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Emissions Trading Scheme

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Introduction

The Emissions Trading Scheme (ETS) is an initiative launched in the European Union (EU) that is part of the overall scheme to reduce climate change by reducing the emissions of greenhouse gases (GHG). The scheme is aimed at reducing emissions in a cost-effective manner so it does not impose a financial burden on companies and therefore gain wider acceptance.

Cap and Trade

The Emissions Trading Scheme was launched in 2005 and is based on the “cap and trade” system. This means that there is a “cap” on the total amount of certain greenhouse gases that can be emitted by a factory or facility during the year. Within this cap, a company can receive an emission allowance which they can sell to or buy as they need. To ensure that the allowance has a value for allowance so that it enables it to be traded between companies.

At the end of the year, a company must surrender the allowances to cover the level of emissions it has created or it can be fined. If the company has reduced its emissions it will then have allowances to sell or trade with companies who have not been able to reduce emissions and need to purchase additional allowances. Each year the European Union reduces the overall allowances, so the total amount of emissions will fall. The scheme penalizes those companies who are unable to reduce their emissions.

Geographical Impact

The ETS has a wide geographical reach throughout the EU and beyond. The scheme covers all twenty seven EU member states, as well as other non-EU nations, Iceland, Liechtenstein and Norway. Up to 2012 the facilities covered by the ETS included power stations, combustion plants, oil refineries, iron and steel works, and factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. As of 2012 the ETS also included aviation companies.

Aviation

As of 2012 the ETS has included companies that operate air transport in the EU. This means that all international flights that arrive or depart from an airport inside of the European Union are part of the ETS. Consequently all airlines will receive allowances covering a certain level of emissions from their flights per year. At the end of the year airlines must surrender a number of allowances equal to their actual emissions in that year. Like other industries the airlines will be able to sell allowances if they have reduced emissions or purchase allowances if they have failed to keep within the allocated allowances.

The reason air travel has been included in the ETS is the high level of emissions created by aircraft. The Intergovernmental Panel on Climate Change (IPCC), a scientific intergovernmental body established in 1988 by the UN, has estimated that aviation is currently responsible for around 3.5 percent of anthropogenic climate change. The IPCC estimates that the scenarios for 2050 will be between 5 and 15 percent.

Although the ETS did cover US airlines, in July 2011, the US House and Transportation Infrastructure Committee made its opposition to the ETS clear, explaining it has no intention of participating in this program. The US airlines fought the case in the European Court of Justice, but did not prevail. The court affirmed that the ETS does not constitute a tax, fee or charge on fuel, which could be in breach of the EU-US Air Transport Agreement.

From 2012, overall emissions of the aviation industry were capped initially at 97 percent of 2005 emissions levels, and from 2013 onwards at 95 percent. All airlines flying to and from the EU will have to surrender one allowance for every ton of carbon dioxide (CO2) emitted on a flight to and from Europe or on a domestic European flight. The ETS could include 4,000 passenger and cargo airlines with allowances to trade or purchase, although most will not reach the annual emissions threshold. The ETS will exempt airlines operating either fewer than 243 flights per period for three consecutive four month periods or flights with total annual emissions lower than 10 000 tons of CO2 per year.

The cost of the ETS for airlines could be immense. The International Air Transport Association (IATA), has estimated that paying for emissions will cost the industry about $1.2 billion in 2013, increasing to as much as $3.76 billion in 2020. So far over 40 nations have complained to the EU about the ETS scheme and some, including China and India, have instructed their nation’s airlines not to participate in the scheme.

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