Aviation and climate change Commission activities and policy statements relating to the use of economic instruments Niels Ladefoged DG Environment, European Commission December 2004

Overview The challenge The challenge Major Commission policy statements Major Commission policy statements Key Commission studies Key Commission studies The possible control options The possible control options –Taxes or charges –Emissions trading Next steps Next steps

Aircraft emissions have grown rapidly… GHG emissions from international aviation reported by Annex I Parties to the UNFCCC: + 48 % from 1990 to % from 1990 to 2000 ~ 1.2 % of total national emissions ~ 1.2 % of total national emissions Note: Note: –Total radiative forcing of aviation higher than that of CO2 alone –Only comprise reported emissions of Annex I countries (e.g. not Thailand, Brazil, China)

..and air traffic is forecast to continue growing According to ICAO analysis presented in February 2004, the world passenger aircraft fleet could double by an increase from in 2002 to roughly aircraft in “Global air freight will average 5.6% growth between 2003 and 2008” (MergeGlobal, Inc. Global Freighter Capacity & Fleet Model) "World air cargo traffic will expand at an average annual rate of 6.2% for the next two decades, tripling over current traffic levels." (Boeing forecast) "World air cargo traffic will expand at an average annual rate of 6.2% for the next two decades, tripling over current traffic levels." (Boeing forecast) “With respect to climate change (CO2-equivalents) air transport is dominating the EU-plus outbound and inbound tourism transport impact with 72% […] The general trend in tourism towards more frequent, less long and further away trips has a strong impact on transport demand. [… ]Cheap air transport leads to a combined mode-destination shift which very strongly influences the environmental impact.” (Feasibility and preparatory study regarding a Multi-stakeholder European Targeted Action for Sustainable Tourism & Transport, DG Enterprise) “With respect to climate change (CO2-equivalents) air transport is dominating the EU-plus outbound and inbound tourism transport impact with 72% […] The general trend in tourism towards more frequent, less long and further away trips has a strong impact on transport demand. [… ]Cheap air transport leads to a combined mode-destination shift which very strongly influences the environmental impact.” (Feasibility and preparatory study regarding a Multi-stakeholder European Targeted Action for Sustainable Tourism & Transport, DG Enterprise)

Major Commission policy statements of relevance COM(96) Report under Directive 92/81/EEC… COM(96) Report under Directive 92/81/EEC… COM(1997) 30 - Proposal for a Directive restructuring the Taxation of Energy Products COM(1997) 30 - Proposal for a Directive restructuring the Taxation of Energy Products COM(1998) White Paper on Fair Payment for Infrastr. Use... COM(1998) White Paper on Fair Payment for Infrastr. Use... COM(1999) Air Transport and the Environment COM(1999) Air Transport and the Environment COM(2000) Taxation of Aircraft Fuel COM(2000) Taxation of Aircraft Fuel COM(2000)821 - Community objectives for 33rd ICAO GA COM(2000)821 - Community objectives for 33rd ICAO GA COM(2001) 31 - Proposal for the 6th Community Environment Action Programme (6EAP) COM(2001) 31 - Proposal for the 6th Community Environment Action Programme (6EAP) COM(2001) White Paper on the Common Transport Policy COM(2001) White Paper on the Common Transport Policy COM(2004) 74 - A Community aviation policy towards its neighbours COM(2004) Financing the European Union SEC(2004) Impact of Int. Aviation on Climate Change – prep. For 35th ICAO Assembly

Key Commission studies Economic incentives to mitigate greenhouse gas emissions from air transport in Europe Economic incentives to mitigate greenhouse gas emissions from air transport in Europe Bibliographical data: R.C.N.Wit, J.M.W.Dings, P.Mendes de Leon, L.Thwaites, P.Peeters, D.Greenwood and R. Doganis. Bibliographical data: R.C.N.Wit, J.M.W.Dings, P.Mendes de Leon, L.Thwaites, P.Peeters, D.Greenwood and R. Doganis. Delft, CE, Publication number: Delft, CE, Publication number: Further information on this study is available from Mr. Ron Wit: Further information on this study is available from Mr. Ron Wit: Tel: / Tel: / The final report can be downloaded at: The final report can be downloaded at: Analysis of the taxation of aircraft fuel Analysis of the taxation of aircraft fuel Study VII/C/4-33/97 Study VII/C/4-33/97 Final report January 1999, prepared by a Consortium led by Resource analysis, Delft, The Netherlands (Tel: / Final report January 1999, prepared by a Consortium led by Resource analysis, Delft, The Netherlands (Tel: / On the basis of this study, the Commission adopted a Communication on taxation of aircraft fuel – COM (2000)110 – which can be found at On the basis of this study, the Commission adopted a Communication on taxation of aircraft fuel – COM (2000)110 – which can be found at M M M M

1999 Comm. on Aviation & Sustainable Development Proposed long term policy target: to achieve improvements to the environmental performance of air transport that outweigh the environmental impact of growth Proposed long term policy target: to achieve improvements to the environmental performance of air transport that outweigh the environmental impact of growth Noted this was very ambitious, especially for CO 2 emissions, without breakthrough developments in engine technologies Noted this was very ambitious, especially for CO 2 emissions, without breakthrough developments in engine technologies Recognised new approaches are required Recognised new approaches are required

Other reasons to consider market based instruments internalising external costs internalising external costs getting fairer treatment between sectors getting fairer treatment between sectors the internal market the internal market general transport and tax policies general transport and tax policies possibly helping finance the EU possibly helping finance the EU

Fuel/Emission Tax 1996 EC Report on imbalances from the exemption of international aviation from excise duty 1996 EC Report on imbalances from the exemption of international aviation from excise duty 1997 EU Council noted the Report & requested information on effects of introducing such taxation 1997 EU Council noted the Report & requested information on effects of introducing such taxation 1999 Analysis of Taxation of Aircraft Fuel by Resource Analysis et al published 1999 Analysis of Taxation of Aircraft Fuel by Resource Analysis et al published

