Thank you for your letter of 26 June 2007[25] addressed to Gillian Merron in which you requested further information on proposals for including aviation in the EU emissions trading scheme. Specifically you highlight the issues of free allocation of allowances, in particular a benchmarked allocation methodology, and enforcement provisions. There has been good progress on the dossier in recent months. I therefore consider that now is a good time to provide a further report and to respond to your specific questions.

ALLOCATION METHODS

  Since Gillian Merron wrote to you as Minister for Aviation on 14 July 2007[26] there has been some discussion of the allocation methodology for aviation which has primarly been fuelled by the publication of the UK's study into the impacts of different benchmarking criteria. We have attended a number of European Council working groups at which benchmarking has been discussed, in particular we attended an experts' group in June, at which we presented the results of the UK study. The experts' group was well attended and provided an opportunity for a number of Member States to put forward their preferred allocation methodology. The proposals ranged from 100% auctioning to complicated benchmarks which took into account average fleet age and national economic growth rates.

Since the discussions in the experts' group and the publication of the UK study into benchmarking, there has been some support in the working group for a complicated benchmark that attempts to address some of the perceived inequalities of including aviation in the EU emissions trading scheme (ETS). However, many more States, including the UK, have recently seen the value of having a simple benchmark which rewards environmental efficiency and provides an incentive for future action and have supported the benchmark proposed by the Commission (revenue tonne kilometre[27] (RTK)). Discussions have now moved on to the possibilty of adjusting the RTK benchmark to take into account air traffic management inefficincies in flight routine and the additional weight required by aircraft to carry passengers instead of freight, but these have been as yet inconclusive.

  The European Parliamentary Committees have also considered the allocation methodology for aviation. The Environment, Transport, Finance and Industry Committees voted on this directive recently with three of the Committees voting for a change in the proposed benchmark. The Environment Committee supported RTK benchmark with a higher standard passenger weight; the Industry Committee voted in favour of a RTK benchmark which took into account the actual flight path rather than the great circle distance; and the Transport Committee supported the use of a capacity benchmark based on an aircraft's available capacity as opposed to its output.

  Discussions on auctioning have run alongside those on the benchmark, however there has been a clear divide between those who support higher levels of auctioning and those who support the low levels (approximately 3%) proposed by the Commission. Only the Industry Committee supported very low levels of auctioning, while Transport supported 20%, and Finance and Environment Committees supported 50%. The UK, along with several other Member States, has argued for significantly higher levels of auctioning compared to the Commission's proposal, given the experience of Phase 1 where operators received significant windfall profits and to ensure adequate access for new or fast growing airlines.

ENFORCEMENT PROVISIONS

  The detailed arrangements for application and enforcement of penalties remain a pending issue. Airlines operate very differently from national ground-based installations. The UK has started to consider the most appropriate enforcement provisions for those airlines that it would administer and we have engaged with the Commisssion and other Member States on this matter. In order to make decisions on the way forward we would like greater clarity on the details of the scheme to be applied and are giving priority to that. However, our work plan includes the need for full analysis of the options. We shall consult stakeholders and keep them informed of developments when the work progresses.

PROGRESS TO DATE

ICAO Assembly

  I would also like to update you more generally on the progress to date on including avaiation in the EU ETS. As you may be aware, the International Civil Aviation Organisation (ICAO) held its triennial Assembly in September at which the UK, with its European partners, worked constructively to try to agree a positive way forward that would have demonstrated ICAO's leadership role in aviation and climate change and left the way clear for Europee to implement its proposal for aviation emissions trading. However, several key non-European states insisted on text in an Assembly resolution on the environment that would effectively have prevented Europe from implementing its emissions trading proposal as currently planned. As a result, the UK, along with the rest of Europe, was forced to enter a reservation to this part of the resolution. The consequence of this is that Europe is not bound by that part of the resolution and is free to continue with its plans to bring aviation within its emissions trading scheme, and will do so.

Another outcome of the Assembly was the establishment of a high level Group on International Aviation and Climate Change that will, amongst other things, develop a global framework for making emissions reductions and to consider global aspirational efficiency goals. The UK will, through European representatives, take an active role in the work of this Group, and continue to engage in other ICAO work, to try to make progress towards a global solution.

Progress in EU negotiations

As we mentioned in our previous correspondence, negoatiations at a European level went well in the first half of the year with general agreement on the scope of the scheme and the inclusion of third country operators. At the June Environment Council, the German Presidency presented a progress report under Any Other Business which outlined the common areas of agreement, disagreement and areas for compromise.

