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ETS and the airlines: the EU’s looming enforcement nightmare

8th November, 2012

The framers of the EU’s Directive containing its Emissions Trading System (ETS) for aviation were well aware it would generate controversy. It has.

Almost every major nation has vociferously opposed it; even Russia, China and the US are for once wholeheartedly united in their opposition. China and India have banned their airlines from participating in the ETS and similar legislation has passed both houses in the USA. A 26 country “Coalition of the Unwilling” has formally agreed a series of retaliatory measures should EU states impose sanctions for non-compliance. The outcome could be bloody and very costly to airlines and economies alike, the last thing the industry needs at this time.

The real crunch comes when enforcement of the ETS is attempted. Individual EU member states must be the ones to fine and even, as directed by the Commission, suspend services by foreign airlines. This means each EU state and its airlines risks being picked off by retaliation from the offending country.

The first of a two part report, this article reviews the practical implications in implementing the EU's penalties for non-compliance with its controversial ETS rules. Part II will look at the ironies of the EU's focus on following the tabloid herd, while failing to get its own house in order.

Considered unilateral and discriminatory by many foreign governments and airlines alike, the EU’s controversial ETS is shaping to prove a massive headache for member governments once it comes to applying sanctions for non-compliance.

But, in Apr-2012, Connie Hedegaard, the EU’s climate action commissioner, came out fighting: “Why all the fuss about aviation? Why has Europe passed its own laws to make airlines reduce their CO2 emissions? And why don't we have international rules for an international sector? It’s right to ask these questions.”

The answers though may be less palatable all round, once foreign states have their right of reply.

The UK is in the frontline to impose ETS penalties – and for probable retaliation

With its careless attitude towards aviation, the UK is poised to become the frontline as resistance to the EU ETS consolidates.

The way the non-compliance punishment system works is that responsibility for enforcement against individual airlines falls on the country where the particular airline has the largest number of services. For many major airlines, that means the UK.

But if the UK government is silly enough to go ahead full steam on its own, it could quickly find its own airports and airlines seriously isolated as the implementation – inevitably – provokes retaliation by disgruntled foreign governments.

As the months pass, the Apr-2013 deadline for full punitive action grows closer.

There is no shortage of recalcitrant foreign governments, so there is likely to be mounting excitement as the months pass. The EU has steadfastly (well, most of the time) maintained that it will not give an inch. But there are other immovable objects about to come into contact with that rock-like posture.

The issue is not so much about the need to reduce emissions. There are few airlines or governments who do not support this goal. The fact is that most governments consider the ETS an unacceptable unilateral imposition of EU dogma. This transcends merely the payment of emissions charges; the ETS raises dangerous issues of nationalist pride, more technically described as sovereignty.

Those are fertile breeding grounds for intransigence and conflict.

A recent paper from a leading aviation law professor at prestigious Leiden University[1] has reviewed the merits of the EU’s Directive and the mechanics and feasibility of the possible enforcement provisions where airlines fail to comply.

The paper concludes that the “legal foundations of this Directive are made on thin ice” and, if it does infringe international law, “it is difficult to see how it can be enforced.” To the extent that the Directive is perceived to infringe the rights of non-EU states, then “those non-EU States may be tempted to enforce their rights in order to remedy the perceived injustice.”

From the way things look at the moment, that temptation may become irresistible. As Professor Pablo Mendes De Leon, the author of the paper, observes, “the number and intensity of the reactions (by the Coalition of the Unwilling) are unprecedented in the history of international civil aviation.” No mere obfuscation is likely to provide a way out of this head-on collision.

ETS day is 01-Apr-2013. Who will be the April Fools?

The gloves will really come off after April Fools Day 2013, when all airlines are required to submit their final emission certificates and pay up – or else.

In the meantime, there are several monitoring milestones the airlines are expected to comply with.

In reality the process is already under way. As the first step, starting in Jan-2012, all airlines operating in EU airspace have been required to submit data on their carbon emissions occurring since the beginning of 2011. By mid-2012, there had been “systematic non-reporting” of emissions by 10 airlines based in India and China, according to the European Commission’s website on 15-May-2012. There is little likelihood that this will have changed (although things have gone quiet in the meantime).

This followed a specific announcement to the Commission by eight Chinese and two Indian airlines that they refused “to submit their traffic data to the authorities of their administering States, upon which the EU Commission has given them a leniency period until 15-Jun-2012; if not the EU Commission announced that enforcement actions would be started.”[2].

Enforcement actions may have been “started”, but so far it has only been talk.

Altogether some 26 countries, including most of the EU’s main aviation partners, have openly opposed the ETS’ imposition, some more strongly than others. But the common message is that “we will not comply”.

