1. Giving wings to emission trading Inclusion of aviation under the EU ETS: Design and Impacts Ron Wit, ECCP II, Brussels 24th October 2005

2. Overview of talk Objectives of study Design Key design elements Pros and cons of elements Selection of policy options Impacts Impacts on ticket prices Environmental impacts Economic impacts Marginal impact on EU ETS Overall conclusion

3. Objectives of study Overarching objective: –To develop concepts for amending Directive 2003/87/EC to address the full climate change impact of aviation through emission trading Specific goals: –How to address non-CO 2 climate effects? –Design viable systems Geographical scope Allocation and surrendering of allowances Monitoring, reporting verification, etc. –Impact analysis

4. Design: key elements Coverage of climate impacts Geographical scope Trading entity Decision on allocation rules Interplay with Kyoto Protocol Allocation method Monitoring method >> choices within each key design element

5. Coverage of climate impacts (1) CO 2 and non- CO 2 climate impacts from aviation Overall radiative forcing is 2 to 4 times larger than CO 2 alone IPCC, 1999

6. Coverage of climate impacts (2) Scenario 1: CO 2 x multiplier (factor 2) GWP and RFI not a feasible multiplier, but multiplier based on GTP may be feasible less efficient: no incentives to reduce non-CO 2 impacts Scenario 2: effect-by-effect Not feasible (yet) to estimate impacts on individual flight level Scenario 3: CO 2 only, plus flanking instruments NO x LTO airport charge feasible: also reduces NO x cruise emissions Dont need to be compatible with EU ETS ATM Flight procedures: contrails

7. Scope: CO 2 emissions under various geographical scenarios (EU-ETS approx: 2200 Mt) CO 2 emissions in Mt in 2004 % of emissions in ETS 1) Intra-EU52 Mt2.4% 2) flights departing from EU Airports 130 Mt5.9% 3) EU airspace114 Mt5.2% 4) Intra-EU and to/from KP states 72 Mt3.3%

8. Trading entity? Aircraft operator most suitable Other options (fuel supplier, airport, ATM, manufacturer) have one or more decisive disadvantages

9. Decision on allocation rules Level to set total amount of allowances and rules to distribute allowances EU or member states? EU ETS: some degree of subsidiarity Two arguments for EU approach: –International aviation not included in EUs Burden Sharing agreement –Prevention of competitive distortions

10. Selection of policy options Design elementOption 1Option 2Option 3 Climate impactsCO 2 x multiplier CO 2 only plus flanking instrument ScopeIntra-EUDeparting from EU EU airspace Interplay KPBuy above baseline Unrestricted trading (AAUs borrowed) Gateway Allocation methodbaselineBench- marking auctioning

11. Impact assessment Assumptions: –Emissions 2008 historic baseline –Results for the year 2012 –Emissions growth 4% per annum –permit price of 10 to 30 euro/tonne CO 2 –Multiplier of 2 (option 1 only)

12. Impact on ticket prices in 2012 Return flight and 10 to 30 euro/tonne CO 2 (lf=70%) Option 1 Intra-EU and multiplier Option 2 100% departing flights Option 3 EU airspace/ auctioning Short haul0.4 – 9.20.2 – 4,61.5 – 4.6 Medium haul 0.9 – 180.4 – 9.03.0 – 9.0 Long haul01.0 – 19.82.3 – 6.9

13. CO 2 reduction in 2012 compared to BaU emissions in 2012 (permit price: 30 t/CO 2 ) Option 1 Intra EU Option 2 all departures Option 3 EU airspace BaU emissions in 201271 Mt178.5 Mt156.5 Mt BaU emissions in 200860.7 Mt152.6 Mt133.8 Mt Total reduction, of which: 20 Mt25.9 Mt22.7 Mt Reduced within aviation sector Purchased from other sectors 0.7 Mt 19,3 Mt 3.2 Mt 22.7 Mt 5.6 Mt 17.1 Mt

14. Potential trade-offs of CO 2 only regime? -Overall NO x emissions will probably not increase -Contrails may increase due to cooler exhaust

15. Economic impacts All carriers irrespective of nationality and operator are subject to the same scheme Decrease in growth by 0.2 to 1.3% (option 1), 0.4 to 2.1% (option 2) and 1.4% (option 3), (permit price 30 per t/CO 2 ) Therefore no significant impact on EU carriers economies of scale However: non EU carriers can more easy fly most efficient (=new) aircraft on EU routes Auction revenues: 1.3 to 4 billion euro (based on 2008 emissions and a permit price of 10 to 30 euro)

16. -Aviation would buy about 1% of allowances under the present EU ETS -This percentage would be lower in case JI and CDM markets are taken into account -In the short term no significant rise in the allowance price -Long term impacts need further research Marginal impact on EU ETS

17. Overall Conclusion Inclusion of aviation in the EU ETS is feasible Effectiveness and economic impacts depend on design choices Emission trading is a policy option that can be considered alongside emissions charges and fuel taxation to tackle the climate impact of aviation.

18. achterpagina CE Thank you! E-mail: wit@ce.nlwit@ce.nl Final report and a separate management summary can be downloaded from: WWW.CE.NL