This dossier has now been taken forward by the Portuguese Presidency who were particularly keen to achieve a first reading agreement with the European Parliament. However, following a lack of consensus amongst Member States on the detail of the scheme and the vote in the European Parliament, the draft directive will go to a second reading in 2008. The Portuguese Presidency is now indicating that its objective is to reach a political agreement on a common position at the December Environment Council.

European Parliament vote

  The European Parliament held its first reading plenary vote on the proposal to include aviation in the EU ETS on 13 November. 59 amendments were made to the Commission's proposal. The results of the debate demonstrated the European Parliament's desire for an ambitious scheme for aviation. Specifically the plenary vote adopted the following amendments:

— an earlier start date of 2011 for all arriving and departing flights (amendment 78);


— a tighter emissions cap based on 90% of the 2004-06 carbon dioxide emissions (amendments 61 & 24);

— 25% auctioning of initial allocation (amendment 74);

— the introduction of an efficiency indicator (amendment 42);

— the establishment of a new entrant reserve; the exemption of all aircraft under 20,000 kg on the condition that those aircraft operators participate in an offset scheme (amendment 63); and

— the use of a carbon dioxide multiplier (amendments 10 & 65).

  The Environment Council working group has yet to consider the outcome of the European Parliament's vote and it appears unlikely at this stage that the adopted amendments will be included in any political agreement in December. However, more generally many Member States, including the UK have welcomed the European Parliament's vote as an important milestone towards the goal of including aviation in the EU ETS.

UK Consultation

  On a national level, the public consultation on the Commission's proposal ended in June and the summary of consultation reponses was published on the DfT website in October[28]. The consutation demonstated that there was consensus in favour of the inclusion of aviation in the EU ETS and broad agreement on some of the key issues such as scope and timing, however there was a divergence of opinion on the detail of the design options, particularly around the level of auctioning and the use of a multiplier.

Climate Change Bill

Following pre-legislative scrutiny of, and public consultation on, the draft Climate Change Bill, we have made some important changes in our approach to aviation. Firstly, we will ask the Committee on Climate Change that will be established under the Bill to look at the implications of including international aviation and shipping emissions in the UK's targets, as part of its overall review of the UK's 2050 target. Secondly, when the EU ETS rules on aviation have been finalised, we will ask the Committee for its advice on whether there is a methodology for including international aviation emissions within the framework provided by the Bill that it workable and compatible with the EU ETS and takes account of progress in the United Nations Framework Convention on Climate Change and the wider international context, and on the impacts of adopting it.

Reform of Air Passenger Duty

Alongside the proposal to include aviation in the EU ETS, we have also been developing our policy on the use of economic instruments to tackle the climate change impacts of aviation. The Government announced the reform of Air Passenger Duty in the Pre-Budget Report 2007. The change to a per plane duty to come into force in November 2009, aims to send a signal more aligned with environmental impacts and ensures that aviation pays a fair contribution towards the Goverment's spending priorities, including public transport and the environment.

The Government will work closely with industry and stakeholders on the detail of this proposal including ways to make the duty better correlated to distance travelled and encourage more planes to fly at full capacity. The Government aims to consult on these plans early next year. In introducing this duty, the Government will take into account the impact on freight and on transit and transfer passengers, consistent with its wider economic and social objectives.

Transport Strategy

  The Government has also now formally responded to the Stern Review on the Economics of Climate Change and the Eddington Transport Study in our discussion documents, `Towards a Sustainable Transport System: Supporting economic growth in a low carbon world', published at the end of October. This response is the first stage in a consultation process to deliver a transport system that meets the key objectives of supporting the country's economic competitiveness and helping address climate change.

10 December 2007

  I write further to my letter of 10 December, which included information you had requested on proposals for including aviation in the EU emissions trading scheme and notified you of the prospect of a political agreement at the Environment Council on 20 December. I understand that unfortunately Sub-Committee B was unable to consider this letter before recess.

I am therefore writing to apologise for the tight timing which prevented the Sub-Committee from considering my letter ahead of the Council. I had intended to send my letter earlier but, regrettably, it had to be delayed due to key last-minute discussions between Ministers to confirm the UK position on several areas of the proposal. The consequent lack of scrutiny clearance was, of course, a matter of great concern to us. However, as you will know, the UK has always strongly supported the inclusion of aviation into the EU emissions trading scheme, as has Sub-Commitee B, and has played a leading role in campaigning for the proposal. We therefore felt that, even though scrutiny had not yet been completed, the UK should support the political agreement. I beleive that the scheme voted through improves the Commission's proposal in many areas and represents an important step in securing the UK's priority of an environmentally ambitious scheme that is implemented as soon as possible. I hope that the Sub-Committee is also content with the improvements that have been secured to the original proposal.

