EUROPEAN COMMISSION

Brussels, 14.7.2021

SWD(2021) 603 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the document

Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directive 2003/87/EC as regards aviation's contribution to the Union’s economy-wide emission reduction target and appropriately implementing a global market-based measure

{COM(2021) 552 final} - {SEC(2021) 552 final} - {SWD(2021) 555 final} - {SWD(2021) 604 final}

Table of Contents

1.Introduction: Political and legal context

1.1.Aviation and climate change

1.2.EU action and relevant international fora: the Paris Agreement and the International Civil Aviation Organization (CORSIA)

1.3.Integration of CO2 aviation emissions in the EU's Emissions Trading System

2.Problems definition

2.1.What is/are the problems?

3.Why should the EU act?

3.1.Legal basis

3.2.Subsidiarity: Necessity of EU action

3.3.Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved?

4.1.General Objectives

4.2.Specific objectives

5.What are the available policy options?

5.1.What is the baseline from which options are assessed?

5.2.Description of the policy options

5.3.Options discarded at an early stage

5.4.Overview of problems, objectives and policy options

6.What are the impacts of the policy options?

6.1.Environmental impacts

6.2.Competitiveness and economic impacts

6.3.Social impacts

6.4.Impacts on outermost regions (OMR)

6.5.Cross-cutting issues

7.How do the options compare?

7.1.Effectiveness

7.2.Efficiency

7.3.Coherence

7.4.Conclusions

8.Preferred option

9.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

Annex 2: Stakeholder consultations

Annex 3: Who is affected and how?

Annex 4: Analytical methods

1.Common analytical framework for the Impact Assessments of the revision of ESR, ETS, LULUCF, RED and EED

2.Specific analytical elements for this impact assessment

Annex 5: COVID-19 impacts on growth of greenhouse gas emissions in the aviation sector

Annex 6: 2019 ICAO Resolution on CORSIA

Annex 7: Developments following the 2016 ICAO Assembly

Annex 8: Integration of Aviation in the EU's Emissions Trading System

Annex 9: Features of the EU ETS

Annex 10: Assessment of CORSIA pursuant to Art. 28b of the ETS Directive

Annex 11: Study of cost pass-through pursuant to Art. 3d of the ETS Directive

List of Acronyms

1.Introduction: Political and legal context

Tackling climate change and reaching the objectives of the Paris Agreement and other environmental issues (including addressing air pollution and energy demand) are at the core of the European Green Deal 1 . The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on our health and economic well-being. Unprecedented near term investments are needed 2 to overcome the negative impact of the COVID-19 crisis on jobs, incomes and businesses, including in the sectors covered by the EU Emissions Trading System (ETS). The European Green Deal is a response to these challenges. It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the EU's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. At the same time, this transition must be just and inclusive.

The climate neutrality objective, which the Commission proposed in 2018 3 and the European Council 4 and Parliament 5 endorsed, is at the core of this transformation. The Commission has proposed to enshrine climate neutrality into EU law 6 . In order to set the EU on a sustainable path to achieve climate neutrality by 2050, and with the Communication on stepping up Europe’s 2030 climate ambition 7 (2030 Communication) the Commission has proposed an EU-wide, economy-wide net greenhouse gas emissions (GHG) reduction target by 2030 compared to 1990 of at least 55% that will set the Union onto the path to climate neutrality.

The Commission is reviewing all relevant climate and energy policies. This includes increasing the environmental contribution of the Emissions Trading System (ETS) in a manner commensurate with the overall target.

1.1.Aviation and climate change

Aviation accounts for 2-3% of global CO2 emissions 8 , and is an important source of climate impacts from emissions other than CO2 9 . Long-term projections of aviation activity show major increases in traffic. The CO2 emitted in 2018 from all flights departing from the EU28+EFTA was at around 180 million tonnes of CO2 10 . At EU-level, aviation made up 3.7% of total CO2 emissions, or 15.7% of CO2 transport emissions in 2018.

Despite significant technological development in the aviation sector, aviation emissions continued to rise up to 2019 11 and the prospect of impacts upon recovery from the COVID-19 crisis (see Section 2.1) represent an increasing challenge for reaching the EU’s economy-wide greenhouse gas emission reduction target and commitments under the Paris Agreement 12 , as well as the temperature goals under the Paris Agreement. Under the Paris Agreement, the EU and its Members States agreed on a long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels and on pursuing efforts to limit the increase to 1.5% 13 . 

The European Green Deal 14 adopted by the Commission in December 2019, as well as the Climate Law 15 and the Climate Target Plan (CTP) 16 , aim at enhancing the EU climate commitment under the Paris Agreement, consistent with its objective of reaching economy-wide climate neutrality in the EU by 2050. The EU is increasing its domestic economy-wide decarbonisation commitment, from 40% to at least 55% compared to 1990 levels by 2030, without using international credits. The updated Nationally Determined Contribution (NDC) of the EU reflecting the target of at least 55% domestic reduction compared to 1990 was communicated to the United Nations Framework Convention on Climate Change (UNFCCC) on 18 December 2020 17 . To reach the increased climate target, all sectors, including aviation, must adequately contribute to the required emission reduction efforts. The European Parliament has underlined that, as co-legislators, the European Parliament and the Council are the only institutions that can decide on any future amendment to the ETS Directive, and stressed that any amendment of the ETS Directive should only be undertaken if it is consistent with the EU’s economy-wide GHG emission reduction commitment 18 . A key tool for addressing CO2 emissions from aviation in Europe is the EU Emissions Trading System (EU ETS). It has allowed aviation to contribute to the 2020 climate objective, and this should be pursued for 2030, as fully recognized under the CTP.

While the political “mandate” to reinforce the EU ETS for aviation is clear, this is being examined in conjunction with other related and relevant initiatives, such as the revision of the Energy Taxation Directive and the Renewable Energy Directive, as well as the ReFuelEU Initiative, which are being assessed separately, with due account of the ETS dimension and impacts. As indicated in the European Green Deal, reducing CO2 emissions from aviation relies on a mix of policy instruments, as there is no one single solution to decarbonise the sector. The revision of the EU ETS for aviation is therefore part of the so-called “basket of measures”, which includes market-based measures like the EU ETS and CORSIA, the boosting of the production and uptake of sustainable aviation fuels (“SAF”), aircraft technology improvements and operational improvements through e.g. the Single European Sky initiative.

Globally as well, countries have to take increased action in respect of aviation to contribute to achieving the objectives of the Paris Agreement. While the EU ETS currently regulates intra-European aviation, and the Korean ETS, New Zealand ETS, and the Shanghai ETS within China have covered domestic aviation, broader and stronger action is essential.

In the public consultation on updated rules for aviation ETS, 91 % of respondents agree that the aviation sector should contribute more to climate actions. 88% of respondents believe that market-based measures can be effective to tackle aviation emissions in line with the climate objectives.

1.2.EU action and relevant international fora: the Paris Agreement and the International Civil Aviation Organization (CORSIA) 

The International Civil Aviation Organisation (ICAO) Assembly set an objective to stabilise global net CO2 emissions from international aviation 19 at 2020 levels through 'carbon neutral growth' (CNG 2020) 20 , i.e. compensating emission growth above 2020 levels by purchasing carbon credits, and of improving fuel efficiency by 2% annually through 2050. These current objectives are to be attained by a ‘basket of measures’ that consists of measures in four different areas: aircraft technology and standards; air traffic management and operations; sustainable aviation fuels and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The initial CNG 2020 objective is recognized as largely insufficient to bring the necessary contribution from the aviation sector to the achievement of the Paris temperature goals 21 . It has been suggested that aviation emissions should start decreasing no later than 2030 22 .

The EU contributed significantly to, and supported the ICAO Assembly Resolution A40-18, whereby the ICAO Assembly decided to request the ICAO Council to explore “the feasibility of a long-term global aspirational goal for international aviation through conducting detailed studies assessing the attainability and impacts of any goals proposed, including the impact on growth as well as costs in all countries, especially developing countries, for the progress of the work to be presented to the 41st Session of the ICAO Assembly. Work is under way in view of the 41st Assembly in 2022. The EU has for long argued for moving beyond existing CO2 objectives and establishing a common long-term goal in ICAO, consistent with science and the temperature goals under the Paris Agreement, to best guide and boost the development of adequate measures and spur the necessary research and deployment of new technologies.

In 2016, the 39th ICAO Assembly adopted a Resolution for a global market based measure for international aviation emissions (GMBM), known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), despite reservations – on different accounts - from China, India, Saudi Arabia and the US 23 .

By itself, CORSIA does not aim at reducing aviation emissions. CORSIA is an offsetting mechanism, which enables the aviation sector to continue to grow after 2020 in as far as collective international aviation emissions above a certain threshold (the baseline) are compensated through international offset credits (generated in non-aviation sectors mainly). The initial baseline, the average of international aviation emissions from CORSIA participating countries during 2019 and 2020, was deemed inappropriate by the ICAO Council in light of the COVID-19 crisis and was changed to 2019 emissions for the duration of pilot phase 2021-2023. The EU did not request such a change but accepted “to ensure support for CORSIA under the circumstances created by the COVID-19 pandemic and avoid unravelling CORSIA design elements” 24 . The consequence of such a baseline change is that CORSIA compliance is unlikely to require any emissions to be offset under the pilot phase.

States that voluntarily decide to participate in CORSIA offsetting may join the scheme from the beginning of a given year, and should notify ICAO of their decision to join by June 30 of the preceding year. As of 2021, 88 States decided to participate from the start of the pilot phase on 1 January 2021, including all G7 countries. 25 While the US has confirmed its participations, some important partners, such as China, India or Russia, are not participating. Unlike the voluntary participation of states in the CORSIA offsetting in the pilot and first phases from 2021 to 2026, the second phase of the CORSIA from 2027 to 2035 applies to all States. There are, however, two categories of exemptions based on aviation-related and socio-economic criteria. 26  

To be able to implement CORSIA, detailed rules on transparency, accounting, offsetting, registry and governance had to be adopted in the form of ICAO Standards and Recommended Practices (SARPs), which are binding on ICAO member states not filing differences to them. The actual implementation of CORSIA will depend on domestic legislation being developed, adopted and implemented by countries and regions participating in the scheme.

The EU and its Member States consistently argued in support of robust implementing rules and governance (e.g. the environmental integrity of eligible offsets, avoidance of double counting in line with the provisions still to be adopted under the Paris Agreement, robust sustainability criteria for sustainable alternative fuels), as well as adequate participation, in CORSIA’s voluntary and mandatory phases all being key to ensure CORSIA’s integrity and initial objective.

In 2018, the ICAO Council adopted the First Edition of the International Standards and Recommended Practices (‘SARPs’) 27 .

The EU has actively contributed in the process on substance and has been amongst the first jurisdictions to adopt legally binding provisions for the purposes of implementing the monitoring, reporting and verification for ICAO's scheme 28 , which is a key pillar for implementing CORSIA.

While strongly supporting CORSIA in ICAO, the EU Member States notified differences 29 to the ICAO SARPs, due to the presence of existing legislation in the EU addressing CO2 emissions from international aviation. In the differences, they highlight the main governance difference between the EU ETS and CORSIA (route-based, versus State-based regulation). The objective was to maintain the legality of the EU ETS and to preserve the EU policy space and climate ambition, consistent with the EU ETS as last revised in 2017 and with strong calls by co-legislators not to prejudge any further EU action 30 . In the same spirit, the EU and its Member States, through the EU Presidency, re-stated the above principles during the 40th ICAO Assembly in 2019 at the occasion of the adoption of a new Resolution on CORSIA, reiterating, and making it clear that in the EU’s view CORSIA is not to be regarded as exclusive against other schemes and that it should not limit EU climate ambition 31 .

Consistent with previous declarations, in June 2020, the EU and its Member States notified ICAO their participation in CORSIA from the start of the pilot phase on 1 January 2021 subject to differences filed (Council Decision 2020/954), by the ICAO deadline of 30 June 2020.

The ICAO Secretariat has not yet published the reservations of other States by that deadline, despite repeated calls from the EU to do so. The EU and its Member States have for long called for enhanced transparency in ICAO, as last reflected in an inter-institutional declaration agreed at the end of the last co-decision process on the EU ETS for aviation in 2017 32 . The lack of publication of differences, which is key to understand whether and how our international partners intend to participate to CORSIA, is problematic.

In terms of other major partners, there are public reservations to the 2013, 2016 and 2019 Assembly Resolutions made by the US, China, Brazil, Russia, Saudi Arabia, India and Venezuela (see Annex 10).

While the US has issued reservations it made the following public statement: “The United States supported the decision to adopt the CORSIA SARPS based on the understanding that CORSIA is the exclusive market-based measure applying to international aviation, and that CORSIA will ensure fair and reciprocal commercial competition by avoiding a patchwork of country- or regionally-based regulatory measures that are inconsistently applied, bureaucratically costly, and economically damaging. Furthermore, continued U.S. support for CORSIA assumes a high level of participation by other countries, particularly by countries with significant aviation activity, as well as a final CORSIA package that is acceptable to, and implementable by, the United States.” 33 . The US is collecting emissions data from US airlines on an expressly voluntary basis, with the FAA ensuring compliance with CORSIA monitoring, reporting and verification rules by filling data gaps from the limited airlines not providing data on a voluntary basis, and it has been noted that “the State Department will need to work with FAA to secure the implementing legislation necessary for further U.S. participation” 34 .

As regards the Chinese Government, it has publicly stated that: “China opposes any scheme that strays from realities faced by States and goes at the expense of the legitimate rights to development of developing countries and emerging market countries. … China has notified differences according to Article 38 of Chicago Convention.” 35  

1.3.Integration of CO2 aviation emissions in the EU's Emissions Trading System

The EU led the way in implementing a carbon market mechanism for CO2 aviation emissions by including all flights to and from aerodromes in the European Economic Area in the EU's Emissions Trading System (EU ETS) in 2008 (see Annex 8). The European Court of Justice confirmed the EU’s right to regulate airlines based outside the EU on a route basis, which is necessary to provide equal treatment on routes, i.e. to apply the principle of non-discrimination enshrined in Article 11 of the Chicago Convention 36 .

According to Directive 2003/87/EC, all aircraft operators carrying out aviation activities covered by the EU ETS have to annually report their emissions corresponding to the previous year. They have an obligation to surrender as many allowances as the emissions they have reported. Every year, a number of aviation allowances is issued. The total amount is defined by the allowed "cap", which was 95% of the average 2004-2006 emissions. Starting from 2021, allocations to aviation are reduced by the linear reduction factor (currently of 2.2%) now applicable to all ETS sectors (Annex 9 provides more information on the EU ETS for aviation).

Allowances are distributed through two mechanisms: auctioning and free allocation. Currently, 82% of aviation allowances are distributed through free allocation, 3% are part of a special reserve for new entrants and fast growers, and 15% are auctioned. In 2009, the co-legislators noted that ‘auctioning should therefore be the basic principle for allocation, as it is the simplest, and generally considered to be the most economically efficient, system’ 37 . 

The total number of allowances for aviation was based on average emissions in 2004-2006, while the allocation to each operator was based on activity data from 2010. The reason for including free allocation in the distribution of allowances was that the "no allocation" option would have treated the aviation sector differently from those sectors already covered by the EU ETS and it would have increased the demand for allowances towards other sectors. In addition, the share of auctioning for other sectors under the EU ETS has increased, leading to calls from some stakeholders and Member States 38 to move away from free allocation for the aviation sector. The European Green Deal and 2030 Climate Target Plan clearly set out the Commission’s intention to propose to reduce the EU ETS allowances allocated for free to airlines.

The EU ETS has delivered 200 million tonnes of reductions/offsets over 8 years 39 , being applicable to all operators, EU and non-EU alike, on the same routes. The compliance rate is extremely high, as reported last in the recent Carbon Market Report issued by the Commission 40 . This provides the aviation contribution to the 2020 EU climate objective and, as foreseen in the CTP, this will continue for 2030.

The EU and its Member States’ strong support of international action complementary to domestic or regional action to address climate change, including in the field of international aviation at ICAO, is underlined by the fact that the European Parliament and Council have amended the EU ETS three times to reduce its initial geographical scope and thereby facilitate progress in ICAO on CORSIA.

