National Academies Press: OpenBook

The Carbon Market: A Primer for Airports (2011)

Chapter: Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship

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Page 34
Suggested Citation:"Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship." National Academies of Sciences, Engineering, and Medicine. 2011. The Carbon Market: A Primer for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14607.
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Page 34
Page 35
Suggested Citation:"Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship." National Academies of Sciences, Engineering, and Medicine. 2011. The Carbon Market: A Primer for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14607.
×
Page 35
Page 36
Suggested Citation:"Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship." National Academies of Sciences, Engineering, and Medicine. 2011. The Carbon Market: A Primer for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14607.
×
Page 36
Page 37
Suggested Citation:"Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship." National Academies of Sciences, Engineering, and Medicine. 2011. The Carbon Market: A Primer for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14607.
×
Page 37
Page 38
Suggested Citation:"Chapter 4 - State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship." National Academies of Sciences, Engineering, and Medicine. 2011. The Carbon Market: A Primer for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14607.
×
Page 38

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34 While most traditional pollutants have local impacts, the increase of GHG concentrations in the atmosphere presents a unique environmental policy issue, because GHG emissions are global and collective in nature. Many proponents of a market-based solution to reducing GHG emis- sions envision a global market for allowances and offset credits where every GHG emitting per- son, company, or government in the world would be linked by a common regulatory cap-and- trade system and would be required to retire an allowance or offset credit to account for all emissions. Allowances and offset credits would then be tradable across national borders while collectively the world cap would steadily decline, ensuring lower concentrations of GHGs and slowing the impacts of global warming. The following section describes the current state of carbon markets internationally. Because the United States does not have a national compliance carbon market at this time, it is impor- tant to look at operational compliance markets, like Europe and New Zealand, for guidance on how the United States compliance market might operate. 4.1 Global Compliance Carbon Market Overview C H A P T E R 4 State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship Key Takeaways for Airports • No operating compliance carbon markets target airports themselves as regulated entities. • Global carbon offset credit markets exist at this time to serve international markets. • By regulating aircraft emissions, Europe’s cap-and-trade scheme will be the first to regulate existing emission sources from the aviation sector, beginning in 2012. The global carbon market is characterized by national policies driving compliance markets and voluntary emission trading programs. Voluntary emission trading occurs both regionally and globally, through a number of different protocols, largely to meet individual and corporate altruistic initiatives to claim emission reductions. The United Nations Framework Convention on Climate Change (UNFCCC) is the predominant forum for international discussions and agreements relating to climate change. The Kyoto Protocol Treaty is an international and binding agreement to reduce GHG emissions for industrialized countries and to promote clean develop-

ment in less developed nations. This agreement came out of the Kyoto UNFCCC conference in Kyoto, Japan, in December 1997. A total of 37 industrialized nations ratified the Kyoto Protocol, linking them to meet binding national emission reduction commitments (an average of 5% from 1990 emission year baseline) over the 2008–2012 time period. The United States is the only major developed economy not to ratify the Kyoto Protocol and take on binding emission reduction tar- gets. Although most countries committed to Kyoto emission reduction targets have developed national plans for meeting emission reduction targets, Kyoto also establishes global carbon off- set programs, known as flexibility mechanisms, to provide additional opportunities for meeting targets. Figure 5 presents a summary of Kyoto participation status by country. The Kyoto flexibility mechanisms include: • Clean Development Mechanism (CDM): a developed nation with emission reduction com- mitments sponsors an emission reduction project in a less developed nation in return for a certified emission reduction (“CER”) credit. • Joint Implementation (JI): a country with an emission reduction commitment hosts an emis- sion reduction project to generate emission reduction units (ERUs). The host country essen- tially gives away the right to claim these reductions and sells them to another country. State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship 35 Source: United Nations - Environmental Indicator. Environmental Indicator - Climate Change. http://unstats.un.org/unsd/environment/Participation_ClimateChangeAgree.htm. Figure 5. Summary of global Kyoto participation.