  I thought you would also wish to have a summary of the details of the political agreement reached by EU Ministers on 20 December.

SUMMARY OF ENVIRONMENT COUNCIL AGREEMENT

1.   Timing

    Commission proposal: Phased approach—intra EU flights 2011, all flights arriving at and departing from EU airports from 2012.

  Council agreement: Removal of phased approach—inclusion of all flights arriving at and departing from EU airports from 2012.

2.   Level of Emissions Cap

    Commission proposal: 100% of average 2004-06 emissions.

    Council agreement: As Commission proposal.

3.   Auctioning

    Commission proposal: Phase II—Harmonised level equivalent to average of auctioning level of those Member State National Allocation Plans (NAPs) with auctioning.

    Council agreement: Harmonised level of 10% auctioning in 2012. Auctioning level for 2013 onwards to be negotiated in the wider EU ETS Review negotiations. Removal of binding hypothecation clause.

4.   Benchmark Used for Initial Allocation

    Commission proposal: Revenue Tonne Kilometres (RTK) benchmark where a passenger is equivalent to 100kg.

    Council agreement: RTK benchmark where passenger weight is equivalent to 110kg and distance includes the addition of 95km fixed factor to take account of indirect routing and airport congestion.

5.   Special Reserve

    Commission proposal: No special treatment for either new entrants or fast-growing airlines.

    Council agreement: the creation of a reserve for new entrants fast-growing airlines from within the cap. The reserve will be 3% of the total capped allowances for that phase. These allowances would be allocated to operators in the 3rd year of a phase—to those who begin operating between the year for benchmarking data and 2nd year of phase and also to those whose revenue tonne kilometres total has increased by more than 18% per annum in the same period. A reveiw of the continuing need for this reserve in 2015 was also included.

6.   Open Trading Scheme. Access to Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs)

    Commission proposal: Fully open trading scheme that allows for full convertibility between aviation allowances and EU allowances. Access to CERs and ERUs set at the average of the level in Member States' national allocation plans.

    Council agreement: Open trading scheme but with the removal of the clause that allows convertibility between aviation allowances and EU allowances. 15% access to CERs and ERUs in 2012. Future access to be decided as part of ETS Review negotiations.

7.   Review Clause

    Commission proposal: None.

    Council agreement: Inclusion of text that obliges the Commission to review the effectiveness of the scheme for aviation in 2015.

8.   Enforcement

    Commission proposal: Member State action.

    Council ageement: Inclusion of text that describes an escalation process where, at the point where a Member State has taken all reasonable action unilaterally, the matter is referred to the Community and subsequent action is taken by the Community as a whole. This approach is similar to the approach as set out in the safety Regulation 2111/2005 which establishes a Community list of air carriers subject to an operating ban within the Community. Work is ongoing to identify the appropriate regulator within the UK and ensure that legal provision is provided for that regulator to undertake the necessary actions to ensure complaince with the scheme.

9.   Exemptions

    Commission proposal: 5.7t weight threshold. Exemption of all Heads of State flights. No special treatment of routes subject to Public Service Obligations (PSOs).

    Council agreement: 5.7t weight threshold. Heads of State exemption restricted to non-EU. Exemption for PSOs where they are either on routes within Ultra Pheripheral Regions or on routes with annual seat capacity below 30,000. Exmeption for operators who operate at a frequency lower than 243 flights into, out of, or within the EU in a four month period.

  As you can see, whilst the Environment Council vote did not consider the amendments voted through by the European Parliament, on key areas such as timing of the scheme and auctioning level the Council has, I believe, moved towards Parliament's position. We are therefore hopeful that ageement of the Directive should be achieved after second reading, and I will, of course, continue to keep you informed of further progress in the negotiations.

8 January 2008

  Thank you for your letters dated 10 December and 8 January updating the Committee on the negotiations to include the aviation sector in the EU ETS. Sub-Committee B considered these letters at its meeting of 14 January and agreed to clear the dossier from scrutiny.

The Committee is concerned that any emissions trading scheme must be properly regulated to ensure that it achieves its aims in reducing emissions. When clearer proposals are available on how the permits will be traded and how such trading will be regulated, the Committee would be interested in taking further evidence.

15 January 2008

26   Correspondence with Ministers, 11th Report of Session 2008-09, HL Paper 92, p 23. Back

27   RTK is a relatively simplistic benchmark that is already used by the aviation industry. It is based on the number of RTK that airlines fly ie. the more passengers and freight on board a plane per flight, the more free allowances airlines will receive. Back

28   http://www.dft.gov.uk/consultations/closed/aviationemissionstrading/consrespeuemissionstrad Back