First in 2012, when the ICAO Council decided to begin developing guidance for a GMBM for international aviation emissions, EU ETS scope was temporary limited, allowing airlines to choose either full coverage or pan-European coverage. Following the 2013 ICAO Assembly Resolution A38-18 to develop a GMBM to offset international aviation emissions, the EU further limited the scope to intra-EEA flights only during the period 2013-2016 while maintaining equal treatment on routes. Pending the development of the CORSIA implementing rules and modalities (SARPs), the EU ETS Directive was last revised in 2017 to extend the most recent scope derogation until the end of 2023, while indicating the conditions under which the EU would consider implementing CORSIA, namely that its implementation is “consistent with the Union economy-wide greenhouse gas emission reduction commitment for 2030 with the aim of preserving the environmental integrity and effectiveness of Union climate action”. This was intended to provide continued momentum to the international process in the light of the political commitment made by the EU and its Member States to take part in CORSIA from its "pilot phase" (as of 1 January 2021), subject to certain conditions 41 .

The Commission has again recently recognised 42 that international cooperation on aviation is desirable and that international instruments such as CORSIA should promote effective action in this context.

In 2020, the EU ETS was extended to all departing flights from the EEA to Switzerland 43 . As a result, Switzerland applies its ETS to all departing flights to EEA airports, ensuring a level playing field on both directions of routes, as a result of the EU/Switzerland Agreement on the linking of their respective emission trading systems. In the EU-UK Trade and Cooperation Agreement reached in December 2020, the EU ETS shall 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.

(Annex 8 sets out the chronological development of the EU ETS)

2.Problems definition

2.1.What is/are the problems?

2.1.1.Problem 1: Aviation sector must contribute to economy-wide emission reductions necessary to achieve the increased level of climate ambition and to avoid the risk of global aviation emissions undermining the global temperature goals of the Paris Agreement

Aviation emissions account for 2-3% of global CO2 emissions and have significantly increased since 1990 both at EU-level but also globally. At EU-level, CO2 emissions from aviation made up 3.7% of the economy-wide total or 15.7% of CO2 transport emissions in 2018 50 . Aviation’s emissions in Europe increased an average of 5% year-on-year between 2013 and 2018 51 . In 2018, the EU was responsible for 15% of the global aviation CO2 emissions 52 . Moreover, non-CO2 climate impacts are estimated to be at least as important in total as those of CO2 alone 53 .

Notwithstanding the recent reduction in traffic as a consequence of the COVID-19 pandemic, aviation climate impacts are projected to grow further given the sector’s historical growth of above the average of other economic sectors. Before the COVID-19 pandemic, Eurocontrol had projected an annual increase in European aviation emissions by 53% by 2040 compared to 2017 54 . Before the COVID-19 crisis, ICAO had estimated that, by 2040, international aviation emissions could rise by up to 150% compared to 2020 55 . However, given the impact of the pandemic, the airline industry does not expect air travel demand to return to pre-COVID-19 levels before 2024; however, this does not seem to impact significantly the dominant upward trend.

Considering current and projected emissions from the aviation sector, and in the context of an enhanced climate ambition of the EU for 2030, the contribution from aviation to the achievement of the EU objective will need to be significantly strengthened, therefore, also with a view to allow for the necessary contribution to the EU climate neutrality by 2050. The 2019 European Aviation Environment Report also highlighted this need 56 . 

Growing aviation emissions are not only an issue within the EEA but also at the global level. The latest UNEP gap report 57 , recently issued, recalls the growing importance and urgency of reducing aviation emissions (CO2 and non-CO2 emissions having a climate impact) generated by aviation activities, against the temperature goals of the Paris Agreement and climate science.

Since the last review of the EU ETS for aviation, the European political context has evolved with President Von der Leyen’s Political Guidelines 58 , which emphasize that “carbon emissions must have a price, and every person and every sector will have to contribute”. Beyond the increase in EU 2030 ambition to achieve domestic EU-wide economy-wide greenhouse gas emissions reductions of at least 55% compared to 1990, the 2030 Climate Target Plan communication underlines that “in accordance with its international commitment to economy-wide action under the Paris Agreement, the EU should continue to regulate at least intra-EU aviation emissions in the EU ETS”. In its conclusions of 11 December 2020, the European Council “invites the Commission to assess how all economic sectors can best contribute to the 2030 target and to make the necessary proposals, accompanied by an in-depth examination of the environmental, economic and social impact at Member State level” 59 . Outgoing flights are in the scope of the EU 2020 target of -20% GHG emissions reduction 60 , and have been included in the legislation enacting the EU’s -40% GHG emissions reduction commitment 61 and now a -55% NDC 62 .

For aviation to contribute to the goals of the Paris Agreement, broader global action is required. CORSIA is a step in this direction. Additional measures will in any event be needed to enhance the international aviation contribution to the fight against climate change. The Commission is also working with third countries to promote carbon pricing: co-operation with China has been underway for the last eight years, and China’s national ETS begins operating this year, but does not include (domestic) aviation in its scope for the time being. As part of a new trans-Atlantic agenda 63 , the Commission has emphasized that the EU and US “should work closely together on emissions trading, carbon pricing and taxation”.

The decarbonisation of the aviation sector requires an enhanced carbon price signal, including in view of the significant investments needed in Sustainable Aviation Fuels (SAF), improved air traffic management infrastructure, as well as further research and deployment of advanced and breakthrough technologies (such as open rotor engines, carbon-free synfuels, hydrogen or electrically-propelled aircrafts). The use of price instruments to decarbonise the sector is considered to have less-adverse distributional effects, and to be potentially socially progressive 64 . The EU ETS’ current price incentive of approximately €115 per tonne for zero emission jet fuel, is by itself insufficient to bridge the price gap with conventional kerosene. However, by investing auctioning revenues through the Innovation Fund, the EU ETS can also support deployment of breakthrough technologies and drive the price gap down. EU Member States have reported using more than €46 billion or 77% of their ETS revenues for climate action over the last 8 years. Last, the need to further internalize environmental costs and allow for a level playing field among modes of transport is also recognised as an important element of the decarbonisation strategy of the sector. In that respect, the review of energy taxation is also considered as one of the initiatives that would contribute to achieving the 55% net reduction target presented under the ‘Fit for 55’ package of the European Green Deal 65 .

2.1.2.Problem 2: Promote broad and effective participation by States in CORSIA and ensure effective implementation of CORSIA through the EU ETS in a manner that is fully compatible with the EU 2030 climate objectives and the EU’s commitment under the Paris Agreement

2.1.2.1.The effectiveness of CORSIA

Effective implementation of CORSIA worldwide will depend on the baseline (beyond the pilot phase), the quality of required offsets, level of participation, how CORSIA is being implemented domestically, the avoidance of double counting, fuels framework and enforcement by states. Whether CORSIA will work depends on all these factors.

Favoured by the design of CORSIA and its implementing elements, and significantly amplified by the new baseline adapted at the request of international partners as a result of the COVID-19 pandemic, the available supply of units exceeds the likely demand in the short-term (if any demand at all materializes during the pilot phase as a result of the new baseline). This in turn means that, as long as demand is low, CORSIA will not act in practice as an incentive towards emission reductions from the sector.

Indeed, in comparison to current carbon price of around €30 per tonne CO2, international credits trade at far lower prices. For example, the CDM credit price is currently around €0.33 per tonne CO2. Added to this the uncertainty of any significant credit demand in the next years, the steering effect of CORSIA remains doubtful. Where supply exceeds demand, the price for credits will go towards zero.

Notwithstanding the need for robust rules to be implemented by ICAO and participating States, broad/full participation from strategic partners in CORSIA is key if it is to deliver on its initial objective.

The EU has demonstrated its determination to play its part and will continue to do so, but it should also be clear that, for CORSIA to work and to be effective, all strategic partners need to be on board and undertake domestic implementation. 88 countries are listed on the official ICAO Secretariat website 66 , including all EU Member States and all G7 countries, but key States are still missing at this juncture e.g. China, India, Russia, Brazil.

Against this backdrop, the EU will continue to support efforts, multilaterally in ICAO and bilaterally with strategic partners, to secure adequate participation and implementation, as well as to make sure that CORSIA delivers on its initial objective and is further strengthened, avoiding any backsliding at the occasion of the first review planned for 2022.

2.1.2.2.The implementation of CORSIA through the EU ETS in a manner that is fully compatible with the EU 2030 climate objectives and the EU’s commitment under the Paris Agreement

Article 28b of the EU ETS Directive 2003/87/EC requires the Commission to present a report to the Council and the European Parliament in which it shall consider ways for CORSIA instruments to be implemented in Union law through a revision of this Directive. It shall also examine the ambition and overall environmental integrity of CORSIA, including its general ambition in relation to targets under the Paris Agreement, the level of participation, its enforceability, transparency, the penalties for non-compliance, the processes for public input, the quality of offset credits, monitoring, reporting and verification of emissions, registries, accountability as well as rules on the use of biofuels. In addition, the report shall consider whether the provisions adopted under Article 28c(2) need to be revised. Article 28b of the EU ETS Directive foresees the Commission accompanying the report with “a proposal, where appropriate, to amend, delete, extend or replace” the derogations provided for in Article 28a (which limit the scope of EU ETS to intra-EEA flights from 2017-23), that is “consistent with the Union economy-wide greenhouse gas emission reduction commitment for 2030 with the aim of preserving the environmental integrity and effectiveness of Union climate action”.

The review of the EU ETS for aviation should ensure that CORSIA is implemented as appropriate through the EU ETS. Any amendment of the EU ETS Directive must be consistent with EU’s ambition to become climate neutral by 2050, the Union’s economy-wide greenhouse gas emission reduction commitment for 2030 and with the aim of preserving the environmental integrity and effectiveness of Union climate action. At the same time, Union legislation must ensure equal treatment for airlines operating on the same routes.

Based on the ICAO definition of “international flights”, implementing the CORSIA SARPs for the offsetting would mean that airlines based in an EU Member State should offset CO2 emissions generated by international flights between states participating in CORSIA, above the baseline level, irrespective of the ETS in place in the EU and its higher level of climate ambition.

Thus, all international emissions of flights between EU Member States could potentially be subject to both the EU ETS and CORSIA regimes in as far as intra-EEA flights are concerned. However, the EU policy space and level of climate ambition have been safeguarded as a result of the differences agreed at the EU level and filed by EU MSs in ICAO, recalled in a formal EU statement delivered at 2019 ICAO Assembly at the occasion of the adoption of a CORSIA Resolution. This was considered crucial in order not to prejudge the review of the EU ETS in the light of CORSIA and to fully preserve the integrity of EU climate objectives.

This also means that the validity of EU law (ETS) is fully preserved, with airlines being responsible to surrender allowances for their intra-European emissions (and in respect of departing flights to Switzerland) through the EU ETS.

Ultimately, however, the issue is how to apply CORSIA while making sure that it does not allow for any backsliding in terms of climate ambition compared to what the EU has committed to for 2030, does not bring any undue administrative burden compared to the benefits expected and is fully consistent with the spirit and “mandate” of the last ETS review in 2017.

2.1.3.Problem 3: The current high proportion of free allocation of aviation allowances, in the absence of carbon leakage, undermines the price signal and risks future windfall profits.

When the first proposal to include aviation in the EU ETS was issued, free allocation was provided to align with other sectors that received free allocation in the early phases of the EU ETS, also as a way to facilitate the initial acceptability of the new system. Under the ETS more generally, free allocation is now targeted at sectors at significant risk of carbon leakage, while auctioning is recognised as the basic principle for allocation, as it is the simplest, and generally considered the most economically efficient, system.

While a significant risk for carbon leakage for aviation due to the ETS has not been substantiated due to its very nature (difficulties or even impossibility to change/divert route due to the very nature of the traffic), 85% of aviation allowances are nevertheless allocated for free which undermines the effectiveness of the carbon price signal thereby removing incentives for aircraft operators to decarbonise their activities. In 2019, aircraft operators received free allocation of 31.3 million allowances, covering 46% of the total emissions. In contrast, the majority of rail activity in Europe has been covered by the EU ETS since 2005, because of its use of electricity, and it has not received free allocation.

The total number of allowances for aviation was based on average emissions in 2004-2006, while the allocation to each operator was based on activity data from 2010. However, the individual emissions of airlines have taken differing trajectories since 2010. This system has created unfair and unjustified treatment among operators, which now need to be rectified to allow for a better level playing field, also for new entrants. No action by the EU would perpetuate a free allocation scheme, which mirrors the market configuration of 2010.

Taking into consideration the impact of COVID-19 on air traffic, and the likelihood that 2019 levels will not be reached before 2024, a continuation of the current allocation levels would generate not costs, but windfall profits for operators (i.e. a large proportion of the opportunity cost of using allowances received for free has been passed on to consumers/customers), and would create downwards pressure on the prices of ETS allowances. The price signal would not only be insufficient to generate emission reductions in line with the 2030 climate targets but would act in the opposite direction than that required by those targets.

A transition to a higher or full auctioning share, whether immediate or staggered, would eliminate windfall profits and put new entrants on the same competitive footing as existing operators 67 .

Free allocation of aviation allowances does not take into account cost pass through from producers/service providers to customers and consumers, a behaviour which is much better understood now. The issue had been raised for a while by the EP and, as a result of the last co-decision, the EU ETS Directive requires the Commission to “study the ability of the aviation sector to pass on the cost of CO2 to its customers in both the EU ETS and ICAO’s market-based measure, comparing this to industries and to the power sector, and with the intention to propose to increase the percentage of auctioning pursuant to the review referred to in Article 28b(2)” 68 . The Commission study on auctioning and cost-pass through 69 shows that the majority of the opportunity cost of emission allowances is passed through to customers. Whether allowances are received free of charge or against payment would not be expected to make any difference to this cost pass-through decision. Consequently, full auctioning would not imply unreasonable costs on aircraft operators. Recently, in 2020 the European Court of Auditors found that “the number of free allowances allocated to the industry and aviation sectors in phase 3 was not based on their ability to pass through costs (see paragraphs 29 to 31) and that, while carbon leakage has the potential to affect EU carbon markets, and thus the evolution of the greenhouse gas emissions worldwide, there is limited targeting of the free allocation of allowances (see paragraphs 32 to 38)” 70 .

The Communication on a European Green Deal 71 states that there will be a proposal to reduce the free allowances allocated to airlines. This is re-stated in the Communication on Stepping up Europe’s 2030 climate ambition: “For aviation, the Commission will propose to reduce the free allocation of allowances, increasing the effectiveness of the carbon price signal in this sector, while taking into account other policy measures such as energy taxation and the ReFuelEU initiatives”.

In this context, the revision of the EU ETS for aviation should ensure that the allocation of allowances is aligned with the reinforced EU climate objective and is economically efficient.

80% of the public consultation respondents, half of which private sector stakeholders and including most of respondents from the aviation sector, believe that reducing or removing the free allocation of allowances to airlines would increase the cost of flying for operators and consumers. At the same time, 69% of respondents, gathering mostly NGOs and EU citizens, agreed that a reduction or removal of the free allocation of allowances to airlines would increase the climate change mitigation impact by the EU.

3.Why should the EU act?

3.1.Legal basis

The legal basis for the EU ETS Directive 2003/87/EC, as well as all subsequent legislation amending it or other legislation regulating GHG emissions, is Article 192 of the Treaty on the Functioning of the European Union. This should remain the legal basis for any new legislation addressing climate impacts of aviation, as the principal objective of the measure is the protection of the environment through the reduction of GHG emissions.

3.2.Subsidiarity: Necessity of EU action

As recalled in chapter 1, the EU has committed to economy-wide climate neutrality by 2050, and the Commission has proposed an EU-wide net greenhouse gas emissions reduction target by 2030 compared to 1990 of at least 55%, which has been endorsed by the European Council. To reach the target, all sectors need to contribute. The projected continued growth of aviation emissions represents a challenge to reaching the EU’s target and its commitments under the Paris Agreement.

