The new Aviation Emissions Amending Directive (2023) will introduce new rules and reporting requirements on the Emissions Trading System in the Aviation sector, with potential effects on airline operators that provide transport and logistics services from and to Cyprus.
Background
The EU Emissions Trading Scheme (the ETS), laid out in the EU ETS Directive of 2003, aimed to reduce the emissions of greenhouse gases through the implementation of a ‘cap and trade scheme’. This scheme set limits on the volumes of greenhouse gases (GHGs) that can be emitted in certain sectors. In 2008, the Aviation Emissions Directive (2008/101/EC) extended the EU ETS to include carbon dioxide emissions in the aviation sector, such a change having entered into force since 2012.
As part of the ETS, operators are allocated a number of ‘allowances’, which permit the right-holder to emit one ton of carbon dioxide, or the equivalent amount of other GHGs, perfluorocarbons and nitrous oxide. Operators who fall below their permitted emissions are able to ‘auction off’ their excess allowances to other operators. Operators who emit more than their allowance limits are subject to fines. This scheme also contemplates an annual gradual reduction of the total number of allowances, in an effort to reduce the total emissions across Europe. The EU ETS is divided into four phases which determine the rate at which the allowances will decrease and any further obligations that operators must undertake in order to remain compliant with the EU’s environmental goals. We are currently in the fourth phase, which runs from 2021-2030.
Against this background, a new amending Directive (EU 2023/958) which came into effect on 5 June 2023, has introduced changes to phase four of the EU ETS, which are applicable in the aviation sector and must be implemented by 31 December 2023. The changes reflect the EU’s new ambition to become carbon-neutral by 2050, and, as part of this, the ‘Fit for 55 Package’ aims to reduce emissions by 55% (against the threshold of their 1991 levels) by 2030.
The amendments introduced by the new EU ETS Directive in the Aviation sector
The changes introduced by the new EU ETS Directive in the Aviation sector related to a number of aspects of the ETS, including the allocation and auctioning of the total quantity of allowances, the monitoring, reporting and verification provisions and the adoption of a new way of offsetting and reduction of carbon emissions.
Changes to Allocation and Auctioning for Aviation
• The total quantity of allowances will be adjusted from 2024 onwards, in order to take into account routes that were not previously included and will now cover flights between EU States as well as those departing from EEA Airports to Switzerland and the UK.
• The proportion of aviation allowances that are distributed through auctioning will increase until 2026, at which point there will be no free allocation of allowances and they will be entirely distributed through the auction process.
• Aircraft operators will no longer have to apply for an allocation of aviation allowances to the competent authority in their administering Member State (as was required under Article 3e of the 2003 EU ETS Directive).
Changes to Monitoring, Reporting and Verification
• In accordance with Articles 14 and 15 of the EU ETS Directive 2003, Member States must ensure that aircraft operators monitor and report on their emissions annually, and that these reports are verified. Cyprus is, as of the last published statistics, responsible for 24 separate aircraft operators.
• The new directive (EU/2023/958) further requires that aircraft operators report on non-CO2 climate impacts of aviation, including the effects from water vapour, nitrous oxides, soot particles, etc.
The EU ETS and CORSIA
• The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) was developed by the ICAO and aims to reduce carbon emissions globally. This scheme sets a baseline level of CO2 emissions for the international aviation sector and requires any airline operators who exceed this limit to offset their emissions. The pilot phase of this program runs from 2021-2023 before becoming mandatory in 2027.
• In the 2023 Amendment (EU 2023/958), the EU has therefore taken steps to ensure that member states can participate both in the CORSIA voluntary pilot phase and the ETS. The ETS applies to flights operating between EEA states. CORSIA applies to flights between the EEA and ICAO Member States. EU-based aircraft operators can use international credits for flights to or from countries outside the EEA participating in CORSIA, though care needs to be taken to ensure that credits are not counted twice.
What these Changes mean for Aircraft operators
The new requirements are likely to result in increased operation costs for operators in the aviation sector, given the increased costs for compliance and reporting and payments for emission allowances. Moreover, airlines in Europe will likely face increased running costs because they must ensure that they are compliant with the new regulations, pay for emission allowances and potentially increase their expenditure on monitoring, reporting and verification teams, as well as on Research and Development in order to find more sustainable future sources for fuel. It is expected that at least a portion of these costs is likely to be passed on to the consumer and reflected in increased ticket prices, as budget airline companies operate on slim margins and therefore cannot afford to absorb the increased costs. For luxury airlines, ticket prices may not increase to the same extent, but the quality of the service may decrease as airline operators are forced to make cuts elsewhere.
Specifically, in regard to the island of Cyprus, these measures are likely to have a more pronounced impact on Cyprus’ transport system and Cyprus’ global logistics, as compared to the respective systems of countries connected to the main continent, given that both air and maritime transport are affected by the new amendments to the EU ETS Directive, and international travel by vehicle or train are not available as alternatives for operators in Cyprus.
There is no single strategy which can guarantee a reduction of emissions and there is large consensus that achieving net-zero carbon emissions by 2050 will require a coordinated effort from several industry players, particularly as demand for air travel is likely to increase, with an estimate of 16 million flights in Europe by 2050. As the costs associated with emissions are likely to increase steadily over time, firms will likely benefit from investing early in more sustainable aircrafts, research into the use of alternative sustainable aviation fuels (SAFs), and increasing the efficiency of their current practices in a number of ways, such as by using technology to determine more efficient routes, flight profiles and reducing the use of engines when taxiing.
The EU Commission is expected to continue to monitor the aviation metrics to ensure that EU-based airlines remain competitive in the global market and possibly take action to reduce the burdens on EU based airlines if, as a result of the new regulations, ticket prices rise to undesirable levels.
For more information, feel free to contact any member of our Transport & Logistics team or send your queries to [email protected].