A UNFCCC body reviews and approves CDM and JI project methodologies proposed by individual projects and developers. This approval process can be timely and stringent in order to ensure that only high quality offset credits are generated for use. Approved methodologies generally fall into one of the following categories: reducing emissions from energy production, increasing industrial efficiency, methane destruction, or reducing non-combustion GHG emis- sions. Several approved project methodologies reduce emissions in the transportation sector; however, no methodologies in the aviation sector that directly reduce emissions and meet the financial and permanence criteria of the CDM have been approved at this time. Offset credits from United States projects are not eligible to supply Kyoto markets because the United States did not ratify the Kyoto Protocol. The UNFCCC as well as other less inclusive conventions occur regularly to discuss global cli- mate change and strategies to reduce emissions. Conversations of late have focused on global carbon commitments and reduction strategies post-Kyoto (post 2012). No specific plan has been set to date and conversations are ongoing. At this time, the aviation sector is not directly covered by carbon markets, although Europe has a definitive timeline for including the sector under its trading scheme. However, indirectly the aviation sector can be impacted by rising fuel costs to cover compliance costs. Opportunities for airport sponsors to participate in the carbon offset credit market by hosting or sponsoring projects exist but have not been widely undertaken to date. Key policies and carbon markets, as well as the treatment of the aviation sector, are dis- cussed herein at both the regional and national levels. 4.1.1 European Union 36 The Carbon Market: A Primer for Airports Key Takeaways for Airports • Europe’s carbon trading scheme represents the most mature carbon market glob- ally and can be viewed as a precedent of what others might look like in the future. • 2012 and beyond, emissions from aircraft taking off or landing in Europe will be regulated under the EU ETS. • Emissions from airports themselves will not be regulated. The European Union Emission Trading System (EU ETS) is the world’s first and largest bind- ing international trading system for CO2 emissions. It covers over 11,000 energy-intensive instal- lations across Europe and serves as an integrated emission trading system designed to reduce GHG emissions across Europe. The program requires installations to procure European Union Emissions Allowances (EUAs) for every tonne of CO2e that they emitted the previous year. The EU ETS officially commenced in January 2005 with 15 member states and was designed to operate in three phases. The initial phase of the EU ETS spanned from 2005 to 2007. The program is currently in Phase II, which began in 2008 and continues through the end of 2012, concurrent with the Kyoto timeframe. Only the electric generation sector and selected large industrial sectors are covered at this time. Phase III will begin in 2013 and is likely to shift away from emission caps set nationally and toward a more centralized system in which the majority of the allowances are auctioned by a central EU authority. A number of new industrial sectors are likely to be brought under the com- pliance regime in Phase III but will be freely allocated a portion of their emission allowances. Ultimately, EU leaders have committed to reducing total EU GHG emissions 20% below 1990 levels by 2020, and the Phase III emissions caps are likely to ensure compliance with this target.