Article 28b of the EU ETS Directive, as amended by Regulation 2017/2392, requests the Commission to present a report to the European Parliament and to the Council in which it shall consider ways for CORSIA to be implemented as appropriate in Union law through a revision of the EU ETS Directive. Furthermore, Article 3d requires the Commission to undertake a study on the cost pass-through of the aviation sector with the intention of making a proposal to increase the percentage of auctioning of aviation allowances, pursuant to the review referred to above.

Any amendment to the ETS Directive can only be brought about by the EU. An EU legal act is required for Member States to apply CORSIA for the flights covered by the geographical scope of application of Directive 2003/87/EC as set out in its Annex I, i.e. flights departing from airports in the EEA and arriving to other airports in EEA or to third countries and, incoming flights to airports in the EEA from third countries.

To ensure a joint effort of EU Member States towards meeting the EU's climate objectives and to ensure a level playing-field on the EU single market, it is essential for the EU to continue to act to ensure a harmonised approach to appropriate implementation of CORSIA across all Member States.

3.3.Subsidiarity: Added value of EU action

Acting at EU level is more efficient than acting at the Member State level, in terms of scale – the larger an emission trading system is, the more cost-efficient the emission reductions. It also prevents distortion of competition in the internal market by ensuring that the environmental requirements are harmonised across the EU. In order to avoid distortions of competition in comparable circumstances, it is important that all flights on the same route be treated in the same way. This harmonized approach through an EU emission reduction tool (cap and trade system) has allowed for aviation's contribution to the EU 2020 climate objective and is set to ensure consistency with the 2030 target.

Specifically, as regards the implementation of CORSIA, EU action ensures the participation of all Member States (effectiveness) while also ensuring a level playing-field on the EU single market and administrative simplification for operators concerned.

4.Objectives: What is to be achieved?

4.1.General Objectives 

4.1.1.Ensure achievement of increased EU climate targets for 2030 and 2050 and fulfil international commitments under the Paris Agreement

Through the 2030 Climate Target Plan, the Commission proposed to raise the level of ambition on climate action and to cut greenhouse gas emissions by at least 55% by 2030 in order to set Europe on a responsible path to becoming climate neutral by 2050. It states that mobility will still have to be made substantially cleaner and that transport, including aviation, will have to substantially reduce emissions in particular in sectors that so far have been hard to decarbonise such as aviation. This means enhanced emission reductions from all sectors of the EU economy, including aviation, consistent also with the EU’s economy-wide commitment under the Paris Agreement.

As recently stated in the CTP, the EU ETS will remain a key tool to achieve reductions of CO2 emissions from aviation by 2030 (directly or indirectly).

The EU ETS is a system designed to drive CO2 emission reductions first in the sectors covered and in the locations where it is cheapest to achieve. Given the rapid growth in aviation activities, the EU ETS has not yet led to aviation sector reductions in absolute terms. This state of play might change if

·the cheapest reductions have already been achieved (reducing emissions in the aviation sector is considered generally more expensive than in other sectors);

·the cost of allowances increases, to a level leading to investment into new technology, operational improvements and sustainable aviation fuels and this, combined with EU initiatives like RefuelEU, leads to direct emission savings;

·the carbon cost (through ETS, removal of tax exemption, removal of VAT exemption or other financial measures or through the ReFuelEU initiative) increases the air fares, potentially reducing demand and incentivising shift to other means of transport;

·demand for air travel is reduced due to rising awareness of the impact of aviation and more online conferencing replacing business travels.

Therefore, strengthening the ETS is considered as an important part of the solution to achieve both emission reductions while reinforcing the price signal to incentivise necessary investments in decarbonisation. At the same time, other EU measures are also needed to further reinforce the price signal, outside the scope of this impact assessment (in accordance with the concept of a “basket of measures”), as also indicated by the fact that a growing number of Member States feel the need to adopt passenger duties. The concept is further supported by the fact that 82 % of respondents to the public consultation agreed that market-based measures such as the EU ETS and CORSIA should be combined with other policies such as support for innovative aviation technologies, operational improvements, taxation, and the production and use of sustainable aviation fuels.

Enhanced action for both domestic and international emissions is needed to significantly reduce climate impacts from international aviation, consistent with the Paris Agreement, the commitments under ICAO and climate science.

The objective of CORSIA, i.e. essentially to compensate for the growth of international aviation CO2 emissions beyond 2019 levels through international credits, is expected to lead to CO2 emission reductions on a global scale, and may even have a positive effect on domestic aviation emissions all over the world, but is in itself far from being sufficient to duly contribute to the EU’s objective of climate neutrality by 2050.

CORSIA – as the first international sectorial agreement on CO2 emissions following the conclusion of the Paris Agreement – should in particular deliver CO2 emissions reductions compared to ‘business as usual’ on the global scale. In case it will ensure contribution from all major international aviation states, thereby leading to world-wide collective action on a non-discriminatory basis, it should be considered as a complement to the EU ETS.

Assuming adequate environmental integrity of offsets 72 and avoidance of double counting, CORSIA offsetting would be transitionally helpful pending the deployment of breakthrough technologies such as electrification, hydrogen or synthetic fuels produced from renewable energy sources. CORSIA relies on airlines purchasing and cancelling offset units that certify reductions achieved in other sectors. The Paris Agreement covers all anthropogenic emissions, from all sectors of the economies, with developed countries being required to undertake economy-wide action while developing countries are expected to move towards economy-wide action over time.

4.2.Specific objectives

4.2.1.Lead international efforts, build alliances with the like-minded and maintain competitiveness

In order for the EU to lead international climate efforts, it should encourage other countries to follow. In 2018, the EU-27 accounted for around 22.5% of total global aviation CO2 emissions (7.5% intra-EU and 15% from flights that either depart or land in the EU to/from a non-EEA third country). The need for the EU to also spur on ICAO states to take action to contribute to achieving the temperature goals of the Paris Agreement is self-evident against this backdrop. In this context, it is encouraging that China has put a national ETS into operation, which may be extended to aviation, and that Korea and New Zealand have ETSs, which cover some emissions from aviation.

4.2.2.Increase carbon price signal, while avoiding carbon leakage and ensuring a level playing field and fairness

As in other areas of climate action, it is important to ensure that the options selected to reduce emissions do not lead to an increase in climate impacts elsewhere, the so-called carbon leakage. There is no evidence of carbon leakage at present for aviation, because there is equal treatment of all airlines on flight routes covered by the ETS. On the other hand, the issue of ‘hub leakage’ (aviation activity could theoretically be somewhat displaced to hub airports where carbon pricing is not applied), should be examined. Another aspect worth examining is substitution of air travel by other means of transport, such as trains.

Ensuring that operators on the same route are treated equally remains a key specific objective, to avoid any discrimination on grounds of nationality. This includes examining the situation of flights to and from outermost regions in addition to impacts on outermost regions in general. It should also be taken into account that EU carriers have a relatively large share of their emissions covered by the EU ETS compared to their non-EU competitors.

5.What are the available policy options?

5.1.What is the baseline from which options are assessed?

Baseline

For CORSIA implementation, options are assessed against option C1BASE (as described below), the current ETS scope, where the application of the EU ETS legislation is limited to intra-European flights. This is the situation under the current scope derogation, which applies to emissions until end 2023.

The baseline against which all other options for auctioning of allowances are assessed is option A0BASE, the ‘do-nothing’ option, under which 15% of allowances for aviation are auctioned as under the current legal situation until 2030.

These are the baselines for the assessment of policy options modelled using the Aviation Integrated Model (AIM) for aviation sector impacts as described in Annex 4.2. As for other impact assessments for the Fit for 55 proposals, we use values from the REF scenario modelled under PRIMES (as described in the common methodological annex 4.1), the common baseline, as inputs for the AIM modelling. The baselines C1BASE and A0BASE use values from the REF scenario to ensure consistency.

Modelling approach and assumptions

The quantitative analysis of impacts of each option and combinations is based on modelling of the aviation sector using the AIM global aviation systems model and of the wider economy using the E3ME global macro-economic model. The full results are presented in the study by ICF commissioned by the Commission 73 . The modelling also relied on information from the assessment of CORSIA, the assumption that a large number of countries apply CORSIA through domestic regulation and maintain their participation, the price of CORSIA eligible credits, and from the study of cost pass through under the EU ETS.

The modelling was carried out both for a set of ‘most likely’ trajectories for input variables (oil price, carbon price, demand growth, CORSIA participation and changes in technology), which give the nominal values for which the results are presented here, unless otherwise stated, and across a series or grid of different ranges or scenarios for these input variables. Uncertainty is examined by using in most cases a high, central and low value for each input variable. This allows highlighting of the cases where a variable is particularly important. The impact of some variables that do not require model runs were also tested and are presented here, such as the extent to which offsets under CORSIA are real and additional.

The model runs were first undertaken in 2020, but were updated by new model runs in January 2021 to reflect the latest information on the impact of COVID-19 and revised Commission projections of aviation demand. The results presented here are those updated to reflect the impacts of COVID-19.

Table 5.1: Broad categorisation of AIM model inputs which may lead to differences in outputs (as assessed by total aviation sector CO2 up to 2050 on a global/extra-EEA/intra-EEA basis)

The variables to which results are most sensitive include CORSIA implementation by states and continued participation, technology assumptions and demand.

Participation

CORSIA coverage will vary substantially depending on its implementation and continued participation by states. CORSIA only covers emissions from international flights when both origin and destination countries are participants. In other words, if a country does not implement or decides not to continue participating in CORSIA, none of the flights to and from that country are covered. In addition, CORSIA foresees that no state should regulate airlines based in any third country. This would pose challenges to ensuring equal treatment on routes, which is important for any economic measure to be effective. As a result, emissions coverage decreases rapidly with reduction in participation.

As the ICAO Secretariat has not published the responses which were required by 30 June 2020 to a State letter, these responses and any conditions attached are not public. The analysis in this impact assessment is based on what the ICAO Secretariat has published on its website. The analysis looks at the following CORSIA participation scenarios:

·Initial assumed implementation: the level assumed for the results presented (nominal) values, assumes implementation and continued participation throughout the period 2021-2035 of the 88 States listed by the ICAO Secretariat on its website in December 2020 (which includes the US), but that none of the larger countries which have opposed CORSIA (China, Russia, India, Brazil or Vietnam) participate in any of its phases.

·High implementation and continued participation: assumes implementation throughout the period 2021-2035 of all of the 88 States listed by ICAO Secretariat on its website in December 2020, plus starting in 2027, participation of the currently five additional States - China, Russia, India, Brazil and Vietnam - which are not exempt from CORSIA’s second phase.

Technology

Technology developments are modelled by specifying individual characteristics of candidate technologies for nine aircraft size class. However the characteristics of future technologies (e.g. new aircraft models, retrofits, operational measures or alternative fuels) can be highly uncertain. In many cases, estimates of the benefits of technologies depend on engineering breakthroughs that have still to be made.

Therefore, the technology adoption model uses scenarios to assess the impact of uncertainty in technology parameters. This assessment is based on three scenarios using technology parameters, including changes in aircraft operating costs by cost type and changes in fuel burn, as derived from Schäfer et al. (2016) 75 and Dray et al. (2018). For example, the ‘pessimistic’ technology scenario used in this study describes a future in which it is particularly hard to reduce aviation emissions through technology; this assumes the reduction in fuel use from new technologies is at the low end of available estimates, costs are at the high end of available estimates, and the date from which the technology is available is at the late end of available estimates. The central scenario assumes all technology parameters are at central/’most likely’ values from available estimates, and in the ‘optimistic’ scenario reductions in fuel use from new technologies are at the high end of available estimates, costs are at the low end of available estimates, and the date from which the technology is available is at the early end of available estimates. In all cases, consistency with ICAO’s CO2 standard is assumed. Measures are adopted based on their cost-effectiveness. This means that high fuel and/or carbon prices can affect which technologies, retrofits and operational strategies are adopted.

The results also depend on a number of other input assumptions, for example the scale of supply of cellulosic biomass-derived drop-in aviation fuel. Projections of how much biofuel might be in use in aviation up to 2050 vary widely and are dependent on the costs, sustainability and supply of biomass assumed, as well as the characteristics of and demand from other sectors and policies. Most recent multi-sectoral analyses project relatively low aviation biomass use to 2035.

Electrofuels (or power-to-liquid fuels) also have potential to contribute to climate neutrality. However, given the current costs at 3-6 times that of untaxed kerosene and uncertainties about uptake, electrofuels are not included in the modelling for this impact

Carbon prices

The following carbon price scenarios are used in this impact assessment for EU allowances and CORSIA eligible offsets (adjusted for the impacts of COVID-19).

Table 5.2: Carbon price assumptions by scenario and allowance type, corrected for the impacts of COVID-19.

The nominal values in table 5.2 above are those used for the results presented in this impact assessment, unless stated otherwise. The nominal case uses the REF scenario EU ETS price, as inthe Impact Assessment for the EU ETS and other proposals. The ETS carbon price in REF only reflects currently adopted policies, with 2030 price at €32 and average prices at €29 for the period 2021 to 2030. Currently observed carbon market prices do already respond to the increased GHG target and vary between €40 and €55. The policy scenarios modelled under the ETS revision Impact Assessment project average carbon price ranges between €45 and €70 for the period 2026 to 2030, with projected carbon prices in the year 2030 ranging between €50 and €85. This is broadly in line with external analyses, for which the average of price forecasts for 2030 is €71, with a large range between €42 and €89 (with all prices adjusted to 2020 Euros).  Both this and the ETS impact assessment recognise that an increase in GHG reduction ambition would lead to higher carbon prices. In addition, the broader EU ETS revision impact assessment also uses the following rounded central carbon price assumptions, based on these and other sources, for the assessment of some impacts, such as auctioning revenues, (in €2020): €50 as average for the whole period 2021 to 2030.

Higher carbon cost scenarios for both EU ETS allowance and CORSIA were also used in sensitivity testing for this aviation ETS impact assessment. These were defined before the finalisation of the modelling exercises for the general ETS impact assessment and are given in table 5.2 above (see the ‘high’ scenarios). The 2030 carbon price assumptions for the ETS high price scenario (EUA (EU ETS) IIb COVID-19 (high)) are however consistent with the upper range of the above price projections, so that the full range of carbon prices is covered by the scenarios modelled. Also, when expressed as averages, the high cost scenario for EU allowances under the EU ETS are above the above mentioned levels used in the broader ETS impact assessment with (in €2018): €51.7 as average for the whole period 2021 to 2030

To ensure consistency in the calculation of revenues, the assumptions of the general ETS impact assessment have been used just for revenues.

5.2.Description of the policy options

5.2.1.CORSIA implementation

5.2.1.1.Option C0WIDE: Return to full scope EU ETS

This option proposes applying the EU ETS legal scope of departing flights to third countries (other than Switzerland and the UK), and incoming flights from third countries (unless exempted), if no amendment to the ETS Directive was adopted before surrender requirements apply to emissions as of 2024 76 . Currently, the flights exempted from this scope are those incoming from Switzerland, while a delegated act is being prepared to exempt incoming flights from the UK, which are in the scope of the ETS of the UK. Incoming flights could also be exempted to provide for optimal interaction between the EU ETS and third countries' measures for reducing the climate change impact of flights. This would maintain the equal treatment of aircraft operators on routes, with the EU regulating departing flights to countries applying CORSIA, while these countries would be responsible for flights to the EEA 77 . This would also be consistent with the EU’s NDC that covers outgoing flights.

In this option, EU allowances are required to be surrendered by airlines for these emissions, while CORSIA is not applied at all by any EU or EEA member state.

Table 5.3: Key features of Option C0WIDE

5.2.1.2.Option C1BASE: Intra-EEA scope

This option is the baseline. It mirrors the current application of the EU ETS. The EU ETS would be applied in line with the scope of the system as currently applied 78 : allowance surrendering obligations for aircraft operators would be based solely on emissions from flights between aerodromes located in the EEA, and for departing flights to Switzerland and the UK. In this option, CORSIA is not applied to any intra-EEA routes, nor on flights to and from the EEA.

Table 5.4: Key features of Option C1BASE

5.2.1.3.Option C2CONLY: CORSIA only

In this option, only CORSIA would be applied to all international flights (as commonly defined by ICAO): flights between EEA states and flights between EEA states and third countries. The EU ETS would no longer apply to aviation in this option.

