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:
Learn more about the ETS calculator
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.
https://www.transportenvironment.org/newsroom/blog/see-how-reformed-aviation-ets-can-work-better
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ETS calculator
At present, airlines covered by the EU emissions trading system (ETS) receive 85% of their allowances for free. They are also, unlike road transport, exempt from fuel taxation. The EU is currently reforming the aviation provisions in its ETS. The tool below allows you to calculate how much additional revenue member states would earn from a reformed aviation EU ETS, and compares it to revenue member states would earn if they ended the fuel tax exemption.
The proposed ETS reforms include cutting the amount of free allowances received. Along with ending the fuel tax exemptions, these reforms would earn much needed revenue for member states and ensure this most carbon-intensive mode of transport pays its fair share.
Countries’ projected revenues from aviation under a reformed ETS, 2021-2030:
How the calculator works
Select options from the drop down menus on the left to see what revenues a reformed ETS and ending the fuel tax exemption could generate from 2021 to 2030.
Member State: All revenue raised from auctioning ETS allowances goes to member states. To date, member states have mostly used this revenue for climate and energy purpose. Selecting ‘EU28’ gives you the total revenue raised by all member states.
Linear Reduction Factor: Unlike the overall ETS, the cap for aviation emissions in the ETS does not decline. However the Commission has proposed that from 2021 this cap will decline at the same rate as the overall system. A declining cap will increase scarcity of allowances and may affect price. However under a 100% auctioning scenario, we forecast no change in total revenue raised under such a scenario, as airlines will have to buy all allowances under and over the cap.
Allowances to auction: At present, airlines receive 85% of allowances under the aviation cap for free. These below-the-cap allowances are called EUAAs (EU Aviation Allowances). When aviation emissions go above the cap, which they have done since the scheme was established, they must buy allowances from other sectors. These allowances are called EUAs (emissions unit allowances). They receive none of these ‘above the cap’ allowances for free.
The 85% free allowances provision was introduced when the EU ETS applied to all flights to and from Europe, and there was a potential risk of carbon leakage. With the ETS reduced to flights only within Europe, that risk is non-existent. Furthermore these free allowances give aviation an unfair advantage over other transport modes such as rail.
Auction price: The amount of revenue raised depends on the price of the allowances when they are auctioned. At present ETS allowances are trading at below €5 a unit, well below what is required to incentivise emission reductions. Future prices are hard to forecast, and will in part depend on reforms to the overall system which are yet to be agreed.
Fuel tax – price per litre: Aviation currently pays zero tax on fuel for flights. The Energy Taxation Directive permits member states to introduced such taxation, and suggests a minimum price of 33c a litre. However no member states have opted to introduce such a tax. Road users pay, on average, 48c a litre for their fuel.
Assumptions
We have used the historical average compound growth rate of the verified emissions from 2013 to 2016 as the basis for projected growth. With emissions growing from 53.5 Mt in 2013 to 61.4 Mt in 2016 in the EU, this is equivalent to 4.7% growth compounded annually, which is applied uniformly across all member states. To distribute projected emissions between member states, the distribution of EUAA and EUA auction earnings in 2015 are used as a proxy.
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