ETS: Europe against the world

AFTER a lot of noisy cross-fire, on May 15th the smoke cleared from the battleground that is the European Union’s policy on airlines and climate change. Twenty-six countries have fiercely opposed a move by the EU to charge airlines using its airports for their carbon emissions. Yet it turns out that only those of China and India, ten carriers in all, are failing to comply with the scheme.

That is ten more than the EU’s climate policy wallahs recently claimed. Downplaying the recent protests, in which America and Russia are also prominent, they insisted that all airlines were abiding by the EU’s new rules. For now, these cost them nothing: under the terms of the EU’s Emissions Trading Scheme (ETS)—which the airlines were included in at the beginning of the year—they are supposed merely to provide data on their 2011 emissions. In April 2013 they will then have to obtain tradable ETS permits to cover their 2012 emissions, 85% of which they will have for free. That the Chinese and Indian airlines have nonetheless stopped providing data on their emissions is a clear effort to escalate the conflict.

It will not have much impact on the ETS carbon price. The recalcitrant airlines, of which eight are Chinese and two Indian, are responsible for less than 3% of the aviation emissions addressed by the scheme. With some justification, given the vigorousness of the opposition to it, the EU’s climate chief Connie Hedegaard therefore hailed the initiative an early success. Yet it could quickly unravel if the Chinese and Indian carriers continue to defy it.

Fighting fire with fire, Britain, Germany, France and other European countries, which play host to the Indian and Chinese airlines, have written to them requesting the missing 2011 data. If they fail to provide it, they are liable to face fines from some of those European countries.

Yet there is still time for a negotiated way out of the mess. By far the best solution would be for the United Nation’s International Civil Aviation Organisation (ICAO) to institute a global emissions-busting scheme, under which all airlines would be forced to pay for their pollution. Emissions from aviation represent a modest 3% of the world’s total; yet they are growing fast. It was indeed ICAO’s longstanding failure to introduce such a measure that spurred the exasperated EU to bring its cap-and trade scheme to bear on the problem. If ICAO is now jolted into taking action—as it is promising, a mite more convincingly than before—the EU would gladly absolve the airlines from having to comply with the ETS.

An alternative would be for the dissenting countries to take their own steps to make their airlines pay for their emissions. In this case the EU would, again, absolve them of any burden under the ETS. In China’s case, this is at least imaginable: there has been some discussion in China of levying a carbon tax on aviation emissions. In India, it is less likely. The country’s airlines are both influential and bleeding money, due to the high operating costs they face in an overcrowded domestic market. India’s current government, beset by multiple economic and other problems, is unlikely to put them under any obligation the EU could consider “equivalent” to that they face under the ETS.

Uncertain permits

A bigger question hangs over the ETS more broadly. Last year, according to data also released on May 15th, emissions from the 12,000 power plants and factories covered by the scheme fell by 2% compared to the previous year. This was largely due to the bad economy and has left the market hopelessly oversupplied with permits.

It has therefore tanked. The ETS carbon price is currently less than €7 a tonne; down from nearly €30 in 2008. And the situation is about to get worse. The EU is in the process of selling millions of extra permits for green energy projects; and also introducing measures to promote greater energy efficiency, which will further reduce demand for permits.

The ETS, by far the world’s biggest carbon market, is supposed to nudge companies into investing in green technology. But this will not happen in any significant way unless the carbon price at least doubles. Alarmed by the uncertainty the state of the market is causing, a number of big investors in the ETS, including E.On, an energy firm, have urged the EU to fix it.

It is now planning to do so—probably by staggering the release of its next big tranche of permits, early next year, in order to limit their supply and so force the carbon price to rise. This would be generally welcomed. But with the details still hazy, and probably undecided, companies remain deeply uncertain about the market’s future.

“How many permits will be withheld and over what period?” asks Abyd Karmali, head of carbon markets for Bank of America Merrill Lynch. “Companies need to see more evidence that the scheme is going to provide them with long-term incentives to invest in clean technology.”



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