Table 5.5: Key features of Option C2CONLY

5.2.1.4.Option C3CLEAN: Clean

The EU ETS would continue to apply to the current intra-EEA scope, as in Option C1BASE, and CORSIA would be introduced for extra-EEA flights, i.e. flights between EEA States and third countries (other than to Switzerland and the UK). In this option, the EU ETS would be applied as at present and CORSIA would be applied to flights to and from third countries which participate in the scheme, provided that a level playing field is maintained on routes. Any emissions above CORSIA’s baseline on routes to and from those third countries would be offset by airlines based in Europe using CORSIA eligible offsets.

A variation of this option is that the EU operators use a sub-set of the ICAO CORSIA Implementation Element listing eligible units, or use ETS allowances if they choose to do so 79 . The EU might decide that units should originate from reductions in countries which are Party to the Paris Agreement, to encourage participation in the global agreement to tackle climate change. The EU might also decide that units should originate in countries which participate in CORSIA 80 , so as to incentivise participation in ICAO’s scheme and discourage free-riding. It could also be ensured that double-counting is avoided with Paris commitments. The EU could also decide to extend the list of eligible offsets to project types not on ICAO’s list.

The option would continue to keep the currently applicable scope of the EU ETS and would potentially strengthen it by application of CORSIA on extra-EEA flights, which could generate additional emissions reductions compared to the current situation, when international aviation emissions as a whole exceed 2019 levels (the current CORSIA baseline).

Table 5.6: Key features of option C3CLEAN

5.2.1.5.Option C4MIX: Mix

In this option, the EU ETS would continue to cover the emissions from domestic flights within each EEA state. For flights between EEA states, which are covered by the EU ETS at present 81 , the ETS would continue to apply for emissions up to the CORSIA baseline (bearing in mind that no CORSIA obligation to offset emissions arises as long as emissions are below that baseline). For emissions above the baseline, CORSIA would then apply. 

In practical terms, given that CORSIA has a later timeline than the ETS, the EU ETS would apply in a way that any CORSIA offsetting that actually takes place could simply be deducted from the next EU ETS emissions surrender obligation, thereby avoiding an airline paying both the ETS carbon price and for offsets under CORSIA, for the same emissions. Accordingly, to ensure the environmental integrity of the EU ETS, the emissions covered by CORSIA offsetting would be deducted from the available amount of allowances (the cap).

For extra-EEA flights between EEA states and third countries, only CORSIA would apply.

Same as for Option C3CLEAN, a variation also of this option would be that the EU applies some specific conditions to the choice of offsets to be used for CROSIA by operators administered by an EEA member state.

De facto, this option would retain the applicability of the EU ETS within the currently applied scope, as long as aviation emissions on all routes worldwide covered by CORSIA do not exceed 2019 levels 82 . Afterwards, intra-EEA emissions would be offset with international credits to the extent required by CORSIA 83 (with the consequence that they could represent reductions achieved potentially outside the territory of the EEA).

Table 5.7: Key features of Option C4MIX

5.2.1.6.Option C5MIX2: Mix bis

In this option, for operators with licences issued by EEA States, the EU ETS would apply to non-domestic intra-EEA flights (for all emissions generated by these flights, independently from the level). CORSIA would apply to flights by these operators to and from third countries participating in the scheme. For operators with licences issued by third countries, the EU would no longer be able to ensure that there is a level-playing field on routes as CORSIA would also apply on those non-domestic intra-EEA flights, in addition to flights between EEA States and third countries participating in CORSIA. The EU ETS would not be applicable to third country operators. This option would not cover domestic flights at all.

Table 5.8: Key features of Option C5MIX2

Table 5.9: Summary of CORSIA implementation options

5.2.2.Auctioning share increase

5.2.2.1. Option A0BASE: “Do nothing” 

Article 3d paragraph 2 of the EU ETS Directive provides that 15% of allowances for aviation shall be auctioned and that the Commission shall study cost-pass through by airlines “with the intention of making a proposal to increase the percentage of auctioning” in the current review. In the absence of any amendment, this level would continue under a revised ETS as well. This option is the baseline against which the other policy options will be assessed.

The aviation cap would be subject to the linear reduction factor, which is currently 2,2%, yearly, and which will be subject to revision in the upcoming ETS legislative proposal 84 . The total number of corresponding allowances would be distributed through free allocation (82%), special reserve (3%) and auctioning (15%).

5.2.2.2.Option A1FULL: Immediate full auctioning

In this option, 100% of the allowances for aviation would be auctioned from the entry into force of the revision (assumption for the assessment: 2023). The aviation cap, as calculated before starting full auctioning, would be decreased by the (revised) linear reduction factor each year up to 2030.

In case the scope of the EU ETS were to change as a consequence of the application of one of the options in section 5.1.1, which differs from the intra-EEA scope, the aviation cap would have to be recalculated proportionally.

5.2.2.3.Option A2SWIFT: Swift phase out

The application of this option would lead to full auctioning of allowances for aviation by 2025. It would start with an auctioning share of 60% in 2023, and then a share of 80% in 2024. The method of distribution between operators would continue the current situation, based on 2010 traffic.

5.2.2.4.Option A3SLOW: Slow phase out

This option would entail a slower movement to full auctioning by 2030. It would start from 20% of auctioning of allowances for aviation in 2023 and would increase in a linear manner to full auctioning by 2030. The method of distribution between operators would continue the current situation.

5.2.2.5.Option A4RED: Slow reduction

Under this option, the auctioning share of 20% of allowances for aviation would also be set in 2023. It would increase in a linear manner to end at 55% at least until 2030 (and afterwards, in the absence of future revisions of the ETS). This option would maintain a number of free allowances for aviation at least until 2030 (and afterwards in the absence of future revisions of the ETS). The method of distribution between operators would continue the current situation.

A mix of business associations and NGOs made suggestions to revise options listed in the questionnaire or to introduce new options. The top three reasons for such suggestions were the importance of creating a level playing-field between EEA airlines and non-EEA airlines; avoiding market distortions on certain routes and avoiding hub leakage; and the impact of COVID-19. The concrete suggestions included aligning policy reference year with CORSIA baseline year 2019; ensuring no double counting; and four new options varying in their coverage of EU ETS.

5.2.3.Cross-cutting issues

In combination with the options on the main parameters above, there are some issues which need to be addressed by the proposal:

5.2.3.1. Exemptions for outermost territories

Currently, the EU ETS temporarily exempts flights to and from outermost regions 85 (e.g. Tenerife – Madrid; Berlin – Tenerife), as well as flights between two different outermost regions (Madeira - Azores) from 2013-2023 86 . However, flights within the same outermost region are covered by the EU ETS (Lanzarote – Tenerife), the exception to that being Public Service Obligation (PSO) flights, which are excluded.

From an environmental perspective, this exemption covers about 14% of the EU ETS aviation emissions. The share of flights to/from outermost regions considered as domestic (to their respective Member State) represents about 6% of the aviation emissions currently covered by the EU ETS 87 . CORSIA does not foresee any special status and exemptions for remote or outermost regions.

The flights to and from outermost regions could:

·Continue to be exempted from the EU ETS, and seek to apply CORSIA

·Be included in EU ETS and CORSIA

·Be exempted from any obligation

5.2.3.2. SAF implementation

EU ETS incentivises operators to use Sustainable Aviation Fuels (SAF) at a level of around EUR 115/tonne, but this incentive is insufficient for large-scale use of fuels that are more expensive. The EU ETS considers a tonne of SAF, which fulfils all the sustainability criteria of RED II to count as zero emissions.

Whereas the EU will continue to rely on the RED II framework for the definition of Sustainable Aviation Fuels, there are different options for dealing with the incentives to use SAF:

·Continue to consider SAF as zero-emissions in EU ETS and consider it zero-emissions for CORSIA too;

·Consider it zero-emissions for EU ETS, but use the life-cycle emissions value from the CORSIA SARPs for purposes of reductions of offsetting requirements to CORSIA;

·Adopt the proportional emissions reduction for the EU ETS too.

The ReFuelEU Aviation initiative would also aim at incentivising operators to use SAF, through obligations on both the supply and demand sides. On the supply side, the ReFuelEU Aviation initiative could introduce an obligation for fuel suppliers to supply only SAF-blended fuels at EU airports. On the demand side, the ReFuelEU Aviation initiative could oblige airlines departing from an EU airport to use a share of SAF. In order to prevent fuel tankering (i.e. a practice whereby an airline refuels with more jet fuel than necessary at an airport outside the EU with less strict SAF obligations and thus cheaper fuel), the ReFuelEU Aviation initiative could foresee an obligation for airlines to refuel before departure at an EU airport with an amount of jet fuel corresponding to that necessary to operate the next flight. Therefore, if adopted, the ReFuelEU Aviation initiative would share the same objectives as the revision of the EU ETS for aviation, namely reducing CO2 in the aviation sector and supporting the uptake of SAF.

5.2.3.3. Exemptions for business aviation

Currently the EU ETS provides for an exemption for aircraft with a total mass below 5700 kg; for flights of non-commercial aircraft operators with annual emissions less than 1000 tonnes; and for flights of commercial aircraft operators with a yearly emission less than 10000 tonnes or less than 243 flights in a year. The effect is that the majority of business aviation is de facto exempted from any obligation of reporting or surrendering allowances. Business aviation flights which are exempted from the EU ETS amounted to 1,1% of emissions of the intra-EEA scope in 2019.

The proposal should examine whether this exemption is still justified or no longer warranted.

5.3.Options discarded at an early stage

Variations of option C4MIX could be maintaining the EU ETS for intra-EEA flights, and also apply CORSIA for the emissions above the 2019 CORSIA baseline. The operators which, having surrendered EU allowances, then cancel ICAO offset units for the same emissions, would receive free allocation proportional to the costs of those offsets (noting that allowances are currently worth around €30, and CDM credits are currently worth around €0.30). This option would create double compliance obligation for the same emissions, implying increased complexity and additional burden both on aircraft operators and competent authorities. Furthermore, this would require continuing free allocation, unless auction revenue were used to purchase any such credits. Therefore, this possibility was not further assessed.

Option C5MIX2 was not further analysed as it would add high level of complexity to the system without significant additional benefit compared to other options and introducing concerns for equal treatment of airlines on routes. In the public consultation, this option received no support, it was the second least favoured option of the respondents.

5.4.Overview of problems, objectives and policy options

The policy options above, to a different extent, directly contribute to the achievement of the objectives defined in Chapter 4. Table 5-8 shows how the policy options are meant to contribute to the solution of the problems described in Chapter 2.

Table 5.10: Overview of intervention logic

6.What are the impacts of the policy options?

This section assesses the environmental, economic and social impacts of each option, for the aviation sector and more generally.

6.1.Environmental impacts

The policy options assessed involve the use of flexible, market-based measures, where airlines can choose either to reduce their own emissions or to buy and surrender allowances under the EU ETS or offsets under CORSIA to comply, which can lead to emissions reductions outside the aviation sector. As a result, the assessment looks both at the direct impact on CO2 emissions from aviation and the net impact on greenhouse gas emissions both for intra-European and global aviation. The net impacts are those which are most important in terms of aviation’s contribution to meeting 2030 emissions reduction targets. In-depth analysis considers that aviation emissions are currently warming the climate at approximately three times the rate of that associated with aviation CO2 emissions alone 88 . These impacts are reflected in the narrative but not in the tables presenting results for direct and net CO2 emissions.

This section goes on to look at the external costs for other environmental impacts associated with each policy option.

6.1.1.Impacts on aviation emissions

This section assesses the impact of the different policy options on direct aviation emissions- CO2 emitted by aircrafts.

It is worth noting that the price for international credits today is less than €1, as compared with the price of ETS allowances, which is above €35. Therefore, the options C2CONLY and C4MIX would simply consist in relaxing the current mitigation policies in place for limiting intra-EEA aviation emissions which have proven effective.

Direct emissions from aviation grow in all options between 2015 and 2030. As shown in Table 6.1 below, direct global aviation emissions are projected to be 1079 Million tonnes (Mt) in 2030 for the baseline option C1BASE and options C2CONLY to C4MIX, up from 769 Mt in 2015. This is down from the growth in projected direct global emissions in the pre-COVID-19 model runs of 1138 Mt in 2030, a drop of about 5% in global aviation emissions taking into account the expected impacts of the pandemic. Option C0WIDE, full scope, is estimated to lead to 1077 Mt in 2030 (down from 1135 Mt in pre-COVID-19 modelling). Direct emissions from Extra-EEA flights (to and from the EEA) show a similar pattern, with options to C4MIX projected to have CO2 emissions of 174 Mt in 2030. Option C0WIDE has emissions of 172 Mt. For intra-EEA emissions in 2030 Options C1BASE 1 and C3ONLY and C4MIX are projected to emit 52.5 Mt CO2, C0WIDE 52.4 Mt and Option C2CONLY 52.7 Mt. The results in the last row of the table below show that when ETS rather than CORSIA is used for extra EEA flights, there is a difference in emissions of 60 Mt (154-94) in C3CLEAN vs C0WIDE scenario and 67 (151 -94) in C4MIX vs C0WIDE, all in 2030.

Table 6.1: Comparison of direct and net aviation CO2 by policy option. Direct CO2 includes all CO2 emitted by aircraft engines. Net CO2 totals take into account the emission reductions taking place in other sectors due to aviation sector’s demand for offsets, allowances and use of alternative fuels. The table also shows how allowance and offset use is distributed between CORSIA offsets and EU allowances. The calculations assume CORSIA offsets are of high quality and fully additional. Due to the functioning of the model, EU-EFTA totals include Switzerland and exclude the UK as EU ETS coverage of departing flights to UK was not agreed at the time of modelling.

6.1.2.Impacts on emissions from other sectors

This section looks at the net impact of the different policy options on emissions, including the reductions brought about in other sectors through the use of EU allowances from stationary installations or eligible offsets under CORSIA for compliance.

6.1.2.1.CORSIA Options

Net aviation emissions are presented alongside the direct emissions in Table 6.1 above. Under the baseline (Option C1BASE), which maintains the EU ETS for aviation at its current, reduced scope, global net aviation emissions are projected to be 992 Mt CO2 in 2030, an increase of 29% from 2015 levels. Intra-EEA net aviation emissions are projected to be 27 Mt CO2 in 2030, a reduction of 27% between 2015 and 2030.

Looking at net global aviation emissions under other options, the reduction in emissions when taking account of reductions under CORSIA and ETS ranges from 15% for option C0WIDE to 3% for C2CONLY.

The greatest impact is for emissions from flights between EEA States, where all options with an EU ETS component lead to a reduction in impacts relative to direct emissions of 43% (for C0WIDE) to 55% (C4MIX), though the impact of the latter is inflated by operators of intra-EEA flights offsetting a share of CORSIA emissions that exceeds their own growth in emissions (see text box 7.1).

For emissions to and from the EEA, the biggest impact on emissions, when emissions reductions under CORSIA and EU ETS are taken into account, is also for C0WIDE with a 45% reduction in CO2 emissions while C2CONLY and C4MIX show a 7% reduction and C3CLEAN a 27% reduction.

The detailed results are in Table 6.1, and the implications in terms of comparison of options are elaborated further in chapter 7. Two messages emerge from this table on net emissions: first is that net emissions intra EU-EFTA are of the same order on all options except for C2CONLY and secondly that all the options under extra EU-EFTA showed a similar scale except for C0WIDE.

The results are sensitive to assumptions about CORSIA participation, as set out in Chapter 5. The results presented in the report are based on the initial assumed participation. Table 6.2 below shows the proportion of global aviation emissions that fall under CORSIA under this scenario as well as under the high CORSIA participation scenario. Note that the values in Table 6.2 below are all emissions that fall under the CORSIA remit, not the proportion of global aviation CO2 that is offset under CORSIA. It includes emissions below the CORSIA baseline that are not offset and biofuel-related direct CO2 emissions which are exempt. For Option C4MIX, it includes intra-EEA emissions below the CORSIA baseline (not offset), which are also covered by the EU ETS. The proportion of global aviation CO2, offset under CORSIA is therefore significantly below the proportion of international emissions covered shown in the table below.

