Thursday, December 1, 2011

Preemptive Resolution to ETS Controversy Appears Unlikely With One Month to Go

There is officially one month left until the aviation industry becomes subject to the EU Emissions Trading Scheme. The initiative has been a subject for discussion at the ongoing climate summit in Durban, with China, Japan and Venezuela all publicly criticizing the measure. See Allesandro Vitelli and Randall Hackley, China, Japan Clash With EU Over Aviation CO2 Curbs at Summit, Bloomberg Business Week, Nov. 30, 2011 (available here). From our vantage point it's impossible to predict what impact the Durban talks will have on the plan to include aviation in the EU scheme. Perhaps the EU could gain concessions from other nations on broader climate initiatives by scaling back its plans for aviation. Alternatively, intransigence from non-EU States on non-aviation climate change solutions might strengthen EU leaders' belief that unilateral emissions regulations are necessary.

A potential complication emerged yesterday with the report that ICAO hopes to coordinate a global agreement on aviation emissions over the course of the next year. The article we linked to in yesterday's post implied optimism on the part of ICAO secretary general Robert Benjamin that a deal could be reached in that time frame. See Alessandro Vitelli and Mathew Carr, UN Aviation Regulator Presses for 2012 Carbon Market Deal, Bloomberg, Nov. 30, 2011 (available here). The secretary general's comments also provided potential answers to two key questions that had been plaguing aviation emissions talks: who would administer the regulations and will developing nations be subject to different rules? With regard to administration, Benjamin suggested that the World Bank would be tasked with setting emissions targets and collecting fees or charges. As far as developing nations are concerned, Benjamin's comments indicated support for treating nations equally. This is one of the most difficult issues in any global emissions debate and is especially tricky for aviation where the Kyoto Protocol's "common but differentiated responsibilities" framework conflicts with the prohibitions against discrimination contained in the Chicago Convention. This very issue was examined by Joanne Scott and Lavanya Rajamani in a paper we called attention to a few weeks ago. See EU Climate Change Unilateralism: International Aviation in the European Emissions Trading Scheme (Nov. 1, 2011) available from SSRN here. The issue will undoubtedly be a source of great debate before an agreement is reached. Indeed a story today quoting comments from ICAO spokesman Denis Chagnon only clouded matters, as Chagnon made ICAO's intention of securing an emissions agreement next year sound more aspirational than firm, and implied that there was not yet a set plan decisively addressing the two issues Benjamin weighed in on.

So what does the latest news from Durban and ICAO mean? The prospect of ICAO successfully negotiating a deal next year, after struggling to do so for the past decade, seems overly optimistic. However, the likelihood of success will undoubtedly increase if non-EU nations spend 2012 complying with the EU scheme and see a global agreement as a way to regain control over regulation of their carriers in future years. Thus, the clearest takeaway appears to be that barring a last-minute change-of-heart by the EU, the ETS will begin to affect aviation January 1 as scheduled and foreign carriers will have little choice but to comply. While ICAO recently reiterated its opposition to the EU's approach, this recent announcement is a strong indication that ICAO views a global agreement as the best, and perhaps only, way out of the current impasse. There does not appear to be any interest in having ICAO decide an Article 84 challenge to the ETS. China has indicated it will file a lawsuit challenging the EU directive before the end of the year, but it is still unknown where the challenge will be filed or whether it will involve any distinct legal claims from those brought by U.S. carriers earlier this year. The outcome of the U.S. challenge, and resolution of the forthcoming Chinese challenge will both come after the new ETS rules have taken effect. While some retaliation by non-EU states is likely, diplomatic relations between the EU and its trade partners appear certain to be dominated by more urgent matters over the coming weeks and it is hard to see the aviation emissions issue making its way to the forefront. Our best prediction right now is that no alternative will be reached before the EU rules on aviation emissions take effect. Once the regulations are in place and their impact can be assessed, the severity of that impact will likely determine the lengths non-EU States are willing to go to find an alternate solution.

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