The UK’s regulations are the most strenuous, ready to punish all 'offenders'

The EU’s Directive requires member states to introduce legislation with ‘effective, proportionate and dissuasive measures’[3] for recalcitrant states.

As Professor De Leon notes, “the UK…has to monitor, verify and supervise by far the largest number of operators.”

And it is the UK which ”has enacted the most stringent, detailed and schematic measures” to force unwilling airlines to comply. The following summary is adapted from his paper.

The UK’s Punishment Timetable

Required action

Sanction

A. Failure to (re-) submit an application for a benchmarking plan

Before 1.1.12:
GBP500 + GBP50 for each day following the service of a notice (max. GBP4,500)
On/after 1.1.12:
GBP1500 + GBP150 following service of a notice (max. GBP13,500)

B. Failure to monitor aviation emissions

Before 1.1.12:
GBP500 + GBP50 for each day following service of a notice (max. GBP4,500)
On/after 1.1.12:
GBP1,500 + GBP150 following the service of a notice (max. GBP13,500)

C. Failure to report aviation emissions

Before 1.1.12:
GBP1,250 + GBP125 for each day following the service of a notice (max. GBP11,250)
On/after 1.1.12:
GPB3, 7500 and GBP375 following the service of a notice (max. GBP33,750)

D. Making false or misleading statements

GBP1,000

E. Failure to comply with emissions plan conditions

Before 1.1.12:
GBP500 + GBP 50 for each day following the service of a notice (max. GBP4,500)
On/after 1.1.12:
GBP1500 + GBP150 following service of a notice (max. GBP13,500)

F. Failure to surrender sufficient allowances

GBP100

G. Failure to comply with information notices

GBP 1500 and GBP 150 following the service of a notice (max. GBP 13,500)

Then, as there is no practical international enforcement process, there is a further step in case of non-compliance: “Publication of names of operators; Detention of aircraft;
 and Operating bans”. This is in response to the Commission’s name and shame requirements under the Directive.

Although it would appear that there are already sufficient grounds for the UK to have taken action against some states already, this has apparently not happened. Nor, seemingly, has the EU Commission taken steps to force the UK to act.

Will the EU be forced to back down?  Can it afford not to?

Despite protestations, there is obviously an awareness in the corridors of bureaucracy in Brussels that head-on confrontation is unacceptable – to the Union and to its constituent members.

The US, Europe’s major trading partner, is adamant in its opposition. Both houses of Congress are, for once, united in that respect too. Following passage through the US Senate in Sep-2012 of bill S. 1956, the “European Union Emissions Trading Scheme Prohibition Act,” the process of reconciling the exact wording with the earlier House of Representatives bill is now under way. Both bills require the Secretary of Transportation to prevent all US airlines (including business jet operators), from participating in the ETS. They also encourage the search for a solution through ICAO.

And with varying legal or administrative means, the other government members of the Coalition of the Unwilling are each lining up with near-identical positions.

Each EU state will be in the firing line for retaliation

The weak link in the EU’s defences is that the crunch of the ETS implementation will of course not be borne by the EU itself, but by the national administrations which are duty bound to punish recalcitrant airlines – and indirectly, their governments[4]. So, whatever the Commission says or does, it will not have the last word, at least in the short term. If its member states fail to enforce against third parties, then the EU will have to punish its own members for non-compliance.

So, rather than forming an impenetrable barrier of nations, each member state is being set up to be isolated – and to suffer retaliation from very unhappy aviation partners. There is of course no way that these responses will be confined to air services – already China has threatened to boycott Airbus purchases[5] – although an obvious first step in case of unilateral suspension of service for non-compliance is to reciprocate and suspend service by the EU nation’s airlines.

Scenario: The German government fines Air China (Germany is responsible as the largest recipient of the carrier’s services[6]), and the Commission tries to terminate the Chinese flag carrier’s operating authority and detain its aircraft.

In retaliation, Lufthansa and all other German carriers are excluded from Chinese airspace!

Or, in the UK, as a similar process rolls out with Delta, United, US Airways, American Airlines and Air Canada (and perhaps their respective metal neutral codeshares on European airline partners), where will British Airways’ and Virgin Atlantic’s hearts lie?

Incensed foreign governments whose sovereignty is attacked in this way can hardly be expected to play by Marquis of Queensbury rules.[7] The gloves will quickly come off and any form of retaliation becomes possible – for example, boycotting European retail enterprises in the foreign country. There is no need to stop at the specific state which has acted against them either; it makes sense to retaliate against all EU states.

And the EU’s own international aviation policy goals are immediately at risk

For the EU too, there is a high level need to adopt a more conciliatory tone.

