. Secondly, increases in the EU’s climate targets for 2030 are planned, to which the EU ETS will contribute significantly.

The most important options for reforming the EU ETS with a view to aviation are:

1. Adjustment of the emissions cap:

   The decisive factor is the level of the cap, i.e. the total quantity of emissions permitted within the system. As experience gathered in the first years of the EU ETS has shown, a static cap is not enough. It cannot take into account actual developments such as a decrease in emissions due to economic or health crises or faster technological developments such as the use of renewable energies. Adjustments to the cap can involve the absolute level of emissions and the speed of emission reductions. The speed at which the cap is reduced is determined by the Linear Reduction Factor LRF. It has already been decided that the LRF will increase from 1.74% to 2.2% in the fourth trading period starting in 2021. In contrast to previous years, the cap for air transport also decreases annually in parallel with that of the stationary sector. The overall cap must be adjusted in view of the substantial surplus of allowances, the effects of the Covid-19 pandemic, which is expected to lead to a collapse in allowance demand, and the long-term European climate targets that have been set. According to calculations carried out by Oeko-Institut, the cap should be reduced by 205 million Annual Emission Allowances (AEA) and the LRF should be increased to up to 5.07% (these calculations were made before the Covid-19 pandemic and thus do not include the significant decrease in aviation emissions and other ETS emissions).

2. Reduction of free allocation of emission allowances:

   Allowances are allocated for free under the EU ETS to avoid carbon leakage, i.e. the migration of activity harmful to the climate to another country or the shifting of CO₂ emissions outside the economic area. In the case of aviation, leakage is unlikely – especially for passenger transport: no one will fly from Berlin to Mallorca via Ukraine to stay outside the scope of the EU ETS. It would therefore make sense to abolish free allocation for aviation. This would directly result in higher costs and incentives to reduce emissions.

3. Additional measures:

   1. Numerous additional measures that are currently being discussed for stationary installations under the EU ETS could also be applied to the aviation covered by the system. These would generally lead to an increase in costs or to a stabilization of prices (e.g. carbon floor price).

   2. It makes sense to continue to separate stationary installations and aviation under the EU ETS. This will allow the quantity of allowances available for aviation to be more precisely controlled.

   3. Connecting the EU ETS with other emission trading schemes would increase the system’s geographic coverage and its effectiveness, especially as regards aviation. Currently, flights are not covered by the EU ETS if they depart from or arrive at airports outside the European Economic Area. By linking emission trading schemes that include aviation, more flights can be included in the system. It has already been decided that the emissions trading systems of Germany and Switzerland will be linked, but the practical implementation of this has been postponed because of the Covid-19 pandemic.