It should be noted that ICAO has no jurisdiction in respect of domestic aviation emissions, which comprise more than 40% of total emissions from aviation 89 . So the table excludes domestic aviation emissions

Table 6.2: CORSIA percentage coverage of international aviation CO2 emissions in 2025, 2030 and 2035, by participation scenario, with the COVID-19-adjusted demand scenario and all other input variables set to nominal values 90 .

A better measure of emissions potentially covered by CORSIA is given by looking at the potential demand for CORSIA offsets, Table 6.3 below.

Table 6.3: Potential demand for CORSIA offsets in the pilot, first and second phases, showing the total demand for each full period (the Pilot and 1st Phase the total over 3 years for each and the 2nd Phase, the total of 9 years), under COVID-19-adjusted nominal scenario assumptions

Under current CORSIA provisions, until 2030, the baseline and the offsetting required for each operator under CORSIA are based on the collective emissions in the baseline year, 2019 for the pilot, and 2019-2020 for future phases, and the growth in emissions above the baseline level for all routes included in CORSIA. For the purpose of modelling only, the assumption made is that the 2019 baseline applies to the pilot phase and future phases.

The impact of these collective provisions is that including or excluding a country changes the collective effort. A decision by a large, emerging economy (such as China or India) with a faster growing aviation sector than in Europe to implement and continue to participate in CORSIA would for example lead to Europe offsetting a larger share of emissions.

For comparison reasons, global aviation demand in 2030 would be around 1 bn Mt in 2030. Tables 6.2 and 6.3 above show, for example, that under Option C1BASE (Intra-EEA), CORSIA coverage, which is projected to be 30.7% of global international aviation CO2 under the initial assumed implementation and continued participation, could rise to 48.0% of global international emissions in 2030 under high participation. In terms of offset demand looking for example at the pilot phase and Option C1BASE, this implies a total offset demand under CORSIA of around 51 Mt for the initial assumed and high participation scenarios. For the first phase running from 2024 to 2026, total offsets demand could be around 113 Mt for the initial assumed and high participation scenarios. For the second phase, 2027-2035, it could go up to 942 Mt under high participation. The impact of participation on other options is shown in the tables. Uncertainty about implementation and continued participation in CORSIA and its enforcement by participating states has a larger impact than oil or carbon price uncertainty on the outcomes of the options 91 .

Note that all the net results presented in Table 6.1 assume that CORSIA is implemented by all 88 countries in the initial participation scenario and that offsets are of high quality and fully additional. The risk of higher CO2 emissions if CORSIA offsets are not additional has also been modelled. Other risks such as double counting have not been modelled but are discussed in chapter 7. The results show that the modelled outcomes, especially for global and extra-EEA flights, are sensitive to assumptions about CORSIA offset quality. Table 6.4 below looks at the extreme case where none of the CORSIA offsets are additional. In this case, net global emissions are 32 to 61 Mt CO2 higher across the options in 2030. There is also an impact on some net intra-Europe emissions outcomes (see Table 6.4 below).

Table 6.4: Year-2030 and 2035 net aviation CO2 after offsets and EU ETS allowances are subtracted, for different levels of CORSIA offset additionality. Central values shown are for all scenario variables at nominal values 92 , including demand growth.

The EU ETS requires the tonnes of direct CO2 emissions covered to be reported and an equivalent number of allowances to be surrendered each year. The coverage of direct CO2 emissions by policy option is shown in Table 6.5 below. This shows that 45 million tonnes of aviation CO2 emissions are projected to be covered by the EU ETS in the year 2030 under Option C1BASE (Intra-EEA), up from 44 Mt in 2025. At the upper end, Option C0WIDE (return to full scope) leads to 224 Mt under the EU ETS in 2030, while Options C3CLEAN (clean cut) and C4MIX (mix) both lead to 45 Mt under the EU ETS in 2030.

Table 6.5: Modelled direct CO2 emissions from routes under the EU ETS, by policy option at nominal values for uncertain input variables in the years 2015, 2025, 2030 and 2035

As aviation emissions continue to grow, and as the overall EU ETS cap declines according to Linear Reduction Factor (with the LRF assumed here to be 2.2%), airlines will use EU allowances from other sectors under the EU ETS for compliance. Additional demand for allowances from aviation will increase emission reduction incentives and scarcity in the EU ETS and therefore result in greater emissions reductions in other sectors. The estimated number of allowances (each equivalent to 1 tonne of CO2) demanded by the aviation sector under each option is shown in the table below. Option C0WIDE leads to a demand of 98 Mt from other sectors, C1BASE, C3CLEAN (clean cut) and C4MIX (mix) to 25 Mt of demand for EUAs from other sectors.

Table 6.6: Annual demand for EUAs from other sectors from aviation in the EU ETS, and projected revenues, in 2030 by policy option at nominal values for uncertain input variables (numbers in larger font) and range due to variations in uncertain input variables (numbers in brackets).

The results presented in this impact assessment include the impact of the decision to change the COVID-19 baseline to emissions in 2019 (instead of 2019 and 2020). The change in CORSIA baseline is expected to delay the need for airlines to provide offsets to cover emissions growth by several years. It is very likely that there will be no need for offsets in the pilot phase or even the first phase due to COVID-19 effects 93 .

In terms of cumulative impacts the RefuelEU and options described here, a higher SAF uptake in 2030 would be expected to lead to a small net increase in net CO2 on routes covered by the EU ETS (C0WIDE, C1BASE, C3 CLEAN and C4MIX) as SAF is zero rated under the EU ETS but is associated with some emissions. It would lead to a decrease in net CO2 on non-ETS routes. ReFuelEU is likely to lead to a reduction in demand for offsets under CORSIA. For example, by ReFuelEU applying on extra-EEA routes, there is a potential for a 40-70% reduction in CORSIA offsetting costs on these routes by 2035.

The different options are associated with other environmental impacts, beyond the impacts of CO2 emissions. The assessment looks at the total EEA external costs of aviation for the period 2021 to 2035, when CORSIA is due to end. It focuses on the external/environmental costs associated with passenger air travel, but the broad impacts of freight aviation are likely to be similar. It covers the external costs from accidents, local NOx and PM2.5 air pollution, noise and habitat destruction as well as climate externalities. The climate costs presented are those associated with the direct CO2 emissions from planes, not the net costs that take account of CO2 reductions in other sectors or the non-CO2 climate impacts. The approach used to estimating the external costs follow the approach set out in the Commission Handbook on the External Costs of Transport, which includes the impacts of non-CO2 aviation impacts and use of a marginal cost of carbon of €100/ tonne CO2 eq. External costs, shown in Table 6.7 below, show a similar pattern across options, with externalities driven by demand. The total external costs assessed amount to €667.5 billion for Option C1BASE with a range from the lowest externality cost for C0WIDE at €662.3 billion to the highest of €669.2 billion for Option C2CONLY. The direct CO2 emissions are doubled to give the CO2 and non-CO2 impacts of aviation. The non-CO2 impacts are more uncertain. If non CO2 impacts are not taken into account in estimating the external costs of climate impacts, the total external cost ranges from €346 billion to €350 billion for the options considered. These are dominated by the externality costs associated with climate impacts, which range from €631.9 billion for Option C0WIDE to €638.6 for Option C2CONLY. The externality associated with local NOx pollution, the next largest cost amounts to €14.94 billion in the baseline, €14.90billion for Option C0WIDE and €15.00 billion for Option C2CONLY.

Table 6.7: Total estimated EEA aviation externality costs by category, cumulative costs for 2021-2035, at nominal values for all uncertain scenario variables. 94  

6.1.2.2. Auctioning share increase options

From 2021 onwards, the total amount of aviation allowances issued will decrease over time consistently with the LRF applied to all ETS sectors 95 , and the ratio of free to auctioned allowances is a policy decision. Fixing the total amount of aviation allowances and applying LRF to the amount will strengthen the steering effect of ETS on the sector.

All modelling scenarios in the ICF Study, including the scenarios with low growth and high ambition, suggest that aviation emissions will exceed the aviation cap. However, increasing the share of auctioned allowances would further reinforce a clear price signal. Airline operators would pay for a larger share of their allowances and have a greater incentive to reduce emissions. This effect will remain limited due to airlines’ ability to pass through the carbon cost to consumer prices, as discussed in section 2.1.3.

Different options for increase of auctioning share may have different impacts on carbon leakage or perceived risk thereof. Due to the nature of aviation (geographical determination of routes), moving the same activity outside Europe has limited possibilities.

The intention of free allocation is to prevent emitters from avoiding carbon costs by moving the location of emissions outside the policy area. For aviation, this carbon leakage could only occur via airline decisions (e.g. choosing to develop non policy-affected routes) or passenger decisions (e.g. choosing an itinerary that hubs via a non-policy-affected country), with the balance of the two depending on rates of cost pass-through and modal shift, whereby shift from plane to rail is the main risk, as switch to road transport is not a viable option for the majority of air travel.

Leakage mechanisms due to carbon pricing can be positive or negative. When leakage is positive, emissions increase outside the policy area. Passengers on a stopping itinerary who could hub via an airport in the policy area may choose instead to hub via a (cheaper) airport outside the policy area. When leakage is negative, emissions may decrease both inside and outside the policy area. Passengers may decide not to travel due to increased costs. Passengers may also choose an alternative, likely less polluting, mode of transport. Because positive leakage is typically less when the policy area is larger (as fewer alternative non-policy hubs are available which do not involve a large detour), even greater auctioning percentages are unlikely to lead to significant positive leakage.

The ICF Study checked whether carbon leakage occurred due to the impact of auctioning share increase on airline cost per RPK, ticket prices and demand (in RPK) by route group. The modelling found that immediate full auctioning option (A1FULL) resulted in lower emissions combined with those CORSIA options where ETS coverage is wider than for options with smaller coverage. This is due to negative leakage, ie. passengers choosing not to fly. For example, comparing option C3CLEAN and C2CONLY combined with immediate full auctioning option, the leakage is negative with around 0.6 Mt reduction in direct emissions in 2035 on non-ETS routes in option C3CLEAN.

In general, the results suggest there is a low risk of (positive) carbon leakage when switching to a higher auctioning percentage, and that changes in cost associated with auctioning changes are still well within the range of cost variability due to fluctuations in fuel price.

6.2.Competitiveness and economic impacts

When looking at economic impacts, it is important to assess the policy options' implications on operating costs, ticket prices and demand, as well as auction revenues as presented below. These are then used to assess whether there is potential for options to distort competition, between airlines, airports and tourist destinations. This section also considers the cumulative impacts of this and other ‘Fit for 55’ initiatives, in particular of RefuelEU and the review of the Energy Taxation Directive, on costs and competitiveness of airlines and EU airport hubs to the extent possible given the timetables for the different impact assessments and availability of data. The section ends with an evaluation of the administrative effort for the different options.

6.2.1.Impacts on operating costs, prices and demand 

The options vary in their coverage of CO2 emissions from aviation and in the policy tools used to cover different segments of emissions. The two policy tools, EU ETS and CORSIA, lead to different prices for each tonne of CO2 emissions covered. As a result, the different options have different impacts on the operating costs of airlines. The extent to which changes in operating costs lead to changes in ticket prices depends on the extent to which airlines can pass extra costs on to customers. Higher fares may change passengers’ and freight operators’ demand for air transport, or transport on the routes affected, depending both on the size of the change in fare and on airline customers’ price sensitivity. However, the ICF study finds the impact of the carbon price for all policy options (except C0WIDE) negligible compared to differences in other sources of airline costs (e.g. fuel).

6.2.1.1.CORSIA implementation options

For intra-EEA flights, the baseline leads to a projected increase in carbon costs from 0.2% of total operating costs in 2015 to 1% in 2030. This represents an increase in carbon costs from 1.2% to 7 % of fuel costs from 2015 to 2030. The impact of the carbon price on the operating costs is very small for all other options. In Option C2CONLY, CORSIA only, this impact, a rise of 0.005%, is negligible. For all other options, also, the impact is very limited (between 0.8% and 1% for the central or nominal scenario presented and at most rising to 3% of operating costs under the high cost scenario).

For extra-EEA flights, the costs of all options, except C0WIDE, full scope, are negligible in 2030, under the nominal and high cost scenarios. For C0WIDE, the cost rises to 1.8% of total operating costs in 2030, rising to a maximum of 5.6% of operating costs for the high cost scenario.

Table 6.8: Estimated intra-EEA carbon costs when all scenario variables , including carbon prices for EU ETS allowances and CORSIA, are at COVID-19- adjusted nominal values, as a percentage of fuel costs and total operating costs, by policy option, 2015 and 2030.

Table 6.9: Estimated extra-EEA carbon costs when all scenario variables, including carbon prices for EU ETS allowances and CORSIA, are at COVID-19-adjusted nominal values , as a percentage of fuel costs and total operating costs, 2015 and 2030

Note carbon costs are non-zero in 2015 as routes to/from the UK are included in extra-EEA throughout.

In terms of impact of carbon costs on ticket prices or fares, the calculated initial average carbon cost pass through rates (for EU ETS and CORSIA costs) is around:

·74% for intra-EEA flights

·75-82% for extra-EEA flights

·And 77% for other routes (flights not within, or to or from the EEA)

As can be seen in Table 6.10, the resulting impact on fares is small. By 2030, for C1BASE, the baseline, the average one-way fare for intra EEA flights is projected to be €148.10 (€150.2 under the high price scenario), up from €143.47 in 2015. For extra-EEA the 2030 projected price is € 330.16 (or €330.4 under the high price scenario), up from 311.41 in 2015 and for other routes €188.38 in 2030 down from € 193.31 in 2015. Other options are projected to have very similar fares. One-way intra-EEA fares vary by less than €1 between the different policy options (or €3 under the high cost scenario). For extra-EU/EFTA fares, the largest difference is between Option C0WIDE and other options, amounting to around €2 for one-way, less than 1% of the total ticket price or fare. Under the high carbon price scenario, this rises to €6 difference, less than 2% of the total fare.

Table 6.10: Average fare in 2030 and 2035 by region and policy option, for all uncertain scenario values set to COVID-19-adjusted nominal values).

With minimal ticket price differences between the options in 2030, the assessment also predicts small differences in demand, measured in Revenue Passenger Kilometres and Revenue Tonne Kilometres (RTK), for all policy options. Table 6.11 shows that for extra-EEA flights, all options are projected to have the same demand with 1.87 trillion RPK and 90.3 trillion RTK in 2030, except Option C0WIDE, which leads to RPK of 1.85 trillion, and RTK of 88.5 billion just 1% and 2% lower than other options. For intra-EEA flights all options lead to the same passenger demand projection of 0.78 trillion RPK in 2030. For freight, there is also little difference, with C2CONLY leading to the highest demand with 2.26 trillion FTK and all other options at 2.23 trillion RTK in 2030.

Table 6.11: Estimated global, extra-EEA and intra-EEA RPK and FTK by policy option, for all uncertain input variables at COVID-19-adjusted nominal values

The results presented here assume base case carbon prices, also adjusted to reflect the impacts of COVID-19. For EU allowances this €26 /tonne in 2020 and €31 in 2030 and €1/tonne in both 2020 and 2030 for CORSIA credits (all in year 2018 Euros). The ICF Study also looked at sensitivity to carbon prices if these follow the high carbon price scenario, with EU allowance prices rising to €83/ tonne in 2030 and CORSIA credits to €13 per tonne (see Table 6.12 below)

Table 6.12: Direct comparison of intra-EEA and extra-EEA RTK at different carbon price assumptions, under COVID 19-adjusted nominal scenario inputs for all other uncertain variables, by policy option.

6.2.1.2.Auctioning share increase options

Aviation auctioning costs to airlines vary substantially depending on the auctioning option chosen, ranging from €41 billion 96 over the 2023-2030 period in the case of an immediate full auctioning and full scope EU ETS, to 0 euros in the case that only CORSIA is applied. It should be noted that in the case of CORSIA, airlines will have the obligation to finance private entities around the world through purchase and use of offset credits, instead of contributing to public finance in their own jurisdiction. Typically, global EU ETS-related airline costs exceed CORSIA-related costs unless the EU ETS for aviation is stopped completely (option C2CONLY). This is because EUA prices are assumed to be significantly higher than eligible unit prices for CORSIA.

