EU Emissions Trading System

eu ets logo

The EU Emissions Trading System (EU ETS) [1] is the cornerstone of the EU’s policy to combat climate change. Through the inclusion of multiple economic sectors (e.g. power, heat, manufacturing industries, aviation), this cap and trade system incentivises CO2 reduction within each sector, or through trading of allowances with other sectors of the economy where emission reduction costs are lower.

In 2008, the EU decided to include aviation activities in the EU ETS [2] , and they are thus subject to the EU’s greenhouse gas emissions reduction target of at least minus 55% by 2030 compared to 1990. The initial scope of the EU ETS covered all flights arriving at, or departing from, airports in the European Economic Area (EEA). However, flights to and from airports in non-EEA countries or in the outermost regions were subsequently excluded until the end of 2023 through a temporary derogation. This exclusion [3] [4] , facilitated negotiation of a global market-based measure for international aviation emissions at the International Civil Aviation Organisation (ICAO).

It is permitted to link the EU ETS with other emissions trading systems, provided that these systems are compatible, mandatory and have an absolute emission cap. An agreement to link the systems of the EU and Switzerland entered into force on 1 January 2020 [5] . Accordingly, flights from the EEA area to Switzerland are subject to the EU ETS, and flights from Switzerland to the EEA area fall under the Swiss ETS [6] . Allowances from both systems can be used to compensate for emissions occurring in either system.

The EU ETS Support Facility [7]  continues to provide 26 States with access to ETS-related data, as well as traffic and emissions data to over 300 aircraft operators.

In July 2021, the European Commission adopted the ‘Fit for 55’ Legislative Package to make the EU’s climate, energy, transport and taxation policies fit for achieving the 2030 greenhouse gas emissions reduction target. This included proposed amendments to the EU ETS Directive for aviation activities [8]  that covered:

  • Consolidating the total quantity of aviation allowances at current levels;
  • Applying a higher linear reduction factor of 4.2% per year to the aviation cap, instead of the current 2.2%;
  • A gradual phase out of the free allocation of EUAAs (EU Aviation Allowances) to aircraft operators by 2027;
  • Continuation of the intra-EEA application of the EU ETS, as well as flights to Switzerland and the UK51
  • Implementing CORSIA appropriately to extra-EEA flights; and
  • Ensuring that airlines are treated equally on the same routes with regard to their obligations and economic impacts.

In addition, the Commission is proposing to adjust the EU ETS Directive to implement Member States’ notification to EU-based airlines of the offsetting requirements for the year 2021 [9] .

51In the EU-UK Trade and Cooperation Agreement reached in December 2020, the EU ETS will continue to apply to departing flights from the EEA to the UK, while a UK ETS will apply effective carbon pricing on flights departing from the UK to the EEA, starting in 2021. See also Commission Delegated Regulation (EU) 2021/1416 of 17 June 2021.

An initial cap for aviation in the EU ETS was based on average emissions between 2004 and 2006 of flights within the initial ETS applicability scope, representing 221.4 million tonnes (Mt) of CO2 per year. The cap for aviation activities in the ETS’s third phase (2013- 2020) amounts to 95% of the initial cap, adjusted for the change in applicability scope. While aircraft operators may use EU Aviation Allowances (EUAAs) as well as EU Allowances (EUAs) from the stationary sectors, stationary installations are not permitted to use EUAAs. In addition, aircraft operators were entitled to use certified emission reduction credits (CERs) up to a maximum of 1.5% of their verified emissions. In 2019, 611 aircraft operators were reported as having a monitoring plan (7% fewer than in 2018) of which 308 were commercial and 303 were non-commercial [11] .

Aircraft operators are required to report verified emissions data from flights covered by the scheme on an annual basis. As is shown in Figure 7.1. , total verified CO2 emissions from aviation covered by the EU ETS increased from 53.5 Mt in 2013 to 68.2 Mt in 2019. This implies an average increase of CO2 emissions of 4.15% per year. The impact of the COVID-19 pandemic on international aviation saw this figure fall to 24.9 Mt in 2020, representing a decrease of 63.5% from 2019 levels. Since 2013, the amount of annual EUAAs issued is around 38.3 Mt of which about 15% have been auctioned by the States, while 85% have been allocated for free. The purchase of EUAs by the aviation sector for exceeding the aviation cap has gone up from 21.4 Mt in 2013 to 32.5 Mt in 2019 contributing thereby to a reduction of around 159 Mt of CO2 emissions from other sectors during this period. As a result of the COVID-19 pandemic, the verified emissions of 24.9 Mt in 2020 were below the freely allocated allowances for the first time – see the dotted line for year 2020 in Figure 7.1. .

As shown in Figure 7.2. , the annual average EU ETS carbon price varied between €4 and €25 per tonne of CO2 during the 2013-2020 period. Consequently, total aircraft operator costs linked to purchasing EU Allowances (EUAs) have gone up from around €84 million in 2013 to around €955 million in 2019. For 2019, it is estimated that the ETS costs represented about 1.5% of total operating costs for aircraft operators on flights within the scope of the EU ETS52.

The ETS has seen a number of modifications which will affect the aviation sector [14] , including the linear reduction factor of 2.2% per year that is applied to the aviation cap since 2021. In addition, the emission reductions will need to be exclusively within the EEA, therefore only EU Aviation Allowances (EUAAs) and EU Allowances (EUAs) are eligible for compliance as is the case for all other sectors under the EU ETS. Once agreed, changes to the EU ETS under the Fit for 55 Legislative Package will apply to the fourth phase.

During 2021, the EU ETS carbon prices have further increased, and record-high EUA prices exceeding €90 per tonne of CO2 were observed in early 2022 [13] .

52Estimation from EASA AERO-MS model.