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08 Dec 2011

Airlines, climate change and carbon pricing

by David Hodgkinson

Notwithstanding action by some states either individually or collectively, action by the EU and other governments means that it is unlikely the aviation emissions problem will be successfully addressed anytime soon.

The main object of the Commonwealth’s climate change legislation passed by the Senate last month – the clean energy bills which establish an emissions trading scheme (ETS) from 1 July next year – is to give effect to Australia’s obligations under the United Nations Framework Convention on Climate Change (the UNFCCC) and its Kyoto Protocol (Kyoto) and to support a global response to address the climate change problem.

The UNFCCC provides a framework for future action and cooperation by states on climate change; it does not set out legally binding limits on emissions for parties to the Convention. Unlike the UNFCCC, Kyoto does set legally binding limits on (developed) state parties" emissions of greenhouse gases, and does so for the commitment period 2008 – 2012.

But Kyoto also does something else: Article 2(2) provides that developed state parties "shall pursue limitation or reduction of emissions of greenhouse gases… from aviation… working through the International Civil Aviation Organization" (ICAO). In other words, aviation is excluded from the world’s primary climate change instrument. It leaves the aviation emissions problem up to ICAO.

International aviation represents a significant and growing source of emissions. However, ICAO has failed to reach any kind of consensus on a comprehensive approach to aviation and climate change.

Given aviation’s absence from Kyoto, and ICAO’s failure to successfully address the aviation emissions problem, some states – and coalitions of states – are taking action to include aviation, but not without difficulty. Such action and such difficulty are outlined below.

Australia

Rather than paying a carbon price through amendments to fuel tax credit and excise schemes, domestic Australian airlines may choose to participate in the Commonwealth’s ETS from mid-2013 through an opt-in arrangement provided for in the legislation – Part 3, Division 7 of the Clean Energy Act.

Regulations will be developed in 2012 to support such participation.

For airlines, it offers an opportunity to be able to opt in to the carbon pricing scheme as it may enable airlines to source abatement measures at least cost. Put another way, airline participation in the ETS enables carriers to manage both their fuel and carbon-cost liability more effectively.

Europe

Under Directive 2008/101/EC on the inclusion of aviation in the European Union’s ETS, all flights (EU and non-EU) landing at or taking off from any airport within an EU member state from 1 January 2012 must surrender emissions allowances equal to the emissions created from the entire flight. Most of these allowances (85%) will be allocated to the airlines for free.

The EU ETS would, thus, include Australian airlines landing at or taking off from any airport in the EU.

International airlines (led by those in the US) oppose the proposed inclusion of aviation in the EU ETS and have challenged its legality in the European Court of Justice (the ECJ). The ECJ’s Advocate General has issued a non-binding opinion in which she recommended that the ECJ find the scheme legal.

The United States and others

Following the Advocate General’s opinion, in late October, the US House of Representatives approved a measure that would make it illegal for US airlines to comply with the EU law (although there is no indication that the US Senate will do the same). If the legislation does pass the Senate, however, airlines would be unable to fly to and from Europe without breaking either a federal US law or an EU law.

Finally, in early November, ICAO – again, the body charged under Kyoto with addressing the aviation emissions problem – through its Council endorsed a working paper approved by 26 states including the US, China, Russia and India calling on the EU to exclude non-EU carriers from the EU ETS. It also adopted a non-binding declaration contesting the EU’s plan to include international airlines.

A sectoral agreement for aviation? A "bottom-up" approach?

Notwithstanding action by some states either individually or collectively, action by the EU and other governments means that it is unlikely the aviation emissions problem will be successfully addressed anytime soon. It also appears unlikely that, at the UNFCCC/Kyoto climate change conference this month in South Africa, major emitters – developed or developing states – will enter binding agreements to reduce emissions, whether as part of a Kyoto "second commitment period" post-2012 or otherwise.

One alternative approach to moving forward may be to break the climate change problem up into different pieces and address the pieces in more specialised fora. This decentralized approach might not be sufficient in itself to substantially address the climate change problem. But if the UNFCCC continues to be stalemated, perhaps a decentralized regime, in which smaller groups of like-minded countries address specific issues, and in which countries and regional groupings take parallel action on their own (without attempting to include those states not in agreement with them), might emerge – a "bottom-up" rather than a "top-down" approach.

Such an approach could include a sectoral agreement for aviation, which would avoid countries taking specific action and remove the aviation emissions problem from the UN. Or it could include a sectoral agreement where airlines rather than states were parties to a global, airline-driven aviation emissions agreement.

As one commentator said recently, "since an agreement among the major emitters is unlikely anytime soon, we should seek progress where we can, through whatever means and in any forums that are available."

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.