The other major climate issue is how to raise sufficient climate finance. The Paris agreement commits developed countries to raise at least US$100 billion a year to finance developing countries’ transition to clean growth. That target will be even harder to reach thanks to Trump, and EU member states should be looking at what is the most effective and fairest way to raise the needed cash.
Putting the EU ETS to work
Over the next few months, European decision-makers can take steps to solving both of these issues. The aviation provisions in Europe’s emissions trading system are currently being amended in response to last year’s deal to establish a global offsetting scheme from 2021 onwards. That deal, known as CORSIA (the Carbon Offsetting and Reduction Scheme for International Aviation) has many unknowns and uncertainties. And we’ve been very vocal on its shortcomings.
A legislative response to CORSIA is needed as otherwise the aviation ETS would return to covering all flights to and from Europe. (Since a mooted trade war in 2012, the scope was reduced to just flights within Europe.) We’d have no problem with it remaining ‘full scope’ – it would be an important form of pre-2020 ambition, and would substantially increase the emissions coverage of the measure. However the political consensus is that it would upset efforts the finalise the CORSIA.
Yet this amendment also offers an opportunity to improve the environmental effectiveness of the ETS, and it’s an opportunity decisionmakers should grasp. One way to do this is to look at the revenue that can be raised through auctioning allowances to the aviation sector.
One of the peculiarities of the aviation sector is that it pays zero tax on its fuel (and is generally exempt from VAT). This is the result of the air service agreements (essentially trade deals for the sector) which prohibit the imposition of tax on fuel sold for international flights. This means that the most carbon-intensive mode of transport, which is used most often by the wealthiest section of society, receives a massive tax exemption calculated at €60 billion a year on a global level.
The ETS is one way to recoup this lost revenue. As the aviation sector grows, it must purchase allowances to cover its emissions. Normally this would mean revenue for member states which auction these allowances. However, under the current system, airlines receive 85% of these allowances for free.
The ETS calculator
Now that this legislation is being reviewed, we have an opportunity to change this. By increasing the share of auctioning from 15% to 100%, we can raise an average of €1 billion each year from the sector over the period 2021-2030. A member state such as Italy could raise an additional €100-€120 million a year over this period.
See below using our ETS calculator how different allowance prices and auctioning can raise different amounts of revenue. This can be used to fund research into clean technology or fund Europe’s climate finance commitments. Sustainable alternative fuels is an area where a lot of research is needed, and the aviation industry should pick up the bill for it.
Countries’ projected revenues from aviation under a reformed ETS, 2021-2030:
As you can see from the tool, this ETS cost is minor compared to a scenario where the fuel tax exemption was ended. For example, if Italy imposed 33c a litre tax on kerosene, as envisaged in the Energy Taxation Directive, it would raise €871 million to €1 billion a year. Or between €1.2 billion and €1.4 billion if the average fuel tax levied in petrol for road transport (48c a litre) was applied to aviation.
The EU ETS can function as an effective carbon pricing mechanism, raising much needed revenue from a sector which is well able to pay. MEPs and member states should grasp this opportunity.