In defence of the EU ETS

In defence of the EU ETS ICAO and McGill IASL Worldwide Conference on Aviation Safety, Security and the Environment Richard Janda Martine De Serres Institute of Air & Space Law Faculty of Law McGill University September 16, 2007

Disclaimer The following is an optimistic dramatization. Unfortunately, none of the views expressed can be attributed to real actors with political clout.

We have a big problem

Make a confession

Do penance

Seek redemption

Contributed to putting a patient in the emergency room

Role in poisoning • Adding more poison all the time • But only 2% of what is being added • Have to poison the patient to do good things • Getting better all the time at poisoning less intensively

True confession • Actually, 2% of part of the poison (CO2) • But 3% of all poison (radiative forcing) • Actually, will be poisoning more because of projected growth • Will account for5% by 2050 • FASTEST GROWING CONTRIBUTOR

Another true confession Have been avoiding penance and seeking pity • Times have been hard • Don’t force me to do anything • Have others pay

But have had an epiphany

My friend, Chemical Industry • Resisted EU REACH • Registration, Evaluation, Authorisation and Restriction of Chemical substances • Now learning to apply it globally

Want to stop poisoning, though I can’t right away – give me 50 years • I realize that it is cheaper to do it now than later (invest 1% GDP to avoid 11% GDP loss) • Can imagine non-poisonous aircraft, but this is now science-fiction

Make me pay for my poisoning in the meantime • I will buy the right to poison from others who have cut down • Will embrace EU ETS • Will lobby to have an ETS everywhere • Over the nest two weeks will seek to have ICAO create a SARP consistent with the EU ETS to be applied by all Members

Giving up on voluntary measures • Voluntary measures will create competition distortions • Have experienced destructive competiton before

Let me introduce my friend…. • ICAO discourages environmental taxes • SARP on emissions is a light touch • ICAO has not taken any mandatory action pursuant to Kyoto Protocol mandate • ICAO has not welcomed “unilateral action” by EU

What’s the best solution? Taxes? • Low price elasticity of demand • Little political support for high taxes • Competition distortion unless internationally applied • ICAO recommends against

ETS: the best solution • ETS more dynamically efficient than tax • ETS self-adjusts to economic growth • A well-designed ETS may: • Create abatement incentive for other industries • Allow emission caps on all aviation GHG • Avoid many competition distortion effects

Design elements of an ETS • Auctioning most credits may dampen competition distortion effects • Downstream ETS that includes other GHG than merely CO2 will efficiently reduce all aviation emissions • Open ETS could finance reductions in other sectors, compensating for air travel growth • Large spatial scope and coverage will strengthen flexibility of an open ETS • Banking could promote early action and protect against price fluctuations

Overview of EU ETS • Each member state responsible for its reduction goal, and allocates as such • Minimum 95% of rights grandfathered b/w 2005-2007, 90% b/w 2008-2012 • Only CO2 covered for now • Downstream system. Only 5 major industries covered, with expansion underway • Unrestricted transactions (banking ok) • Monitoring and supervision through reports • Penalty for failure to purchase allowances

Shortcomings of EU ETS • Trading period (5 years) may be too short for adequate financial planning • More auctioning needed • Allowance price is too low to efficiently promote reductions; too many sellers => Need for emissions buyers

EU proposal to include aviation • EU in better position than ICAO to set up open ETS • Airlines are chosen participants • EU ETS would apply to • Domestic flights starting 2011 • International flights starting 2012 • Avoids competition distortion

EU proposal to include aviation (cont’d) • After 2012, amounts of allowances equal to average emissions b/w 2004-2006 • No double-counting: EU will negotiate with states having at least equivalent requirements => Invitation toward international ETS

Summary of our penance • EU ETS is the largest open ETS currently available • Global aviation regulation acknowledges that EU ETS should be built upon rather than opposed BUT… the global aviation industry has raised doubts about EU jurisdiction

Does the EU have jurisdiction? • Argument against: Art. 24 of Chicago Convention (customs duties) and Arts. 11 and 15 (non-discriminatory regulations and charges) Art. 1 (sovereignty) • ETS is not a customs duty • ETS is not a navigation charge • ETS applies in a non-discriminatory fashion as between EU and non-EU carriers • ETS accounts for the emissions attributable to aircraft movements with EU origin or destination: does not regulate movements originating and terminating outside the EU. Therefore is not extra-territorial • CO2 molecules do not respect territory

Toward redemption • Need to expand toward an international system • To avoid forum shopping • Avoid competition distortion on international scales • Efficiently reduce the climate impact of aviation

ICAO’s benchmark for success Create SARP on ETS: • Standard: design elements of ETS for aviation • Rules on allocating rights • Deciding on actors • Banking allowed • Accurately and transparently measuring emissions • Common and differentiated responsibility • Recommended practice: all Member States have an open ETS for efficient reductions A SARP is NOT voluntary

Ultimate redemption? Lowering demand until 0 footprint achieved vs.

In defence of the EU ETS