UN Aviation Regulator Seeks 2012 CO2 Deal, May Enlist World Bank

The International Civil Aviation Organization said it aims to strike a deal to create a global carbon market for the airline industry next year because Europe will have started its mandatory program.

“I’m under great pressure because of the European Union emissions trading system,” said Raymond Benjamin, secretary general of the United Nations-overseen regulator based in Montreal. The World Bank may help manage the proposed global greenhouse gas market for the world’s 50 biggest nations that may supersede the EU program around 2014 or 2015, Benjamin said yesterday in an interview in London.

The organization plans to present emission-reduction options, including for the new market, to ICAO’s 190 members as early as January, seeking agreement by the end of 2012 and ratification by September 2013, he said. Emissions from airlines, currently about 2 percent of the world total, may surge as the number of passenger flights almost doubles to 5 billion a year by 2020, according to the group’s own estimates.

“No one wants a commercial war,” Benjamin said. “For the moment, everybody is showing muscles” and some developing nations may retaliate against the EU’s imposition of carbon trading by cutting the bloc’s access to landing slots or imposing flight curfews, he said. “No country has formally announced retaliatory measures” and it’s unclear any will.

World Bank Role

Assuming it achieves agreement from the 36-member ICAO council next year, the organization will need to decide “who will collect the money and who will manage it,” Benjamin said. Under cap-and-trade programs a central regulator is responsible for setting emissions targets and then creating scarcity by handing out or selling fewer allowances than expected emissions. The World Bank would be one option for this job, ICAO said.

The package for agreement will probably also include increased use of biofuels, standards to cut aircraft fuel use and more efficient flight paths, Benjamin said.

“After a decade where nothing happened internationally, the reality is that the EU law finally makes ICAO move towards a global carbon market for aviation,” Connie Hedegaard, the EU’s climate action commissioner, said today in an e-mailed statement. “This is interesting news. I hope ICAO does not miss the opportunity this time.”

‘May Seek Leniency’

Achieving agreement in that time frame will be hazardous, even compared to the intense debate over the EU program, said Matthew Cowie, an analyst in London for Bloomberg New Energy Finance. “ICAO may be jumping out of the frying pan and into the fire,” he said today by e-mail.

Developing countries may want lenient treatment and there will likely be fights about how money from selling carbon allowances should be spent, he said.

The EU in September set benchmarks to calculate the distribution of free carbon-dioxide permits among domestic and international airlines when they join the bloc’s emissions- trading system next year.

Europe decided in 2008 that international aviation should become a part of its cap-and-trade program, the world’s largest, after airline discharges in Europe doubled over two decades. U.S. carriers including AMR Corp. (AMR)’s American Airlines and United Continental Holdings Inc. are challenging the carbon plan in court, arguing the EU exceeds its jurisdiction.

AMR yesterday filed for bankruptcy after failing to secure cost-cutting labor agreements and dropping from the world’s largest airline to No. 3 in the U.S.

‘Common But Differentiated’

Some nations do hold reservations about whether a global carbon market for the industry is the best solution, the ICAO chief said without being specific. “We have found a solution. We are saying no discrimination” between rich and poor nations.

The 1997 Kyoto Protocol and 2009’s Copenhagen Accord say that global greenhouse gases should be reduced under “common but differentiated responsibilities,” suggesting that the rich nations that produced most of the greenhouse gases in the atmosphere should cut first and fastest.

Under the 1944 Chicago Convention governing international air travel, all nations should be treated the same, Benjamin said. The proposed options for an industry carbon market may exclude nations with less than 1 percent of global market share, he said. The smallest few of about 50 remaining nations in the program may be able to start in the market at a later date than the biggest nations, he said.

Durban Debate

The EU measure is against international civil aviation rules, Su Wei, China’s lead envoy, said in an interview yesterday during the UN talks in Durban, South Africa. Japan called the European law unacceptable, echoing concerns voiced earlier this year by the United States, India and Russia, and highlighting the challenge of forging a global framework to cut greenhouse gases blamed for global warming.

“You can’t take unilateral measures to solve a multilateral issue,” Su Wei said. “It has some impact on the discussions here in Durban.”

Airlines will try to pass on the costs of EU carbon allowances to customers and probably fail because there is so much price competition in the industry, the International Air Transport Association said Oct. 3.

EU carbon permits have plunged 41 percent this year on muted demand because of the bloc’s sovereign debt crisis and surging supply of offset credits. They advanced 5.1 percent to 8.39 euros ($11.30) a metric ton today on the ICE Futures Europe exchange in London as of 1:42 p.m.

Because cutting aviation emissions is expensive, prices may be high in a global cap-and-trade market for airlines, said New Energy Finance’s Cowie. To cut costs, airlines may be allowed to use cheaper credits from other programs, such as the United Nations-overseen offset markets.

UN Certified Emission Reduction credits for December jumped 4.9 percent today to 5.77 euros on ICE.

To contact the reporters on this story: Alessandro Vitelli in London at avitelli1@bloomberg.net; Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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