12 June 2007

Aviation EmissionsETG submission to DEFRA

Presentation of Draft Submission

WG5/6 – 12 June 2007

12 June 2007

Aviation Sub GroupRepresentative Company

Charles Crosthwaite Eyre (Chairman) Eyre Consulting Ltd

Andy Kershaw British Airways

Danielle Chapman ThomsonFly

Stuart Jones My Travel

Sian Foster VirginAtlantic

Mike Smith Monarch

Howard Simpson Excel

Roger Wiltshire – Neal Weston BATA

Martyn Graham Society of British Aerospace Companies

Tim Atkinson/Dirk Forrister Natsource

Brian Hall Clifford Chance

Andreas Arvanitakis Point Carbon

Paulo Bello BHPBilliton

Dick Boarder Castle Cement

Bryan Bateman Confederation of Paper Industries

Gillian Simmonds CBI

Mark Johnson British Energy

Rob Walker/Matthew Croucher SMMT

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

3 Baseline 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 criteriaEnvironmental effectivenessEconomic efficiencyAdministrative efficiencyCompetitively neutralMarket 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

Policy options considered (1) Intra EU Flights (2) EU departures (3) All flights

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

• 2004-2006 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

Policy options considered (1) 1990 (2) 2004 - 2006 (3) 2008 (4) 2005 - 2007

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

Discussion based on EITHER baseline years 2004 – 2006 OR 2005 - 2007 (1) Slight increase (2) Straight line (3) Slight decrease

12 June 2007

Installation allocationsPolicy 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 allocationsPolicy 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

Policy options considered (1) Load based (Revenue tonne

kilometres)

(2) Capacity based (Available tonne-

kilometres)

(3) Technology based (e.g. engine

specification)

12 June 2007

Installation allocationsAuctioning

• 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

charles.eyre@eyreconsulting.co.uk

01264 356 900