The aviation sector will, for the first time, be covered under the EU ETS in 2012. The EU ETS is the only carbon trading scheme to date that has or is planning to hold the aviation sector respon- sible for their GHG emissions. Airlines will be required to surrender one EUA or eligible off- set credits for every tonne of GHG emissions released from a domestic or international flight that either originates or lands at an airport of a participating country. This means that flights originating in the United States and landing in one of the EU-27 nations will be impacted by this regulation. Certain flights, including military operations, search and rescue flights, train- ing flights, and those by aircraft weighing less than 5,700 kg are exempted from the program. Emissions include the first movement of an aircraft from departure location to its final rest- ing after landing. The aviation sector will receive a relatively large pool of free emission allowances initially to help mitigate the cost of compliance. In 2012, airlines will receive free emission allowances that will cover approximately 97% of baseline emissions, determined as the average annual emissions released from 2004 to 2006 (Flight Global 2011). This allocation will decrease to 95% for the duration of the following compliance period beginning in 2013, and will contin- ually decline thereafter. Because the pool of potentially covered entities will vary, airlines will have to apply to the EU in advance of the compliance period to be considered to receive allocations under the EU ETS. Airlines must undertake a number of steps to comply with EU ETS. First, they must obtain an EU ETS GHG permit to operate in the EU. Additionally, airlines will be required to develop a plan for accounting for, monitoring, and verifying GHG emissions and to have implemented this to account for calendar year 2010 emissions as an initial baseline year. The plan for tracking and reporting emissions is documented in the GHG permit. Annual emissions must be indepen- dently verified and reported to the EU by April following the close of the calendar year. Allowances to cover these emissions, which may include EUAs, CERs (up to 15% emissions), or other approved flexibility mechanism units, must be surrendered by May 2013 and annually thereafter for the previous calendar year emissions. Finally, projected CO2 emissions covered under the EU ETS must be incorporated into corporate planning and public financial information. The impact to passenger costs and airline revenues is expected to be noticeable, but not sig- nificant enough to deter ridership significantly in the near term due to the large allocation of free emission allowances. The EU estimates that individual ticket prices will increase by approxi- mately 62–69 through 2020 (European Commission n.d.). However, the full impact of the market-based mechanism is not fully quantifiable at this time. Further, at this time there are several United States airlines that have launched litigation against the EU for these regulations. This case is in the hands of the European Court of Justice. Until a final decision would be made to except these entities, the airlines must comply with the rules as written (European Commission 2011). At this time no other national carbon regulation is slated to cover airline emissions. However, due to the global nature of the industry, the EU ETS may set a precedent for other national or regional climate trading schemes to also directly cover the aviation industry. 4.1.2 New Zealand The New Zealand Emission Trading System (NZ ETS) was passed in 2008 and implemented in July 2010, and after the EU ETS, represents the second most developed national level cap-and- trade program in the world. Currently, forestry, transportation fuels, electricity producers, and industrials are covered. By 2015, synthetic gas producers, the waste sector, and agriculture will fall under coverage of the NZ ETS. New Zealand Units (NZUs) may not be traded to another nation for compliance purposes. Participants in the NZ ETS will retain the ability to use Kyoto flexibil- ity mechanism credits for compliance purposes with no limits, providing a solid linkage to the global carbon market. State of the Global Carbon Markets and Aviation: Regulatory Requirements and Voluntary Stewardship 37

At this time the aviation sector is not directly covered under the NZ ETS. However, impacts are expected from indirect cost pass through from the transportation fuels sector. 4.1.3 Other Developed Economies Other developed nations, such as Australia, Canada, and Japan, that have committed to the Kyoto Protocol have yet to finalize national plans for compliance. Iceland has chosen to partic- ipate in the EU ETS to meet its national Kyoto commitments. Much discussion has occurred at the national level in these countries to implement national trading schemes linked to the global carbon market but have yet to be finalized and implemented. A major argument preventing greater participation in the global carbon market is the lack of participation to date of the world’s leading emitters, the United States, China, and India. 4.1.4 Developing and Emerging Economies No other countries at this time have fully implemented national carbon regimes. Developing and emerging economies have resisted setting a hard cap on carbon due to fears that this cap will inhibit their economic growth. A common means for these countries to address their con- tributions to global emissions is through the adoption of intensity-based GHG emission tar- gets. Intensity-based targets can use any number of established baselines—including emission reductions over a “business as usual” emission trajectory or reducing emissions per unit GDP— ensuring continued economic growth. Coming out of the UNFCCC conference of 2009 in Copen- hagen, Denmark, several emerging economies with intentions to address their emissions, includ- ing China, Brazil, India, Indonesia, South Korea, and South Africa, agreed to develop plans around intensity-based targets. Many of these countries are still developing national plans to meet these intensity-based targets. At this time, there is no definitive impact to the aviation industry from these commitments. For the next few years, at least until the end of the first Kyoto commit- ment period in 2012, these nations will continue to be eligible host countries for CDM projects until a succeeding program is designed and implemented for the post Kyoto period. 38 The Carbon Market: A Primer for Airports

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TRB’s Airport Cooperative Research Program (ACRP) Report 57: The Carbon Market: A Primer for Airports provides information on carbon and other environmental credit trading markets, and highlights the potential opportunities and challenges to an airport's participation in these markets.

The primer also addresses the new terms and concepts related to the carbon and other environmental markets.

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