Despite Ms Hedegaard’s obdurate confidence about achievement of a solution, underneath the water this European duck’s legs are paddling furiously. There is simply too much at stake for European governments and their airlines to risk a confrontation with major air trading countries – especially not if it wishes to enhance those relations and gain further access. These are tough enough times for Europe’s airlines without a most unwelcome sideshow.

For example, according to the Commission’s report of a media conference held by Commission Vice President Siim Kallas on 27-Sep-2012 it is the Commission’s goal to gain better access to business opportunities for the EU aviation industry in new markets. He even published a timetable:

“20-21 Dec. 2012: EU transport ministers meeting to discuss the Commission's proposed external aviation policy package.

“By early 2013: Commission expects green light from EU member states to obtain mandates to start negotiations with foreign countries, including China, India, Russia and the Gulf states.”[8]

This – not coincidentally – reflects the surge of European traffic heading towards these destinations, as conditions at home promise to languish for some time to come. Yet most of these targets are the very same ones that have been most strident in their opposition to the ETS – and are promising to have their airlines fined and possibly impounded by the would-be partners in the EU. The discussions should be more interesting than usual.

Almost in the same breath, when confronted by questions at the announcement, Mr Kallas optimistically “denied.…that the running battle with China, India and the United States over the EU’s Emissions Trading System would harm long-term trade and business dealings, saying those issues are expected to be worked out within the International Civil Aviation Organisation (ICAO).”[9]

He and Ms Hedegaard may be having some long dinners to sort out these niceties.

Aircraft leasing companies – point and counterpoint

Once the juggernaut begins to roll, there is also a host of other industry player who become affected – and likely to respond accordingly.

According to industry sources, aircraft leasing companies which have aircraft placed with airlines that risk punitive action for non-compliance have advised their lessees that covenants may be breached, sparking default.

But this too raises a hall of mirrors. If the lessors place “defaulting” countries’ airlines at risk because of the prospect of an EU government impounding the aircraft, then will they need also to anticipate the threat of retaliation against the aircraft of the impounding EU government’s airlines?

The potential repercussive effects are surely too extensive to allow this chain to begin.

These ETS scenarios may be farcical – but it is neither funny nor easily resolved

Then, for example, there is the small matter of the hundreds of millions of dollars being collected by some airlines as part of the EU’s requirement. If the deadline for imposition of ETS charges is delayed, it will probably not be long before consumers or competition authorities, or both, become interested in what is happening with the money being collected from them under this heading. A detailed look at the various levels of added charges being made by foreign airlines flying into Europe do not always show a clear correlation with the EU’s requirements.

As the EU opens this Pandora’s box, what seemed initially to be a relatively simple confrontation between ideologies and states is becoming a tangled mess in which – even if compromise can be reached – innumerable issues will be raised in coming months.

The potential for conflict between EU states and third parties is obvious. Perhaps even more challenging in practice will be the problems raised internally, as the Commission attempts to pressure member states to suspend foreign airline operating rights – and punish them if they fail to do so. For example, the Commission does not have the legal authority to exclude a foreign airline from any member state's airspace, so must direct the states involved to take such action. That will be when things really start to get interesting.

It was reported recently that UK Prime Minister, David Cameron, had no knowledge of the aviation ETS issues. He does now. As other EU government leaders are awakened to the risks, the conflict will almost certainly become a matter for direct resolution at the highest EU levels.

There, anything is possible; especially while Mr Cameron is again prevaricating about the UK’s membership of the EU.



[1] “Enforcement of the EU ETS: The EU’s Convulsive Efforts to Export its Environmental Values”: Pablo Mendes DE LEON, Professor of Air and Space Law at Leiden University and President of the European Air Law Association (EALA); Air and Space Law, issue 4/5 of 37th year

[2] Mendes de Leon paper

[3] Article 16(1) of EU Directive 2003/87

[4] Judging by many responses to eg recent cargo price fixing cartel proceedings in several jurisdictions, a string of delaying legal/diplomatic responses can be expected too, as states claim sovereign immunity for their state-owned flag carriers.

[5] And, despite high level talks which appeared to avoid this outcome, many suppliers complain that they cannot get Chinese airline delivery date commitments for Airbus aircraft.

[6] As of Aug-2012, Air China has the most flights to Germany among Chinese carriers, with 56 services per week including from Beijing to Frankfurt, Munich and Dusseldorf and from Shanghai to Frankfurt.

[7] A code of rules accepted in boxing which restricts how actions must be limited

[8] “EU looks East for air travel growth opportunities.” EU website, Published 27-Sep-2012. Emphasis added

[9] “EU looks East for air travel growth opportunities; published 27 September 2012”

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