European Parliament forms agreement on aviation and Brexit

On 13 September 2017 the European Parliament adopted its position on aviation’s role under the European Union Emissions Trading System (EU ETS) and agreed on provisions that would reduce uncertainty surrounding a hard Brexit. International flights will continue to be excluded from the EU ETS with the continuation of the stop-the-clock provisions until 2021, while the rules for a global deal on mitigation from the aviation sector are drafted under the International Civil Aviation Organization (ICAO). However, flights within the EU will continue to be covered under the EU ETS and will be subject to a declining cap from 2021. The European Parliament also proposed that the auction share will increase from 15% to 50% with funds earmarked for climate related projects. The European Council found agreement, largely in line with the European Commission’s proposal on aviation earlier this year.   Now that agreement has been formed in the European Parliament, negotiations can begin between the European Parliament and European Council in an effort to form a final agreement, which is required before the end of the year to avoid a legal gap with regards to compliance with the current ETS regulations.   

The so called “Brexit-amendment” addresses growing concern that if a transitional deal cannot be found before the United Kingdom’s (UK) scheduled departure from the EU (March 2019), there would be a large sell off of allowances that would no longer be required by UK installations given they would no longer be regulated by the EU ETS. The UK is the second largest emitter of greenhouse gas emissions in Europe, making its power utilities significant buyers of European allowances, both to cover their current power production but also to hold allowances for power sold on forward contracts. The amendment would disallow covered entities from surrendering allowances that were issued by a Member state after January 2018 that no longer had compliance obligations under the EU ETS. In the case of a hard Brexit, the amendment would make void any allowances auctioned by the UK government from 2018 if it were not to remain a part of the EU ETS following Brexit. To make this amendment operational, allowances sold by the UK government would be issued with a country stamp, differentiating them from the allowances sold by the other 27 Member States. The deal now must be agreed between the European Parliament, European Commission and the European Council  to be implemented before January 2018. 

Finally, the European Commission, European Parliament, and European Council met to discuss reform of the EU ETS for Phase IV (2021-2030). According to sources, a conditional agreement was reached on doubling the Market Stability Reserve intake rate from 12-24% for the first five years of operation as well as on providing the option for voluntary cancellation of allowances by Member States to account for emission reductions resulting from domestic policy measures. A number of important issues remain within the discussions including: the flexibility to shift allowances between auctions and free allocation, as well as from where allowances would come to support the modernization and innovation funds. The next trilogue meeting is scheduled for October 12.