For policy options where ETS and CORSIA do not apply on the same routes, the impact of different auctioning options on total CORSIA offset costs is under 0.5%. Under option C4MIX, the two schemes overlap, with CORSIA also covering intra-EEA slightly higher CORSIA costs. However, offset costs still change by less than 1% between different auctioning options.

Around 75% of this cost will be passed through, given the characteristics of the routes operated in terms of competition, airport congestion and passenger demand sensitivity 97 .

6.2.2.Impacts on level playing field

Generally, changes in operating costs, ticket prices and demand may affect the level playing field for example:

·If airlines pay different carbon costs when operating on the same route or if certain airlines bear a high proportion of costs because a larger share of their operations are in higher carbon cost routes;

·If a reduction in demand due to higher carbon costs affects some airlines, but not others with which they are in competition;

·If carbon costs lead to investment in airports outside higher carbon cost areas instead of within the higher cost area;

·If policies implemented equally across routes are not enforced equally by different states.

In the policy options regarding both CORSIA implementation and auctioning share increase assessed for this impact assessment, the costs and impacts on ticket prices and demand are too low to have a significant impact. With significant pass through of carbon costs to customers, European companies will not face significant disadvantage as result of carbon pricing in the EEA in terms of overall margin for manoeuvre when competing with airlines from jurisdictions without carbon pricing.

For example, the impact differences between the immediate full auctioning and swift phase-out options are small, and mainly concern years 2023 and 2024. Because this is part of the pandemic recovery period, all estimates of impact during this time period are uncertain.  After this point, differences between the two options are basically negligible (for example, there is not an appreciable ongoing difference in airline fleets, operations or ticket prices for any of the policy options). The main difference between the two auctioning options is that the increase in airline costs and ticket prices from moving to full auctioning comes into effect in a single year in the immediate full auctioning scenario, and is phased in over the time period to 2025 in the swift phase-out scenario. This means that year 2023 and 2024 demand are slightly lower, and ticket prices higher (0.2%), for the immediate phase-out option.

6.2.2.1. Competition between airlines

Competitive distortions may arise when policies do not apply equally on routes, and where they are not enforced equally. Enforcement has been crucial for the success of the EU ETS to date 98 . Options apply uniformly to all airlines so do not create direct distortions.

There is also a risk that airlines that have a higher proportion of flights on high carbon cost routes than other airlines are less able to cross-subsidise them from lower carbon cost routes. Several studies nevertheless argue that such cross-subsidisation is minimal 99 . This is consistent with the 2017 Aviation ETS Impact Assessment 100 , which considered the risk of indirect distortion of competition to be theoretical, mainly due to low extra allowance costs.

Airlines also compete with other transport sectors. With a small increase in ticket prices for the options considered, there may limited impact on choice of travel mode.

6.2.2.2.Competition between airports

For airports, the largest risk of competitive distortion is between EEA airports and major non-EEA airports close enough to the policy area to provide an alternative. Looking for example at London airports versus Paris or Amsterdam, Option C0WIDE, the option with the highest impact, leads to a 0.54% lower demand in million passenger movements per annum (mppa) when compared to the baseline C1BASE. All other options have a similar impact to option C1BASE or when compared to one another. For Paris and Amsterdam, the difference in impact on mppa varies from 1% to 1.4 % for the different options. A similar impact is seen when looking at Istanbul and Athens. The ICF Study suggests that higher intra-EU costs will reduce demand at both EEA and nearby non-EEA airports, with the latter marginally less affected.

In the longer-term, a risk is that airlines could move their operations to less-affected airports, for example in regions close to the EU with lower carbon costs (e.g. Istanbul).

The carbon costs associated with the options assessed are unlikely to have a significant impact on hub choice for passenger airlines, given the high costs of changing networks and hub location. Freight airlines are more likely to move cargo services for cost reasons, but do so primarily in the same catchment area 101 , suggesting a limited impact on changes in freight hub. The carbon costs of the options considered are also typically not sufficient to lead to network changes for freight airlines. This is further made less likely due to bilateral air service agreements and ownership regulations. In any case, fluctuations in fuel price easily outweigh fluctuations in carbon costs both in the medium and longer term.

Only 25 % of the respondents to the open public consultation provided views on the hub leakage risk. According to some respondents, the EU should consider taking measures to mitigate the competitive distortions between feeder services of EEA-airlines that are subject to the EU ETS and feeder services from airlines from neighbouring non-EEA-countries related to these hubs. Concrete suggestions to address the competitive distortion included introduction of a carbon border adjustment mechanism, and alleviating the financial burden on EEA feeder flights by inter alia excluding them from EU ETS.

6.2.2.3.Competition between Tourist Destinations

When looking at whether tourist destinations subject to higher aviation carbon costs may lose market share, the ICF Study concluded that tourism demand has historically been relatively insensitive to cost changes. While there may be transport mode shift and changes in destination choice, any impacts are likely to be small at the carbon cost levels projected for the options considered.

6.2.3.Cumulative Impacts of Fit for 55 Initiatives

With all policy options (except C0WIDE) modelled to have no impact demand 102 , and with modelling for other ‘Fit for 55’ initiatives of importance for aviation completed later than for this impact assessment, no cumulative impacts were modelled. However, a qualitative assessment has been undertaken, building on available information at the time of drafting and the sensitivity analysis undertaken on the modelling for this impact assessment. This also concludes that cumulative impacts are expected to be negligible or very small.

The Energy Taxation Directive Impact Assessment 103 suggests that the proposed aviation fuel tax will have a greater impact than the price signal resulting from any of the options considered in this impact assessment. Adding the small carbon cost impacts of ETS and CORSIA options assessed here to the ETD impacts will not make a significant difference to the ETD costs as a proportion of operating costs, fares or competitiveness.

The cumulative impacts when considering the effect of ReFuelEU and the increased use of Sustainable Aviation Fuels (SAF) will also be limited. Higher use of SAFs should lead to a reduction demand for ETS allowances and CORSIA offsets (zero emission factor applies for sustainable fuels in the EU ETS and SAFs can be used for compliance under CORSIA). This will lead to a reduction in carbon costs though this reduction will be small compared to the fuel price increase, because the carbon costs, especially under CORSIA are small.

Though the fuel price increase will outweigh any change in carbon costs, the fuel price increase is estimated to be well within the fuel price sensitivities assessed for this impact assessment. Airline costs and ticket prices for the options in this impact assessment, along with RefuelEU preferred options are expected to be closer to the central or nominal scenario modelled for this study than the high fuel cost sensitivity analysis. While the effective fuel price for airlines would be higher, the impact is also small, the Impact Assessment for ReFuelEU foresees a 0.8% air ticket price increase by 2030 under its preferred scenarios. Therefore the overall cumulative impact on prices, demand and competitiveness is expected to be small.

6.2.4.Impact on auction revenues

In accordance with Article 3d(3) of the ETS Directive, the revenue from auctioning aviation allowances is proportionate to the share of the total attributed aviation emissions for all Member States for the reference year, which is the calendar year ending 24 months before the start of the trading period. For the fourth trading period of the ETS (which began on 1 January 2021) this means that the reference year for the distribution of aviation revenues is 2018. For the increased revenues from an increased share of auctions from the allocation of aviation allowances, the same rule would apply.

Following the inter-institutional agreement of 16 December 2020, the Commission committed to table in June 2021 proposals for new own resources based on the revision of the Emission Trading System, including its possible extension to aviation and maritime, a new Carbon Border Adjustment Mechanism and a new digital levy. The EU budget plays an increasingly important role for the EU to meet its commitment to become the first climate neutral continent by 2050. 30% of the expenditures under the MFF 2021-2027 and NextGenerationEU will be dedicated to climate-related projects.

The coverage of aviation ETS and in particular the speed of free allocation phase-out strongly affect aviation allowances auctioning revenue over the 2023-2030 time period. As the auctioning revenue is currently directed to Member States’ budgets, the revenue may enable lowering other taxes, such as income tax, or increasing government expenditure.

6.2.4.1.CORSIA implementation options

Option C2CONLY - CORSIA only - would remove all existing and future auction revenues to Member States or for other uses within the EU, including funding for innovation, modernisation and other support for transition to climate neutrality.

Option C0WIDE’s larger coverage means that auctioning revenues from aviation are the highest. Options C3CLEAN and C4MIX have similar levels of impact on revenues.

When taking into account the effect of ETS revenue recycling to increase government expenditure or reduce taxes, extending the EU ETS to cover all flights (option C0WIDE) would have the greatest positive impact on EU27 employment and GVA. The full-scope CORSIA scheme (option C2CONLY) is associated with the lowest macro-economic outcome, whilst other options with a mix of CORSIA and ETS scopes are expected to have broadly similar, intermediate outcomes. However, the variation in expected macroeconomic effects between policy options is small.

6.2.4.2. Auctioning share increase options

Immediate full auctioning yields 50% more total revenue between 2023-2030 than a slow phase-out. In contrast, aviation demand for general EU allowances is only weakly affected by the chosen auctioning option, with typically only 1-3% difference in total year 2023-2030 EUA demand between the status quo and immediate phase-out options. 

Table 6.13. : ETS revenue estimates including funds and solidarity for aviation (in bn EUR) 104

Table 6.14: Year 2021-2030 EU ETS allowance auctioning revenue, by ETS/CORSIA policy and auctioning option, using the assumptions of the general ETS impact assessment to ensure consistency in estimation of revenues (assuming an average carbon price of €35 for 2021-2030 and €45 for 2026-2030. see footnote 103). These are presented as cumulative amounts or totals across all years for 2021-2022, 2023-2025 and 2026-2030.

6.2.5.Administrative effort

Administrative tasks related to the EU ETS and CORSIA are shared between the aircraft operators, national competent authorities and the European Commission. Operators face the costs of monitoring, reporting and verification of emissions and the effort needed for compliance, i.e. purchase and surrender of EU ETS allowances and CORSIA eligible credits and their surrender. National authorities manage the system for reporting emissions, control free allocation, administer the accounts in the Union Registry, follow up and enforce compliance and are in direct contact with aircraft operators. The Commission provides for the Union Registry, approves free allocation, publishes the list of aircraft operators with the administering Member States and proposes/adopts legislation and provides for guidance documents in order to ensure harmonised implementation of the system.

6.2.5.1.CORSIA implementation options

The application of CORSIA requires aircraft operators to monitor and report their emissions from international flights covered by CORSIA. For routes where there are already EU ETS MRV requirements in place now (intra-EEA international flights), CORSIA may not present a particularly high additional administrative burden for aircraft operators. But for those routes that are not covered by MRV ETS requirements prior to 2019, complying with CORSIA requirements adds administrative effort and associated costs for data collection, reporting, quality assurance and verification 105 . In addition, aircraft operators engaging in routes covered by CORSIA will need to acquire and surrender eligible units for compliance, an activity that is likely to be outsourced at a cost.

The size of an aircraft operator is likely to have an effect on the relative scale of additional costs as a share of their overall costs. Whilst some costs, including emissions data collection, reporting and quality control, typically increase in-line with the number of flights, larger operators may be better placed to benefit from economies of scale by investing in automated IT solutions that reduce manual effort. Larger operators will tend to face relatively lower one-off costs as a share of their total costs, than smaller operators. These one-off costs include tasks such as setting up administrative systems and internal processes, understanding the detailed design and rules of CORSIA, as well as establishing knowledge of the carbon offset credit market in general and, specifically, the procurement of credits.

Option C0WIDE: increased administrative effort on aircraft operators as the geographical coverage is broader compared to the current situation, although this is a quantitative difference as airlines are subject to only one regulation. Increased effort for enforcing compliance can be expected for national authorities and the Commission.

Option C1BASE: no change in administrative costs as this is the continuation of the current system.

Option C2CONLY: airlines are subject only to one regulation, therefore the administrative costs are comparable to the current level, with additional one-off cost due to the change from EU ETS to CORSIA.

Option C3CLEAN: increased level of administrative costs as the aircraft operators are subject to two sets of rules. However, the EU ETS part is the continuation of the existing administrative procedures, and the separation of the two regimes is simple as the two regulations apply to different routes.

Option C4MIX: the level of administrative effort would be considerably higher for all players in the system compared to the current situation, as the same routes would be subject to two compliance obligations.

6.2.5.2.Auctioning share increase options

Full auctioning would reduce the administrative burden immediately and considerably. These administrative costs are mainly on competent authorities and the Commission. It would mean that all administrative procedures relating to the free allocation would be abolished. All other options maintain the current level of administrative burden, either until the end of the trading period (A0BASE and A4RED) or with a phase out time (A2SWIFT and A3SLOW), because the level of free allocation does not influence the level of administrative effort necessary for delivering it. The assessed options entail the condition that the free allocation is distributed on the current basis, namely based on 2010 traffic. Any other choice, i.e. changing the base year for distribution in order to reflect current market condition, would cause significant administrative burden both for the aircraft operators and for the regulators, because this would mean a new collection of tonne-kilometre data.

6.3.Social impacts

6.3.1.Impact on employment

The overall impacts on value added and employment of the different policy options are small: less than 0.05% in terms of both value added and employment in all cases at the EU27 level. This includes the impacts on the aviation and fuel supply sectors, their supply chain and multiplier effects, as well as the impact of recycling EU ETS revenues to increase government expenditure or reduce taxes. It should be noted however, that the impacts of different policy options on flight frequencies and capacities will affect the connectivity between regions and countries. These changes may have more substantial macroeconomic impacts than the changes concerning directly the aviation sector and associated supply changes, and have not been assessed in the modelling.

Most of the impacts of each option can be attributed to recycled EU ETS revenues. With increased auctioning revenues, for instance, governments could reduce taxes, which would result in increased spending across different sectors of the economy. Options with more positive outcomes on value added and employment are generally those with a larger volume of projected revenues from the EU ETS. Due to decrease of demand for air transport, a negative impact on employment in the sector is to be anticipated. However, the impact is estimated to be negligible (-0.13%) even in Option C0WIDE, where the impact is strongest.

The figure below shows the range of macroeconomic impacts (the relative difference between options with the strongest and weakest macroeconomic outcomes, Option C0WIDE and Option C2CONLY, respectively) for all current EU Member States under the assumption that additional government revenues are recycled in the economy. This range appears to be to be generally widest where the projected possible EU ETS revenues is largest relative to GDP. These examples include Cyprus, Malta and the Netherlands. The other policy options show broadly similar trends to Option C2CONLY. Without the effect of revenue recycling, the outcomes for individual Member States are much more uniform across policy options.

Figure 6.1. Differences in GVA and employment by 2035 between Options C0WIDE and C2CONLY, by country. 106  

6.3.2.Impact on households

Evidence suggests that carbon pricing on aviation is likely to be socially progressive, i.e the impact of carbon price is likely to be lower in respect of lower income households. High-income households are more likely to fly and spend larger portions of their income on air travel, as air transport is in much higher demand in higher-income households, and therefore larger portion of its emissions can be attributed to higher-income households. Thus, increased carbon pricing on air travel is likely to be socially progressive as it primarily affects higher-income households, while increasing equal treatment with other modes of transport such as railways and road transport which are subject to taxation and VAT.

Citizens use air transport unevenly, with a small proportion flying very frequently, some occasionally, and most rarely (or not at all) in any particular year. It is still predominantly and disproportionally used by higher income groups. By way of example, a study representative of adults in Germany shows that 11% of respondents accounted for 29% of the flights in 2019. The highest income group reported three times higher average flight distances than the lowest income group. 107 . Results suggest that the share of the world’s population travelling by air in 2018 was 11%, with at most 4% taking international flights. Global data also shows a similar pattern, suggesting that a minor share of air travellers is responsible for a large share of warming: The percentile of the most frequent fliers – at most 1% of the world population - likely accounts for more than half of the total emissions from passenger air travel 108 .

6.4.Impacts on outermost regions (OMR)

In general, most flights to outermost regions are either domestic (e.g. Guadeloupe - Paris) or local short-haul flights with small aircraft, with the exception of the Canary Islands where flights are both domestic and international short haul flights (since the Canary Islands are a touristic destination). Therefore, it is likely that differences in how flights to and from outermost regions are handled will impact mainly the Canary Islands and, to a lesser extent, flights to and from Madeira.

