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Consultation Describes State Aid for Third EU Carbon Emissions Trading Period

by Prajakt Samant

The European Commission (EC) published in December 2011 a Consultation on the draft guidelines for targeting State Aid (Guidelines) in furtherance of the European Union (EU) Emission Trading Scheme (ETS) when the Third Trading Period begins in January 2013.  Interested parties have until January 31, 2012, to submit comments on the draft Guidelines before they are finalized.

Launched in 2005 to combat human-caused climate change by ratcheting down emissions of carbon dioxide, the ETS, as revised in 2008, allocates EU-wide emissions allowances for auction that can be used, banked or traded.  According to the Consultation, State Aid (as defined in the Treaty on the Functioning of the EU), can be directed to the following emission reduction activities:

  • Minimize Carbon Leakage — Carbon leakage occurs when emissions from a source within an EU Member State are reduced by migrating to a source outside of the EU where emission controls are less strict or non-existent.  State Aid can be directed to minimize the risk of leakage.
  • Efficient Power — State Aid can be used to make investments in highly efficient power plants, including facilities capable of capturing and sequestering greenhouse gas (GHG) emissions from power plants Efficiency is to be measured against a standard articulated in the Guidelines.
  • Allowance Grants in lieu of Auction — Member States will have the option to grant free (non-auctioned) allowances to electricity generators where the savings are invested in modernizing their operations through investments in clean technologies and in diversifying their energy mix and sources of supply.
  • Exempting Certain Emission Sources — According to the Consultation, State Aid can be used to exempt certain small emission sources, including hospitals, from the EU ETS, but not from other obligations to reduce GHG emissions.

The amount of State Aid awarded to each of these applications will be based either on a formula in the Guidelines or according to the application’s environmental contribution.  Awards are to be guided by the precept of European law that a sledgehammer should not be used to crack a nut, also known as the principle of proportionality.

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EU ETS to Cap Aviation Greenhouse Gas Emissions

by Prajakt Samant

The Court of Justice of the European Union (CJEU) ruled preliminarily that international aviation emissions can be regulated under the European Union (EU) Emissions Trading Scheme (ETS), which became effective on January 1, 2012.  The December 21, 2011, ruling in Case C-366/10 dates back to December 2009, when several U.S. airlines brought judicial review proceedings to enjoin the UK’s Department of Energy and Climate Change (DECC) from implementing its decision to extend the EU ETS to greenhouse gas (GHG) emissions from airplanes.

In May 2010, the High Court of England and Wales referred the issue to the CJEU, which was asked to rule on the lawfulness of the decision.  Agreeing with the opinion of the Advocate General of the CJEU, given in October 2011, the CJEU confirmed that the Aviation Emissions Directive did not infringe:

  • Customary international law, as EU regulators are entitled to permit air travel on the condition that operators comply with EU standards;
  • The Chicago Convention on International Civil Aviation, as the EU is not a party to it;
  • The Kyoto Protocol, as the EU is not required to pursue the limitation or reduction of GHG emissions from aviation fuels, but rather, could seek to meet GHG emissions targets as it wished; and
  • The Open Skies Air Transport Agreement that the EU and U.S. signed in 2007, as the uniform application of the EU ETS to all flights departing from EU airports is consistent with the agreement, which prohibits discriminatory treatment between U.S. and EU operators.

Airline carriers with flights passing through EU airports will therefore be required to buy emissions allowances, if they have not been doing so already.  Initially, airlines will only be required to pay for 15 percent of their emissions, with 85 percent covered by free allowance, but airlines will be fined if they exceed their allocated quota of allowances.  

The case will now return to the High Court for the completion of the judicial review.  The U.S., China and India have indicated that they may mount a challenge against the CJEU’s ruling.  In addition, certain airlines have already threatened to boycott the requirement, while others have suggested that they will pass on the costs to their passengers.  The increase in costs for airlines could lead to a competitive disadvantage for European airlines.

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