Sept. 24 (Bloomberg) -- Nations from the U.S. to Russia and the European Union are set for a final showdown over the first-ever global commitment to designing an emissions-reduction market tool for the $708 billion airline industry.
Negotiators from more than 190 countries in the United Nations’ International Civil Aviation Organization will decide at a Montreal meeting starting today whether to back a pledge on a market-based measure for the sector, which is responsible for about 2 percent of greenhouse gases globally. Details of the program, a precedent for a single industry worldwide would be decided in 2016 and the market would start by 2020.
In exchange, the EU would narrow down the scope of the world’s biggest emissions-trading system, limiting carbon curbs on carriers to its own airspace and cutting compliance costs for airlines including Delta Air Lines Inc. and OAO Aeroflot. That would help avoid tensions with non-EU nations and a trade war with China, where Airbus SAS said orders for its jetliners remain in limbo as part of a government campaign against the EU’s unilateral emissions measure.
“If approved, it’ll be the first signal for airlines and investors that industry accepts the need for market solutions,” said Bill Hemmings, manager at the Transport and Environment lobby in Brussels. “Whether a global deal can be effective in reducing emissions depends entirely on the details yet to be worked out. The deal on the table is far from ideal; the question is to make sure it doesn’t get worse.”
Support for the draft ICAO agreement “should not be taken for granted” as some countries are seeking to weaken the deal, according to a note sent by the EU’s regulatory arm to governments. A potential debate about linking the continuation of the EU carbon program in its own airspace with exemptions for some developing nations, a solution sought by the African states, could “unravel the package and significantly affect the chances of getting agreement,” the EU said in the document obtained by Bloomberg News.
The draft resolution is a good basis for discussion, according to a State Department official, who asked not to be identified, quoting policy. The U.S. government and the airline industry have strongly supported ICAO efforts to develop a market-based measure and until such a measure is agreed, countries and regions should refrain from regulating emissions beyond their own airspace, the official said.
Countries including Brazil, Russia, India, China, Cuba and Saudi Arabia are against national or regional carbon markets before a global deal is enacted, according to the EU note.
It is crucial for Europe to win ICAO approval for the continuation of the bloc’s carbon program in its own airspace. The EU decided in 2008 that airlines flying to and from European airports be included in its carbon market from 2012 after aviation emissions in the region doubled over two decades. That triggered protests from the U.S., where President Barack Obama signed a bill shielding carriers from the EU measure, to Russia, which said last year it considered limits on European flights over Siberia as part of possible retaliatory measures.
To facilitate international talks and avoid trade conflicts, the European Commission in November proposed to defer curbs on foreign flights, which were originally subject to EU emission rules at their entire length. The amendment, known as the “Stop the Clock” proposal, entered into force in April 2013.
The European Parliament, whose consent will be needed to modify the bloc’s emissions law, is unlikely to agree if the draft ICAO deal is weakened, according to Peter Liese, a German member of the assembly.
“I am optimistic about the outcome of the talks,” Liese told reporters in Brussels today. “The alternatives are unconditional surrender or unconditional trade war.”
The EU cap-and-trade program is the cornerstone of the region’s plan to cut greenhouse gases that scientists blame for global warming. It imposes pollution limits on about 12,000 manufacturers and power companies, leading to a cap in 2020 that will be 21 percent below 2005 discharges.
The annual limit for the aviation industry began at 97 percent of average discharges from 2004 to 2006, falling to 95 percent in 2013. Airlines were given emission permits making up 85 percent of the industry cap for free. EU emission permits for delivery in 2013 declined 0.2 percent to 5.42 euros ($7.31) a metric ton at 4:24 p.m. on London’s ICE Futures Europe exchange.
International aviation forms a significant proportion of the EU carbon market’s demand over the next seven years and its removal will be a “fundamentally bearish development,” according to Konrad Hanschmidt, a London-based analyst at Bloomberg New Energy Finance.
“This has already been mostly priced in over the past year, as the political opposition to the ETS inclusion has been so overwhelming from outside the EU,” he said by e-mail. “The EU’s strategy has however sped up the negotiation of an international market mechanism for aviation which would be a better long-term outcome.”
United Continental Holdings Inc., the world’s largest airline, has been lowering its emissions by replacing older aircraft with more efficient jets such as the Boeing Co. 787 Dreamliner, Mary Ryan, a spokeswoman for the Chicago-based company, said in an e-mail. Airlines also need governments to invest in and improve aviation infrastructure in the U.S. and abroad, while also supporting the advancement of lower-carbon fuels, according to Ryan.
“If those government efforts are happening and we’re not meeting the target, we support having a single global mechanism at ICAO for aviation emissions to meet that target until technology and infrastructure improvements catch up,” she said.
A worldwide market-based tool will help the aviation industry meet its 2020 target of carbon-neutral growth, according to the International Air Transport Association. The airline industry’s estimated revenue will be $708 billion this year with an operating profit of $22.4 billion, giving a margin of just 3.2 percent, according to IATA, whose members include Deutsche Lufthansa AG and Singapore Airlines Ltd.
Without a global accord the industry risks the proliferation of regional programs, which could lead to “a whole lot of overlapping, duplicating, sometimes conflicting schemes,” IATA Chief Executive Officer Tony Tyler said.
“There is a degree of optimism a deal can be reached,” Tyler told reporters on a conference call. “Everybody is aware this is a historic opportunity to take a big step forward.”
The commission, the 28-nation EU bloc’s regulatory arm, plans to put forward a proposal to limit the scope of its emissions law for airlines in the first half of October should ICAO back the deal, two people with knowledge of the matter said earlier this month. Any amendment to the EU legislation on that matter would require approval by the region’s governments and the European Parliament.
“There are some bits and pieces in the text that made everybody unhappy,” Jos Delbeke, director general for climate at the commission, told a conference in Brussels on Sept. 4. “So it may be not far away from an ideal compromise.”
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