Last week, the United States Senate Commerce Committee supported a bi-partisan proposal that would allow the Secretary of Transportation to prevent US airlines from complying with the EU-ETS. If approved in a forthcoming plenary vote in the US Senate, this would put the US directly at odds with the EU, although the Senate proposal also states that the US government should work at the international level to achieve a global solution to the challenge of rising emissions from aviation, something the EU very much supports.
The threat of fresh action in the US Congress (the House of Representatives already passed similar legislation in October 2011) comes against the backdrop of resistance to the EU legislation in other countries as well, most notably China and India. Indeed, whereas a number of non-EU countries (including the US) have so far used diplomacy to protest against the EU’s inclusion of third-countries’ airlines in the EU-ETS whilst their airlines themselves complied with EU reporting requirements, a number of Chinese and Indian airlines have not so far submitted their 2011 verified emission data as required by EU Law.
So far, the European Commission has held firm and for the moment our base-case scenario remains that unless and until there is an alternative global scheme in place (or other major countries make equivalent efforts of their own to those of the EU), the EU will continue with the currently mandated scope of inclusion of third countries’ airlines within the EU-ETS. Under our base-case scenario, the aviation sector faces a cumulative net shortfall of EUAs/CERs/ERUs of -385m out to 2020, against a cumulative surplus for the EU-ETS as a whole of +1,264m. However, given the continuing diplomatic and political pressure being applied to the EU by third countries, we here consider two hypothetical scenarios to see what the potential impact on our EU-ETS supply-demand balance would be of a change to the scope of coverage of aviation within the scheme.
The first scenario we look at is what the impact on the supply-demand balance in the EU-ETS might be if the EU excluded incoming flights to the EU from third countries from the scope of coverage. Under this scenario, we calculate a cumulative deficit for the aviation sector by 2020 of -291m, or 94m less than the -385m in our base case, and hence a notional overall EU-ETS cumulative surplus by 2020 of +1,358m compared with the +1,264m we currently have in our model.
The second scenario we look at is what the impact might be if the EU were to exclude both all incoming and all outgoing flights to and from third countries. Under this scenario, we calculate a cumulative deficit for the aviation sector by 2020 of -168m, or 217m less than the -385m in our base case, and hence a notional EU-ETS cumulative surplus by 2020 of +1,481m compared with the +1,264m we currently have in our model.
The politics and diplomacy around the inclusion of flights between the EU and third countries will likely continue for many months, with the moment of truth coming next 30 April 2013 when EU and non-EU airlines alike have for the first time to surrender EUAs and/or CERs/ERUs against their emissions. In the meantime, we think market attention will continue to focus on the outlook for changing the auctioning profile of Phase-3 EUAs, with news due in the autumn on the quantity of allowances that the Commission proposes to back-end load.