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EU ETS Newsletter from VERIFAVIA - December issue


This last newsletter of the year 2014 includes news and updates on key aspects of the EU ETS for aircraft operators:

  • Reminder of the new geographical scope of EU ETS
  • Status of the allocation of free aviation allowances
  • Update on the Global ICAO MBM
  • Update on EU carbon market reforms

Reminder of the new geographical scope of EU ETS

Following the entry into force of Regulation 421/2014 on 30 April 2014, I remind you that the geographical scope of the EU ETS for aviation is restricted to intra-European flights only during the 2013-2016 period. This means that only the following flights must be reported: 
  • flights operated between airports located in mainland EEA countries
  • flights operated between airports located in the same outermost region

Please note: 
  • flights between EEA mainland and outermost regions must not be reported
  • flights between EEA mainland and overseas territories must not be reported
  • flights between EEA and Switzerland must not be reported

Please also note that the 10,000 tCO2 threshold for commercial operators does not change: all intra- and extra-European flights must be considered to determine whether an operator exceeds the threshold or not.

See the details of the new geographical scope of the EU ETS
> Read the latest UK Environment Agency newsletter
More information on Regulation 421/2014

Status of the allocation of free aviation allowances

Member States have published the amount of free aviation allowances (EUAA) that will be allocated to each operator during the 2013-2016 period following the entry into force of Regulation 421/2014 and the reduction of the geographical scope to intra-European flights.

Check the amount of free allowances {company} will receive

Operators that do not appear on the list may be considered as new entrants into the EU ETS and may be eligible for free aviation allowances from the special reserve set aside for new entrants and fast-growing operators. The deadline for the submission of a 2014 TKM report and an application to the special reserve is 30 June 2015.

More information on the special reserve

The free aviation allowances due for the 2013 monitoring period will be credited to the operator's registry account shortly. The free aviation allowances due for the 2014 monitoring period will be credited in February 2015. The deadline for the surrendering of allowances for the 2013 and 2014 periods through the Union registry is 30 April 2015.

Update on the Global ICAO MBM

Since the ICAO 38th general assembly in October 2013, several working groups have been established to design a Global Market-Based Measure (GMBM) for international aviation:
  • the Environmental Advisory Group (EAG) whose task is to design the basic principles and framework of the GMBM
  • CAEP GMTF sub-group on MRV whose task is to define the rules of the future global Monitoring, Reporting and Verification system for aviation
  • CAEP GMTF sub-group on quality of offsets whose task is to define the rules and eligibility criteria of the carbon offsets

According to proposals, the GMBM would be a mandatory offsetting scheme without revenue generation. Starting from 2020, aircraft operators captured by the GMBM could have to offset an amount of carbon emissions derived from a formula that would take into account not only the difference between their annual emissions and their historical emissions calculated over the 2018-2020 period but also the sectoral growth of aviation as a whole. Only carbon offsets that respect the specified criteria would be eligible.

As with the EU ETS, aircraft below 5.7 MTOW and aircraft operators emitting less than 10,000 tCO2 could be exempt. There would be provisions for new entrants, fast-growing operators and early movers. In order to take into account the Special Circumstances and Respective Capabilities (SCRC) of developing states, special route-based might be introduced (such as route-based exemptions or a gradual phase-in route-based approach).

Read more from GreenAir Online 1
Read more from GreenAir Online 2

Update on EU carbon market reforms

The EU ETS has seen some material reforms with more on the way.  Politicians want to see the carbon price in double figures, either because they want carbon pricing to support certain technologies or because governments are becoming dependent on carbon auction revenues. The European Commission's market reform package consists of two elements:

1. Backloading – This measure, passed into law in February 2014 and implemented from March 2014, removes 900Mt of EU Allowances (EUAs) from government auctions, 400Mt in 2014, 300Mt in 2015 and 200Mt in 2016. It is envisaged that all 900Mt are put back in the market in 2019-20. This leaves mainly the utilities undersupplied by the auctions and looking for allowances from other sources. The gap will be filled by sales of historically accumulated surplus, mainly held by industrials, and switching of international offsets to release EUAs. The carbon trading community expects sellers will increasingly demand a premium as the available volume declines especially as most industrials become short themselves (for the first time) over phase 3 and are keen to ‘bank’ what they have for their own use. The carbon trading community estimates that the reform could boost Europe's carbon price above €10/t in 2015. It has already caused prices to rise by around €2.00 in 2014 (current price €7.02).

2. The Market Stability Reserve (MSR) is designed to withdraw the EU ETS’s accumulated surplus (largely caused by the financial crisis and the CER use) and to tackle future shocks by automatically reducing auction supply from 2021, according to predefined rules. As things stand the proposal is likely to prevent the 900Mt of backloaded volume (described above) returning in 2019-20 AND there is pressure from many member states to start withdrawing 100Mt from as early as 2017 (Germany, the UK, France, Italy etc.). Should this happen prices around €20/t are expected as early as 2020 and even higher over Phase IV (2021-28).

In the coming months lawmakers are likely to agree on the final carbon market reforms. Firms will likely develop strategies to maximise the value of their allocation and reduce the risk of exposure to cost increases.

Bloomberg New Energy Finance analysis shows the aviation sector is fully exposed to these developments despite its access to special aviation allowances (EUAAs). As a whole airlines are underallocated and will increasingly have to buy regular allowances (EUAs). The carbon trading community therefore expects the small discount of EUAAs to EUAs to narrow from the current €0.23/t to near-parity.

Read the latest Redshaw Weekly Market Update
Visit the Vertis Environmental Finance website
Read Bloomberg New Energy Finance

Please contact us for any questions you may have on this newsletter or other ETS related issue.

The Verifavia team wishes you happy holidays! Back to all Verifavia News