Carbon Markets Take Flight (in Europe)

At a time when many are adopting the narrative that carbon markets are faltering, the European Union (EU) is aggressively pursuing the expansion of theirs to include aviation. One of only two mandatory greenhouse gas (GHG) cap-and-trade systems in the world, the EU Emissions Trading Scheme (ETS) plans to fold in a new sector beginning in January 2012. Our research shows reducing GHG emissions from aviation is critical if we are to mitigate the impacts of global climate change. Low-carbon fuel technology and other technologies for airplanes are advancing at a rapid clip, but we need a climate policy—either a price on carbon or something else—to get over the hump.

Although there are many opportunities to reduce aviation’s impact on global climate change available now, experts expect GHG emissions from aviation to grow by up to 300% by 2050 if left unchecked. Action in the areas of advanced biofuels, airplane navigation and landing systems, and engine and airframe efficiency could help considerably. However, because of market failures, many new technologies may not succeed without public policy.

The point of market-oriented regulations like the EU ETS is to help push that new technology into the market without deciding technological winners. That appears to be exactly what’s happening with aviation in Europe. Low-carbon fuel technology along with more advanced engine and aircraft designs are beginning to enter the market just as new regulations are about to take effect. For example, European airlines including KLM and Lufthansa are beginning to fuel some of their planes with advanced biofuel-petroleum blends.

The EU’s view is that equally pricing the carbon emitted from airplanes flying into and out of European airports is fair and reasonable. And to that end, countries like the United States and China could look at this as one more additional cost to doing business in Europe and support the plan. They don’t. Their concerns include the legality of the program, the fairness of European-specific action, and the economic impact on the aviation industry.

Both countries claim the move is illegal and an act of "extraterritorial jurisdiction" or ETJ. ETJ is an arcane legal term that essentially means a country is trying to exercise authority beyond its borders. U.S. airlines filed a lawsuit in 2009 with the European Court of Justice challenging the legality of the EU plan. The airlines are also concerned that their tight profit margins will be squeezed further, which could lead to even more fees. The International Air Transport Association estimated the program would increase the annual cost to Europe’s airline industry by 1 billion euros while their profit for 2011 is expected to be less than half that. It’s unclear how much of the additional cost could be passed on to consumers.

Though the U.S. government is not a party in the case, it also believes the program violates international treaties. The U.S. government has officially come out against including U.S. airlines in the EU plan saying the intentions are good, but the method is wrong. Since aviation is a global industry and climate change is a worldwide problem, the U.S. argued it’s sensible to want an international agreement instead of a patchwork solution that may be unfair. The International Civil Aviation Organization (ICAO) has been working on such an agreement for many years.

Meanwhile, China is taking a retaliatory approach by putting the brakes on a major deal with Airbus, blaming the current "political environment." Using a $4 billion deal as a bargaining chip is certainly an aggressive move by the Chinese. China also makes the claim that the EU program is illegal.

If the EU plan is legally upheld, the U.S. and China could meet its requirements if domestic measures are taken that result in equivalent GHG emission reductions. The purchase of fuel-efficient planes like Boeing’s 787 Dreamliner could reduce emissions and save airlines money in the long run. In addition, biofuels and other alternative fuels can act as a hedge against unstable oil prices, which have seen significant volatility in the last decade. In fact, seven U.S. airlines intend to start fueling some U.S.-based flights with biofuels. Finally, the U.S. military is leading the way in establishing a market for biofuels in aviation.

There are lots of reasons to want more low-carbon fuels and fuel-efficient technologies in the aviation marketplace. Along with hedging against oil price volatility and improving national security, mitigating global climate change is an important co-benefit of efforts to move off oil. Climate policy is a necessary step to help drive technological innovation and address these problems head on. The EU deserves credit for being a first-mover on this issue.

—Nick Nigro is a Solutions Fellow at the Pew Center on Global Climate Change. He is responsible for research, analysis, and communication of transportation technology and policy solutions for greenhouse gases. Opinions in this piece do not reflect the views of Txchnologist or General Electric. This commentary was first published in the July 2011 issue of Txchnologist and is used by permission.

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