Changes in the cost of flying or the frequency of available flights can affect the access by outermost region residents to education, training, goods and services to a much greater extent than for other, less-isolated regions. For outermost regions other than the Canary Islands, access costs to national capital cities, as a fraction of the local minimum wage, are 2-3 times greater than they are in other insular European regions. This means that the same level of cost increase in ticket prices for outermost region routes as for other routes can represent a significantly higher cost burden for residents of these regions. In turn, this may affect the economic development of these regions. Flights within outermost regions that have been deemed socially necessary, however, are operated under Public Service Obligations (PSOs) 109 . As these flights are excluded from the Annex I activity in the ETS Directive, they may remain excluded from the EU ETS due to their PSO status even if the temporary exclusion of routes to and from outermost regions in Article 28a of the ETS Directive ends.

6.4.1.CORSIA implementation options

C0WIDE: includes EEA flights to/from and within the outermost regions, as well as flights between outermost regions and non-EEA destinations. This option would lead to EU ETS application for nearly all outermost region arriving and departing flights. This is the only option that has non-negligible impact on OMR. Because OMRs are typically geographically distant from mainland Europe, the impact of applying the EU ETS to flights to and from OMRs is similar to that of applying the EU ETS to extra-EEA flights, i.e., around €2.20 per one way flight or 1.2% of ticket price, for nominal values in 2035 (the central scenario) for uncertain variables. At the upper end of the uncertainty range impacts could be up to 4.8% of ticket price (€9 per one way flight) – see Table 6.15. This impact became smaller due to the COVID-19 crisis. If looking at the impact of the high carbon cost scenario alone, with other uncertain variable at nominal values, a high carbon cost leads to a difference of €4.68 per one way flight or 2.6% of the ticket price when applying the EU ETS to flights to and from OMRs.

C1BASE: this would continue the current situation (flights within a given outermost region included in the EU ETS, flights to and from outermost regions to both EEA and non-EEA destinations excluded). There would also be no change of status for UK-Canary Islands or Switzerland-Canary Islands flights.

C2CONLY: Flights between outermost regions and international destinations participating in CORSIA would be included (at CORSIA-appropriate carbon prices), but domestic flights, including flights within a given outermost region, would be excluded. The majority of flights to and from outermost regions other than Madeira and the Canary Islands are domestic. Because CORSIA carbon prices are projected to be low, and only apply to emissions above the CORSIA baseline, this option is likely to have only limited impacts. As far as EU outermost regions in the Caribbean are concerned, few Central and South American nations are likely to be CORSIA participants, so short and medium-haul flights for EU outermost regions in this region are unlikely to be covered.

C3CLEAN: This option would be broadly similar to option C1BASE, but non-EEA non-domestic flights to and from outermost regions would be covered under CORSIA. Thus e.g. flights from the UK to the Canary Islands would have a small extra carbon cost.

C4MIX: This option would have a similar impact to option C3CLEAN (i.e. non-EEA non-domestic flights to and from outermost regions would be covered under CORSIA) .

Table 6.15. Projected carbon costs and numbers of flights on routes to and from outermost regions, 2030.

Table 6.16. Average one-way fare for routes to/from/within EU outermost regions by policy option, 2015 and 2030 for all uncertain variables set to nominal values

6.4.2.Auctioning share increase options

Changes in auctioning are also likely to have impacts on the outermost regions. This mainly affects option C0WIDE, because flights to and from outermost regions are exempted in options C1BASE-C4MIX (though there is still a small impact via the coverage of flights within each outermost region).

Applying immediate full auctioning under option C0WIDE implies that ticket prices will increase by around 2% as cost pass through is expected (as for air passenger duties, which are often higher in comparison). Costs would normally be passed on, as the initial average pass-through rates on routes to and from EU outermost regions are estimated at 74-77%. If there were zero cost pass through, there would be an increase in operating costs per RPK for flights operating to/from or within OMRs in 2024 of around 4%. Depending on the operating margins of airlines running flights to and from the outermost regions, there may be a reduction of profits on these routes, noting that some are supported by other means (e.g. PSOs). However, most routes to/from OMRs and the continent are not supported by PSO as most PSO schemes apply to flights within one given outermost region (e.g. from one island of Azores to another island of Azores).

The other auctioning options, in combination with C0WIDE, take effect more gradually, but have similar impact by 2030. Impacts on passengers are likely to be limited, with cost increases for option C0WIDE and full auctioning of around €3 per one-way flight and demand reductions of 2-3% compared to scenarios where flights to and from outermost regions are exempted.

As a summary, the impact on outermost regions of the changes in auctioning are minimal for all options except C0WIDE, where these may be significant.

6.4.3.Conclusions

The impact on outermost regions of changing ETS eligibility is likely to consist of changes to air fares and flight frequency. Longer-term impacts might include decreases in the number of carriers operating on non-PSO routes if carbon costs substantially affect the operating margin on outermost region-associated routes. Changing flight costs and frequency may also affect the attractiveness of the outermost regions as tourist destinations.

Reducing flights by tourists would have an impact on local economies. Reducing flights by residents would affect residents’ access to employment, education and other opportunities. This in turn may act to limit the economic development of these regions.

Changing flight costs and frequency may also affect air freight to the outermost regions. However, impacts on overall freight volume are likely to be limited, as the outermost regions depend primarily on shipping for the transport of goods.

Because of their remote locations, flights to and from outermost regions are typically long-haul flights for which fuel is a relatively high percentage of total costs. Airline cost and ticket price impacts for applying carbon prices on these flights are similar to those for applying carbon prices on extra-EEA flights, and typically exceed impacts for intra-EEA flights.

The cost pass-through for these routes is estimated to be around 74-77%, which is similar to the level of pass-through on extra-EEA routes. Outermost regions typically have limited connectivity, meaning that a high percentage of destinations may only be reachable from outermost regions via a multi-segment journey. This means that also policy options, which exclude direct flights to and from OMRs, will have an impact on average ticket price to and from outermost regions. However, it is to be noted that price increase would be smaller than many air passenger duties which are applied. One means to help palliate the impact of lifting the exemption for OMRs would be that OMRs benefit from the revenues resulting from auctions, which was the case already in the past.

Overall, however, in spite of the considerations made in this section, impacts on fares show that the levels of change in ticket price are small compared to variations arising from changes in other variables, most notably fluctuations in fuel price.

6.5.Cross-cutting issues

6.5.1.Small emitters

As also stated in the impact assessment of 2017 110 , the Commission published in 2014 a study by PWC et al. 111 that investigated the costs and benefits of the inclusion of small emitters in the EU ETS. It revealed amongst other things that the obligations with regard to MRV generate relatively higher administrative costs for small than large operators. Compared to the level of EU ETS revenues raised from a small emitter, the administrative cost can be up to 4 times higher. This study also showed that small emitters represent 90% of aircraft operators while contributing to 2.2% of emissions.

Regulation (EU) No 421/2014 introduced a number of simplifications for small emitters. Regulation 2017/2392 further simplified the MRV requirements for operators emitting less than 3 000 tonnes of CO2 per year under the current geographic scope (intra-EEA) of the EU ETS, allowing the use of the small emitters tool underpinned by Eurocontrol and exempt them from verification. If aircraft operators meet the EU ETS thresholds for the use of Small Emitters Tool (SET) (<3 000 tonnes CO2 full scope; <25 000 tonnes CO2 reduced scope; for data gaps), then they can also use SET for their CORSIA related data.

Implementing Regulation 2018/2066 defines ‘small emitters’ as aircraft operators operating fewer than 243 flights per period for three consecutive four-month periods and aircraft operators operating flights with a total annual emission’s lower than 25 000 tonnes CO2. In this situation the aircraft operator is allowed to estimate the fuel consumption using tools implemented by Eurocontrol or another relevant organisation once their use is approved by the Commission. Delegated Regulation 2019/1603 requires commercial aircraft operators to report their CORSIA emissions even if they operate fewer than 243 flights departing in or arriving in an aerodrome situated in the territory of a Member State.

In addition, Regulation (EU) No 421/2014 introduced in Annex I (k) of the EU ETS Directive a de-minimis threshold to remove any obligations for small, non-commercial aircraft operators operating flights with total annual emissions lower than 1 000 tonnes per year. This exemption was extended until the end of 2030 by Regulation (EU) 2017/2392.

Business aviation belongs typically to small emitters. Any policy choice that re-introduces parts or all of them into the scope of the EU ETS would increase the administrative costs of these emitters, on top of the compliance costs.

6.5.2.Legal considerations and relationship with third countries, ICAO and UNFCCC

The legal considerations contained in Chapter 5.5.2 of the 2017 Impact Assessment are still valid and not repeated here.

Option C0WIDE: This option would avoid an overlap between the EU ETS and CORSIA, as their scopes of application would be distinct. Airlines, whether European or non-European, would be required to apply the same mechanism on the same routes, which avoids any distortion of competition. This option would amount to the EU’s non-participation in CORSIA, which would differ from Council’s notification to the ICAO Secretariat (while noting that the EU has reserved its full policy autonomy by filing differences to the CORSIA SARPs: they limit the scope of CORSIA application to be in accordance with whatever amendments are made to the EU ETS Directive).

Option C1BASE: This option would avoid an overlap between the implementation of the EU ETS and CORSIA as their scopes of application would be distinct. Airlines, whether European or non-European, would be required to apply the same mechanism on the same routes, which avoids any distortion of competition. In this option, however, flights to and from the EEA are not covered, either by the EU ETS, or by CORSIA. This option would amount to the EU’s non-participation in CORSIA, which would differ from Council’s notification to the ICAO Secretariat.

Option C2CONLY: Without considering domestic flights, this option would avoid the overlap in relation to implementation for intra EEA flights, as these flights would be covered only by CORSIA. However, domestic flights within the EEA would no longer be covered, leaving over 20% of the currently covered aviation emissions without any compliance obligation, which is a regression compared to the current situation.

Option C3CLEAN: This option would avoid an overlap between the implementation of the EU ETS and CORSIA as their scopes of application would be distinct. Compared to option C1BASE, all flights would be covered by one of the two mechanisms. Airlines, whether European or non-European, would be required to apply the same mechanism when operating the same flights, which would avoid any distortion of competition on routes.

Option C4MIX: This option would avoid overlap between the implementation of the EU ETS and CORSIA, as their scopes of application would be distinct. Airlines, whether European or non-European, would be required to apply the same mechanism when operating the same flights, which would avoid distortion of competition.

All flights departing from the EU are covered by the EU’s updated nationally determined contribution (NDC) under the Paris Agreement (on the basis of fuels sold in the EU). The European aviation industry also supports action to achieve net zero CO2 emissions by 2050 in relation to all flights within and departing from the EU 112 . Furthermore, the NDC states that “emissions from aviation are currently addressed by EU legislation and will be partially addressed by international measures under ICAO”. Therefore, option C2CONLY that abolishes the EU ETS coverage of aviation emissions and render CORSIA exclusive would contradict the updated NDC, as well as option C0WIDE, by excluding CORSIA implementation. Options that reduce the EU ETS current scope would run against the objectives laid down in the NDC.

6.5.3.Fuels

ICAO developed a framework to reduce offsetting requirements under CORSIA through the use of eligible aviation fuels that are subject to compliance with sustainability criteria. Based on the sustainability criteria, CORSIA Eligible Fuels (CEF) include Sustainable Aviation Fuels (SAF, a renewable or waste-derived aviation fuel) and in principle but not yet, Lower Carbon Aviation Fuels (LCAF, a fossil-based aviation fuel). As of January 2021, no LCAF have been identified as eligible fuels, only SAFs.

As all options maintain the zero emission factor approach for sustainable fuels in the EU ETS, there is no difference between the options in this regard. The question of how sustainable fuels are treated will be assessed in the frame of the general ETS review. The EU ETS provides for an incentive for the use of SAF of over 100 EUR per tonne fuel.

Options that increase the auction part of the allocation can potentially contribute to a higher degree to the better uptake of SAF by using the auction revenue for reducing the price gap from conventional fuels or by contributing to relevant innovation projects.

The revision of the Energy Taxation Directive would aim at incentives through the taxation of fuels. The taxation of traditional fossil fuels used in aviation would complement the review of the ETS for aviation. Taken together, these initiatives would reinforce the carbon price signal and the economic attractiveness of mitigation measures such as the implementation of energy efficiency measures or the switch to SAF. Both measures can be modelled in a similar way, as a carbon price or a fuel tax. It is worth noting, however, that the carbon price signal resulting from the options considered for application of ETS and CORSIA to aviation emissions are expected to be lower than the impact of the proposed taxes in aviation. The ReFuelEU Aviation initiative would aim at boosting the production and the demand of SAF. More specifically, the ReFuelEU Aviation initiative would likely oblige fuel suppliers to supply a minimum share of SAF and it would likely to impose on airlines a minimum share of SAF use. The revision of the Renewable Energy Directive also has the objective to further support the use of SAFs. All initiatives would have an interplay with this revision of the EU ETS as regards the uptake of SAF.

7.How do the options compare?

7.1.Effectiveness

7.1.1.Environmental effectiveness

The options have different coverage of emissions by CORSIA, the EU ETS or a combination of the two. Both CORSIA and the EU ETS are market-based measures to address CO2 emissions. However, there are important differences between them 113 , which have been studied extensively in advance of preparing this Impact Assessment and were already looked at in the previous Impact Assessment (2016).

The environmental difference is twofold: ambition (reduction versus stabilisation) and units used (aviation, power or industrial EU sector vs international credits).

The EU ETS is a cap and trade system setting a limit on the total GHG emissions of the participating sectors so as to reduce them in absolute terms within the EU. CORSIA is a carbon-offsetting scheme, which allows emissions from the aviation sector to grow above the baseline (2019 emissions), and foresees offsetting with credits from reductions in other sectors worldwide (international offsetting).

Through the EU ETS, aviation has contributed to an average reduction of 25 Mt per year over the past 8 years mainly due to reductions in the EU power sector. While the in-sector aviation emissions for intra-EEA flights kept growing, from 53.5 million tonnes CO2 in 2013 to 69 million in 2019, the flexibility of the EU ETS, whereby aircraft operators may use any allowances to cover their emissions, meant that the CO2 impacts is reduced at a rate of 2.2% per year.

However, the third difference from a global environmental perspective is its scale: while the EU ETS allows EU goals to be met, as CORSIA is going to be implemented by 88 countries, the impact at global level has the potential to move towards stabilizing the aviation emissions from international participants to a much larger degree than a regional approach.

CORSIA relies on international offsets. The quality of international offsets is harder to control and raises concerns over additionality, permanence, net harm and the applicable accounting rules to avoid double counting.

Quantitative analysis

First, there is very little difference in direct CO2 emissions, i.e. emissions from aircraft without considering any reductions either by ETS allowances or by CORSIA offsetting, across the different options in 2030. The carbon costs for the different options are insufficient to drive significant reductions within the aviation sector:

-Full EU ETS scope (C0WIDE) leads to lower direct CO2 emissions than all other options for global, extra and intra-EEA flights.

-Applying CORSIA to international flights (C2CONLY) leads to the highest direct CO2 emissions in all cases.

This is due to the collective effect of CORSIA explained in Chapter 6 introduction.

Looking at net emissions (emissions after reductions in other ETS sectors or from use of CORSIA offsets), the picture is more complex. The reductions below will not include reductions from SAF as they are considered therefore come from use of ETS allowances and use of CORSIA offsets.

For global net emissions in 2030:

·Return to full-scope (C0WIDE) leads to the lowest net global emissions. These are projected to even be 74 Mt or 7.5% below the baseline C1BASE, which does not cover extra-EEA flights.

·Option C2CONLY, CORSIA only, leads to the highest net global emissions, at 55Mt or 5.5% above the baseline.

·After C1BASE, the next best options in terms of net global emissions are Option C3CLEAN, clean cut, with emissions 1.1% above baseline and Option C4MIX with emissions 3% above the baseline.