Main Tax Options Studied Taxation Level 245 euros/1000 litres wef 1998 Taxation Level 245 euros/1000 litres wef 1998 Option A Option A All routes from EU Option B Option B Intra-EU routes/EU carriers only Intra-EU routes/EU carriers only

Tax - Results Option A Option A - more environmentally effective - more environmentally effective - less economic/competitive impact - less economic/competitive impact - more cost-effective - more cost-effective Option B Option B - immediately feasible legally - immediately feasible legally - but not really effective - but not really effective

Tax - Conclusion Confirmed commercial aviation fuel should be taxed as soon as the international legal situation allows such a tax to be levied on all carriers, including those from third countries. EU should pursue this in ICAO. Confirmed commercial aviation fuel should be taxed as soon as the international legal situation allows such a tax to be levied on all carriers, including those from third countries. EU should pursue this in ICAO. Recommended EU Member States should be able to tax fuel used for domestic flights and, by mutual agreement, fuel used on flights between such States. [Since given effect by Directive 2003/96/EC] Recommended EU Member States should be able to tax fuel used for domestic flights and, by mutual agreement, fuel used on flights between such States. [Since given effect by Directive 2003/96/EC] Differential en route charges based on environmental impact of aircraft should be pursued in addition or as an alternative meantime. Differential en route charges based on environmental impact of aircraft should be pursued in addition or as an alternative meantime.

Emissions Charges These could e.g. take the form of a levy added to the fare a levy added to the fare a levy based on distance flown/ environmental performance of the aircraft a levy based on distance flown/ environmental performance of the aircraft a levy associated with airport LTO charges a levy associated with airport LTO charges

The revenues These could fund environmental investments fund environmental investments (eg. in R&D, in new technologies) (eg. in R&D, in new technologies) fund compensatory measures fund compensatory measures (direct or indirect eg. carbon offset) (direct or indirect eg. carbon offset) be revenue neutral (ie. reward the better environmental performer at the expense of the worse) be revenue neutral (ie. reward the better environmental performer at the expense of the worse) be some combination of these be some combination of these

Options studied An environmental charge An environmental charge A Performance Standard Incentive (PSI) A Performance Standard Incentive (PSI)

Incentive Level Same for both options Same for both options Based on external costs of climate change Based on external costs of climate change Mid-range working values of 30 euros per tonne of CO 2 and 3.6 euros per kg of NOx Mid-range working values of 30 euros per tonne of CO 2 and 3.6 euros per kg of NOx Sensitivity analysis: low(10 euros and 1.2 euros respectively) and high (50 euros and 6 euros) Sensitivity analysis: low(10 euros and 1.2 euros respectively) and high (50 euros and 6 euros) Choice of level ultimately a political issue Choice of level ultimately a political issue

Environmental charge - impact Main effects would be reduced CO 2 emissions in EU airspace of reduced CO 2 emissions in EU airspace of 10 megatonnes (9%) in megatonnes (9%) in 2010 increased ticket prices of 3-5 euros for short flights and for long ones increased ticket prices of 3-5 euros for short flights and for long ones annual revenues 1-9 billion euros annual revenues 1-9 billion euros Revenues could either be - allocated to Member States, or - allocated to Member States, or - to an EU emission abatement fund - to an EU emission abatement fund

Revenue-neutral PSI - impact Reduced CO 2 emissions in EU airspace of Reduced CO 2 emissions in EU airspace of 6 megatonnes (5%) in megatonnes (5%) in 2010 Impact on ticket price would depend on the definition of the ‘performance standard’ Impact on ticket price would depend on the definition of the ‘performance standard’ No net financial burden on industry, though some segments would benefit at the expense of others No net financial burden on industry, though some segments would benefit at the expense of others

Other findings No significant economic distortions between airlines identified No significant economic distortions between airlines identified No legal obstacles provided the incentive No legal obstacles provided the incentive - has no fiscal aim - has no fiscal aim - is based on the ‘polluter pays’ principle - is based on the ‘polluter pays’ principle - is not directly linked to fuel consumption - is not directly linked to fuel consumption

Emissions trading Commission is now launching a study Commission is now launching a study Will examine the feasibility of including aviation in the EU ETS Will examine the feasibility of including aviation in the EU ETS Terms of Reference available Terms of Reference available Final report due 8 July 2005 Final report due 8 July 2005 If aviation were to be included it should be done in a way that doesn’t compromise the environmental integrity of the current scheme If aviation were to be included it should be done in a way that doesn’t compromise the environmental integrity of the current scheme

Implications for air service agreements Important to ensure that the ongoing reform of the EU’s external air transport relations does not undermine but support efforts to mitigate the sectors’ impact on the environment: Important to ensure that the ongoing reform of the EU’s external air transport relations does not undermine but support efforts to mitigate the sectors’ impact on the environment: –To allow for the taxation option created by Council Directive 96/2003/EC and to keep all options for market-based measures open to mitigate the climate impacts of international aviation, air services agreements between Member States and third countries should not contain provisions excluding the option of fuel taxation on flights operated by third country carriers between two points in the EU –In future negotiations on comprehensive Community agreements the services of the Commission are of the view that the Community should insist on preserving full flexibility as regards aviation fuel taxation.

Next steps The Commission may announce proposals to deal with the impact of aviation on climate change in If and when it does so and what it will consist of will depend on The Commission may announce proposals to deal with the impact of aviation on climate change in If and when it does so and what it will consist of will depend on –The outcome of the study on aviation and EU emissions trading –The relative merits of the different options –How the new Commission sees this