A Brief Introduction To Emissions Trading For Aircraft Operators

There are 25 operational Emission Trading Schemes (ETS) as of the start of 2022 with more emerging. Source: ICAP Status Report

Emissions trading schemes (ETS) and carbon markets are complex systems. They are made no less complicated by the fact that many businesses operate across borders where different schemes may be in place.

Where emissions trading concerns aviation, aircraft operators are required to purchase “emission units” for any CO2 they emit that falls within the scope of an applicable scheme or exceeds the stipulated limits. Depending on the scheme, these can be in the form of carbon offsets or emission allowances.

There are currently close to 50 emissions trading schemes globally, spanning various geographical areas. Of these, about half are in force, whereas the rest are under consideration or development.

The US does not have a federal emissions trading scheme. However, some states do, such as California’s carbon cap-and-trade program. China has several regional pilot ETSs currently running, all covering domestic aviation. Meanwhile, the main schemes to consider for international aircraft operators are CORSIA, the EU ETS, and the UK ETS.

Those who do not comply with the applicable regulation of the ETS under which their activities fall will be subject to civil penalties. Thus, understanding how trading schemes work - and who is responsible for complying and when - is equally important for business aviation operators as for commercial airlines with scheduled services.

Courtesy of Ascend Materials

ETS terminology

One form of emissions trading is the cap-and-trade system. The cap is the government’s limit on how much CO2 can be emitted by an industry or entity. This is gradually lowered over time to encourage the adoption of pollution-reducing measures. The trading occurs through transactions in units that constitute the right to emit a fixed amount of greenhouse gases.

Carbon offsetting is an action whereby a company (or individual) compensates for their CO2 emissions by investing in climate action projects elsewhere. The quality of carbon offsetting has evolved over time, as has the certification landscape. Projects are now often related to renewable energy, methane capture, nature-based solutions, and direct air carbon capture (DACC).

Although they are both fundamentally climate accounting mechanisms, trading with carbon offsets and emission allowances differ from each other in that they are separate systems.

Emission units awarded as an allowance under a cap-and-trade mechanism provide the right to emit a certain amount of CO2. Should an entity (company, country, etc.) not emit all the CO2 for which it has credits, it can auction the credits onward to another entity.

Market supply and demand determine the value of the allowances, which provides a financial incentive to lower emissions beyond the allowed units of CO2. Meanwhile, carbon offsets are a mechanism to actually reduce emissions elsewhere.

CORSIA

In 2016, the International Organisation for Civil Aviation (ICAO) adopted CORSIA. This stands for Carbon Offsetting and Reduction Scheme for International Aviation. It is a global umbrella offsetting mechanism covering international flights.

CORSIA is currently running in a pilot phase until 2023. From 2024 to 2026, there is an early phase affecting operators of flights between two states participating in the voluntary round. Meanwhile, starting in 2027, CORSIA will become mandatory for most states.

The scheme aims to stabilize emissions at 2019 levels (the official baseline is 85% of 2019 carbon emissions). It obliges aviation operators to monitor and report emissions from 2019 and, starting in 2021, to purchase carbon credits to cover any industry growth in CO2 emissions above the baseline. Operators can also count the use of CORSIA-eligible sustainable aviation fuel (SAF) towards their emission reduction.

All who operate aircraft between states that have signed up for CORSIA are obliged to comply if they fly planes that weigh more than 5,700kg on takeoff, emit 10,000 tonnes of CO2 or more on international routes annually, and have been operating for more than three years. Given that a Gulfstream G650 has a maximum take-off weight (MTOW) of 42,500kg, many business aviation aircraft operators have to comply with CORSIA reporting.

EU and UK ETS

The EU ETS is the oldest emissions trading scheme in place, adopted in 2005. International aviation emissions (for extra-European flights) have previously been exempt from the EU ETS due to opposition from trade partners. However, according to the European Commission’s proposed Fit for 55 package, free emissions allowances for airlines would be phased out by 2027.

Commercial air transport operators (possessing an Air Operator Certificate and operate flights for revenue) that operate less than 243 flights in each of three consecutive four-month periods with annual fossil emissions lower than 10 000 tonnes of CO2 are exempt until 2030. As for CORSIA, flights operated by aircraft with a MTOW of less than 5,700kg are exempt. However, for non-commercial operators, like a corporate flight department, that baseline is much lower at just 1 000 tonnes.

Prior to Great Britain’s departure from the EU, UK operators were covered, or rather, needed to comply with, the EU ETS. However, from 1 January 2021, anyone who becomes an aircraft operator in the UK must abide by the UK ETS, established to fill the void left behind by EU regulation.

The same regulations for exempt operators and flights apply as with the EU ETS. The UK ETS covers domestic flights, flights between the UK and Gibraltar, as well as flights from the UK to the European Economic Area (EEA)1.

Emissions from outbound flights from the EEA to the UK remain covered by the EU ETS, whereas flights from the UK to the EEA are counted under the UK emissions trading scheme. Meanwhile, the CO2 emissions of flights from Switzerland to European airports have been covered by the Swiss emissions trading system (CH ETS) since 1 January 2020.

Carbon accounting and reporting becoming the norm

As illustrated by this brief introduction to emissions offsetting and trading schemes as they relate to aviation, the landscape of carbon trading is evolving.

With CORSIA on the way to becoming fully implemented and more national emissions trading schemes taking shape beyond the EU and the UK, and as the caps for emissions begin to reduce, aircraft operators need to become accustomed to CO2 calculating and reporting, regardless of fleet size. Compliance with these various schemes will likely be a part of aviation operations for a long time to come.

1 The EEA consists of the 27 EU member states as well as Lichtenstein, Switzerland and Norway