12 June 2007 Aviation Emissions ETG submission to DEFRA Presentation of Draft Submission WG5/6 – 12 June 2007

12 June 2007 Aviation Sub Group RepresentativeCompany Charles Crosthwaite Eyre (Chairman)Eyre Consulting Ltd Andy KershawBritish Airways Danielle ChapmanThomsonFly Stuart JonesMy Travel Sian FosterVirginAtlantic Mike SmithMonarch Howard SimpsonExcel Roger Wiltshire – Neal WestonBATA Martyn GrahamSociety of British Aerospace Companies Tim Atkinson/Dirk ForristerNatsource Brian HallClifford Chance Andreas ArvanitakisPoint Carbon Paulo BelloBHPBilliton Dick BoarderCastle Cement Bryan BatemanConfederation of Paper Industries Gillian SimmondsCBI Mark JohnsonBritish Energy Rob Walker/Matthew CroucherSMMT Aviation Advisory Incumbents

12 June 2007 Terms of Reference 1.Implications of an EU versus a national level approach 2.Establishing the cap –Coverage –Exclusions –Start date –Baseline reference years –Cap setting 3Baseline methodology –Installation allocation options –The role of auctioning 4 Implications of introducing aviation as a major new (Non Kyoto) sector into ETS Phase 2 and Phase 3

12 June 2007 Criteria and issues Evaluation criteria Environmental effectiveness Economic efficiency Administrative efficiency Competitively neutral Market accessibility Impact on incumbent members Issues –The combination and interaction of alternative policy options –Selection of policy options for Phase 2 and 3 –Aviation sub-sector structure

12 June 2007 EU versus a national level approach Unanimous agreement - harmonised and administered at an EU level on: –setting caps –installation allocations –both Phase 2 and Phase 3. Minimises the potential for national variation and competitive distortions In line with EU ETS policy trends in other sectors for Phase 3 1

12 June 2007 Establishing the cap Coverage Important competitive impacts however the scheme is designed Phase 2 – agreed - limit scheme to intra EU only (1) to: –reduce uncertainty and administrative complexity –reduce impact and uncertainty on incumbent sectors Phase 3 – consider broader inclusion reflecting post Kyoto policy framework 1

12 June 2007 Establishing the cap Exclusions –Include all commercial air traffic –Very limited exclusions allowed –Address regional issues via relevant policies Start date –Aviation sector – agreed early Phase 2 start (2010 or 2011) –Incumbents – prefer start in Phase 3 to avoid uncertainty and potential market volatility

12 June 2007 Establishing the cap Baseline reference years 1990 rejected due to sector growth, structural changes, data quality and availability 2008 rejected – potential for gaming, impact on market/incumbents of continued uncertainty preferred by incumbents – transparency of data; multiple years; close to start date 2005 – 2007 preferred by aviation – most recent emissions data; limited (if any) potential for gaming; multiple years

12 June 2007 Establishing the cap PHASE 2 sector cap setting All options are a reduction to BAU but (3) delivers greatest environmental benefit Rules for aviation in Phase 2 should follow other sectors Phase 2 – contentious areas: –Acceptable level of “effort” –Ability of aviation to pass through opportunity costs –Ability of aviation sector to pass through marginal compliance costs Competitive impacts between regulated/non regulated airlines and aviation/incumbents increases with stringency PHASE 3 – aviation should be treated as per incumbents

12 June 2007 Installation allocations Policy option: Grandfathering Though administratively efficient, rejected due to: –Potential for gaming if future years included –Early action not rewarded –Sector structural and operational changes since the benchmark period would not be reflected, reducing economic efficiency –Longer term administrative drawback - Phase 3 is unlikely to be grandfathering –Grandfathering is not well suited to sectors with dynamic growth and structural change such as aviation

12 June 2007 Installation allocations Policy option - Benchmarking Benchmarking is the preferred allocation methodology No agreement on metric due to significantly different impacts across aviation sub-sectors. Three policy options reviewed: Aviation sector agreement on following policy design criteria: –Incentivise CO2 reduction –Not discriminate/ favour operator or business model –Reflect CO2 emitted by aircraft operators –Administratively simple and sustainable –Reflect recent investment Recommend additional work on competitive and distributional impacts

12 June 2007 Installation allocations Auctioning Propose single harmonised EU approach to avoid competitive impacts Level of auctioning –Phase 2 - auction levels as per incumbent equivalent sectors (economic/competitive impacts); higher auction frequency –Phase 3 – Post Kyoto - reflect treatment of other sectors Use of revenues –Impact on sector investment capacity depends on ability to pass through costs –Revenues raised should be used to improve environmental improvements –Revenue as general taxation is environmentally ineffective

12 June 2007 Implications of a major new (non Kyoto) sector Open or closed EU ETS system –Phase 2 – agreed mechanism is needed to protect EU Kyoto environmental commitment –Phase 3 – Post Kyoto framework will determine but aviation objective is full integration Access to project mechanisms –Phase 2 and 3 aviation proposes full access to Kyoto mechanisms Incumbents concern at Phase 2 impact –Rules on supplementarity as per other sectors reflect economic impacts level of effort

12 June 2007 Feedback and comments to draft