Global net emissions are lowest under C0WIDE, followed by C1BASE (see Table 6.1). Note that in both cases CORSIA offset use is at its highest at 61 Mt in 2030. C0WIDE, like C1BASE, leads to a higher use of CORSIA offsets in 2030 for routes not related to the EU, because the absence of extra-EEA and intra-EEA emissions from CORSIA (unlike in other options) leads to a lower CORSIA baseline and greater offsetting requirements for other routes within CORSIA. C1BASE has no coverage of extra-EEA emissions, but these are covered under C0WIDE, as reflected in the higher use of EU ETS allowances by the aviation sector to cover emissions, further amplifying the reduction in net global emissions.

For extra-EEA net emissions:

·C1BASE is the baseline that holds

·the highest net extra-EEA emissions at 170 Mt in 2030

·C3CLEAN is 9.4% below baseline levels

·C2CONLY and C4MIX are 5.3% below the baseline

·C0WIDE leads to the lowest net extra-EEA emissions as it includes full ETS (reduction not stabilisation) and it applies to all routes independently of whether the country of the airline has implemented CORSIA or not. In this case, emissions would be 45% lower than the baseline C1BASE.

For intra-EEA net emissions: 

·Option C4MIX is projected to lead to the lowest net intra-EEA emissions, at 23.9 Mt in 2030, 1.1% below the baseline, C1BASE with emissions of 27Mt.

·C3CLEAN (clean cut) also leads to net intra-EEA emissions of 27Mt equal to the baseline C1BASE.

·Option C2CONLY leads to the highest net intra-EEA emissions, 82% above the baseline.

Some of the outcomes, especially for net intra-EEA emissions, may seem counter-intuitive, in that they are not in line with the impact expected of the relative carbon costs under the EU ETS and CORSIA. This is due to the different approach to covering emissions under ETS and CORSIA, in particular:

1)The EU ETS requires EU allowances to be surrendered to cover all emissions from flights covered, whereas under CORSIA, growth in emissions above the baseline (now 2019 for a limited period) should be offset.

2)The EU ETS regulates the actual emissions of CO2 from flights covered, so that each extra tonne of emissions leads to use of one extra EU allowances whereas the number of offset credits to be used under CORSIA is not equal to the emissions from EU-related CORSIA routes. It is based on a share of the total emissions above 2019 levels from all flights covered by CORSIA across the World. The EU’s contribution changes as participation in CORSIA changes (as explained in more detail in text box 7.1 below). The EU share of offsets surrendered under CORSIA grows not just as more routes and emissions are covered, but also at a rate which changes depending on whether EU routes grow slower or faster than other routes under CORSIA.

Under collective offsetting, airlines in slow-growing regions, such as Europe, have higher CORSIA offset requirements than would be expected based on their own growth, and airlines in fast-growing regions have lower requirements. This distribution of effort provides an incentive for faster growing regions to implement CORSIA. But, along with use of a baseline, it also leads to some counter-intuitive outcomes. For example:

·Option C1BASE, where there is no implementation of CORSIA, leads to lower extra-EEA emissions than Option C3CLEAN where CORSIA is applied to flights to and from the EU. Including slow-growing flights to and from the EU, as in options C3CLEAN and C4MIX makes the CORSIA baseline higher, as the number of flights and emissions covered is increased, but growth above the baseline relatively smaller. The net result is that more CO2 is offset in CORSIA under C1BASE, where extra-EEA flights are excluded from CORSIA and not the EU ETS, than under C3CLEAN when they are covered by CORSIA.

·Option C4MIX leads to a larger drop in intra-EEA net emissions than option C3CLEAN, even though under C3CLEAN all emissions are under the higher carbon price ETS and C4MIX has part of these emissions covered by CORSIA, with lower carbon costs. Intra-EEA flights are growing slowly compared to flights on other routes outside the EEA. Under CORSIA, airlines operating flights on these slower growing intra-EEA routes, should surrender offsets to cover not only the growth in their emissions, but also a share of the emissions growth on other faster growing flights covered by CORSIA. However, looking at the impact on extra-EEA emissions and global emissions, option C4MIX leads to significantly higher emissions than C3CLEAN, as airlines on faster-growing routes offset less than if they were had to cover each tonne of their emissions above 2019 levels themselves 114 .

Given the complex effects of the sector-wide provisions of CORSIA, described above, it is important to look at the whole picture of net emissions – looking both within the Europe and at global level.

The higher emissions under CORSIA options when compared to options with greater EU ETS coverage can be explained also by the fact that CORSIA is designed to stabilise emissions at 2019 levels, whereas the EU ETS is designed to reduce emissions in line with the EU’s 2030 target.

Note that these results assume an initial implementation and participation in CORSIA by the 88 states (including the US) listed on the ICAO website in December 2020, but not China, Russia, India, Brazil. The results in Tables 6.2 and 6.3 in chapter 6 show the high sensitivity of the results to assumptions about participation. As domestic implementation by third countries is necessary and participation in CORSIA can be discontinued, this issue needs to be kept under review on an ongoing basis.

The figures presented assume full implementation and enforcement by the countries participating in CORSIA. Option C0WIDE assumes that third countries implement CORSIA, even when the EU does not; C0WIDE risks lower participation in CORSIA than presented, with global emissions somewhat higher than projected.

In terms of the 2030 target, C3CLEAN and C1BASE are the options that lead to greatest reduction in intra-EEA emissions through reductions in the EU and without use of international offsets. They are the policy options that lead to the greatest domestic contribution to meeting the net domestic reduction of at least 55% in greenhouse gas emissions by 2030.

From the quantitative analysis of the options, C0WIDE and C1BASE both lead to the lowest projected net global emissions. These are the options where ETS coverage is widest. Option C3CLEAN promotes broader implementation and continued participation in CORSIA and is the next best option in terms of net global greenhouse gas emissions. In terms of giving CORSIA support and incentives to actually deliver while still contributing to the global goals of the Paris Agreement, C3CLEAN is the preferred option.

Price signal

It is also important to look beyond the quantitative analysis to qualitative attributes that have an impact on different policy options’ environmental effectiveness. In doing so, it is important to look both at transition by the aviation sector and the impact of the options on other sectors and the economy wide transition to be achieved by Europe and all other countries affected by the options assessed.

The analysis shows that none of the policy options will significantly alter direct aviation emissions by 2030. However, scenarios diverge when reductions acquired through offsets or allowances are taken into account. The projected carbon costs remain relatively low compared to the cost of measures to reduce emissions within the aviation sector. The CORSIA offsets’ cheaper price levels mean lower carbon price for the aviation industry, whereas under EU ETS, the aviation sector is subject to the same carbon price as other ETS sectors and contributes to EU’s climate targets alongside other sectors. The EU ETS price signal is 6 to 31 times higher, depending on the scenario, than any price signal that airlines would pay under CORSIA. The policy options where EU ETS coverage is wider provide a stronger price signal for airlines.

To complement the EU ETS price signal, EU ETS auctioning revenues can be used to support transition towards climate neutrality. Under the EU ETS, Member States report that from 2012 until 2020, over €45 billion of ETS auction revenue has been used to tackle climate change 115 , and additional support is available under the existing ETS Innovation Fund that is expected to deploy upwards of €12 billion in the period 2021-2030. Only options where ETS is retained yield auctioning revenues, with highest revenues coming from options where ETS coverage is widest and auctioning share is highest.

CORSIA’s support for the climate transition would come from the impacts in the host countries from which airlines purchase carbon credits.

Participation and implementation of CORSIA

Wide participation in CORSIA is a key element of its global effectiveness. The aviation sector’s net emissions are reduced most when State implementation and continued participation in CORSIA is highest.

The quantitative results presented in this impact assessment are based on the ‘initial assumed implementation’ of CORSIA, which includes the 88 states listed on the ICAO website in December 2020. These include the US, but exclude major economies such as Brazil, China, India, and Russia.

Table 6.3 in Chapter 6 shows how offset demand under CORSIA changes under high and low participation, giving an indication of the importance of engaging other major economies for making CORSIA a success.

However, if we were to look at CORSIA Phase 2, that is the time when CORSIA foresees full implementation, including China and other major economies (high implementation) 116 , we would see increasing offset demand over the period by 72% to 109 % depending on the option, compared to the results presented in this Impact Assessment. For C3CLEAN, the amount of emissions offset rises to 902 Mt CO2, or about 100Mt per year over the 9 years of CORSIA Phase 2. For C4MIX the amount of CO2 offset rises to 781 Mt CO2 over the 9 years under high participation or 87Mt CO2 per year. In other words, the total level of offsetting under the highest level of CORSIA implementation is equivalent, in annual terms, to the current GHG emissions of Greece or around 7% of the emissions of Brazil. It is important to note though, that these offsets would result in the same level of emissions reductions only if there is no double counting and the offsets are additional.

Unit quality

The emission projections, especially for global and extra-EEA flights, are very sensitive to assumptions about CORSIA offset quality. The modelling looked at only one aspect of offset quality: additionality. An emission reduction project or programme is deemed additional if it would not have taken place in the absence of a market for offset credits. The results of the assessment in Table 6.4 show that net global emissions are 32 to 61 Mt CO2 higher across the options in 2030 if CORSIA offsets are not additional at all. Additionality also affects the ranking of options if looking at intra-EEA emissions. Under the assumption of 0% additionality, options C2CONLY and C4MIX see an increase in net emissions, so that option C3CLEAN, clean cut, performs better than C4MIX, mix, in terms of emissions reductions.

Looking only at the impact of ‘no additionality’ may underestimate the full impacts of other determinants of offset quality.

As described in Annex 10, ICAO established the CORSIA Emissions Unit Eligibility Criteria (EUC), as well as a Technical Advisory Body (TAB) to provide the ICAO Council with recommendations on units that should be ‘eligible’, based on assessment of programmes applying for eligibility under CORSIA. The TAB’s assessment is at programme level rather than on individual project or unit level. In its assessments so far, the TAB has found that while most programmes meet most of the criteria, only one of the programmes meets all the criteria. Programmes also approach some of the critical issues such as safeguards, additionality, baselines, sustainability, MRV, permanence, leakage and no net harm differently. There are no powers under ICAO’s founding instrument for offset standards to be enforced 117 . It should be noted that CORSIA eligible credits include removals, i.e. credits that are based on carbon sequestration rather than reducing emissions. These credits are subject to specific quality risks such as permanence and leakage.

Accounting

Environmental integrity under the Paris Agreement requires going beyond the traditional concept of additionality to ensure that there are measures in place to avoid double counting and to ensure that the market-based mechanisms generating the credits are in line with host parties’ NDCs and long-term strategies.

CORSIA does not have provisions to ensure that offsets used come from Parties that are implementing the Paris Agreement and have taken into account the impact of issuing these offsets on their ability to meet their NDC.

None of the CORSIA eligible programmes have comprehensive provisions which guarantee avoidance of double counting with pre-2020 commitments 118 . The risk of double-counting extends to post-2020 commitments as well. As regards accounting for Parties’ nationally determined contributions under the Paris Agreement, CORSIA requires offset credit programmes to ensure that double counting is avoided. While one of the eligible programmes fulfils this condition, Parties to the Paris Agreement have not concluded on accounting rules for the use of CORSIA offsets. This means that absence of UNFCCC decision on robust accounting and adjustment may lead to emission reductions being used and counted twice, or more than twice, leading to higher than perceived global greenhouse gas emissions. The CORSIA Central Registry (CCR) alone cannot address the risk of double counting at country level, given the wide potential sources and uses for eligible offsets.

A large share of offset projects ar25e delivering emission reductions within their host country’s NDC scope 119 . Use of offsets in a way that may undermine the host country’s NDC or path to climate neutrality will make it more difficult for host countries to meet current and future more ambitious targets.

Due to uncertainties associated with CORSIA participation, additionality of offset credits, and with accounting, the policy options with wider ETS coverage provide more certainty of environmental effectiveness.

7.1.2.Increasing the auctioning share of aviation allowances

Aviation sector emissions are projected to be higher than the aviation cap under all scenarios. At the outset, the environmental impacts between different options for auctioning share increase do not vary as allocation method does not affect the emission cap.

Different options for increase of auctioning share may have different impacts on carbon leakage or perceived risk thereof. In general, the results of the ICF Study suggest there is a low risk of positive carbon leakage when switching to a higher auctioning percentage, and that changes in cost associated with auctioning changes are still well within the range of cost variability due to fluctuations in fuel price. While airline profits may be impacted, effects on passengers are likely to be limited. Significant impacts are also unlikely for access to mobility for outermost regions.

7.1.3.Enforceability

CORSIA is based on a resolution adopted by ICAO which is not a binding international agreement. Detailed implementing rules are adopted in the form of ICAO Standards and Recommended Practices, and these only receive binding force through their implementation in national law but the stringency with which they are implemented varies from one state to another. As the implementation of CORSIA depends on legislative action by third countries, and hence entails some uncertainty, this needs to be kept under scrutiny. Continued participation in CORSIA is also not guaranteed, as countries can withdraw from it. In comparison, the EU ETS Directive applies in a consistent manner across all EU Member States (the question of participation opt-out is irrelevant), irrespective of the nationality of the aeroplane operator and it is further enforced through effective financial penalties that also require the environment shortfall to be made up. By contrast, ICAO has no instruments at its disposal to enforce compliance, and thus no penalties can be enforced by ICAO in case of non-compliance with CORSIA.

While most of the options avoid an overlap between CORSIA and the EU ETS (see section 6.5.2 above), thus also ensuring that enforceability remains separated between the two instruments, some of those options ensure that all flights are covered by an instrument (cf. options C3CLEAN and C4MIX). C0WIDE would present a harder enforceability to implement provided its extra-EEA ETS scope, while C2CONLY would be defined by a weaker enforceability degree, provided the low binding character of CORSIA legal instruments. C4MIX presents additional enforceability challenges related to the additional legal complexity that may arise for the implementation for aircraft operators.

Based on enforceability assessment in the ICF Study, enforceability is stronger in options where ETS scope is wider.

7.2.Efficiency

7.2.1.Impacts on operating costs, prices and demand

7.2.1.1.CORSIA implementation options

There is very little difference between the options in terms of costs. Carbon costs remain very small or negligible relative to operating costs and fuel costs for all options, for intra- and extra-EEA flights, with the highest cost impact for C0WIDE (full scope ETS), which is projected to have carbon costs of 1% and 1.8% of operating costs for intra and extra- EEA flights, respectively.

As a result, the impact of the different options on fares paid by customers is small and varies by less than €1 for intra-EEA flights between C0WIDE the highest cost and other options in 2030 and less than €2 for extra-EEA flights. Even at the upper-most end of the uncertainty range, Option C0WIDE is at most €7 higher for one way for extra-EEA fares in 2030, around 2.6% of the total average fare.

With such small increases in price for customers, the assessment also predicts small changes in demand across all options for both passenger travel and freight, measured in Revenue Passenger Kilometres and Revenue Tonne Kilometres (RTK).

For Revenue Passenger Kilometre, all options have the same level of demand apart from C0WIDE which leads to the lowest demand, but with RPK just 1% below other options for extra-EEA flights.

For freight demand, the situation is very similar, with the same level of demand apart from C0WIDE, with RTK just 2% lower than other options.

The ICF Study also looked at sensitivity to carbon prices where these follow the higher prices from the uncertainty range analysis. The impact of using the higher price has little impact on demand. For example, the difference between option C0WIDE and option C2CONLY, the options with the highest and lowest impact on demand, is only 2.5% for intra-EEA freight demand (in RTK) and 3.7% for extra-EEA RTK in 2030. 

7.2.1.2. Auctioning share increase options

By far the largest carbon cost for airlines is incurred in policy option C0WIDE, which includes flights to and from EEA within the EU ETS scope. In the case of extra-EEA flights with immediate full auctioning combined with option C0WIDE, carbon costs in 2024 add around 3.6% to total operating cost per RPK compared to a situation where no carbon price is applied to these routes, and about 3.5% by 2035. This is still well below the impact of recent fluctuations in oil price, which can change total operating cost by 10 or more percent.

7.2.2.Level playing field

7.2.2.1.CORSIA implementation options

Competitive distortions would arise when policies do not apply equally across routes, or where they are not enforced equally. EU ETS options avoid any distortion of competition on routes, as has been demonstrated over the past 8 years. The CORSIA options require widespread implementation and continued enforcement by participating States if they are to apply uniformly to all airlines and not create direct distortions. The EU obviously cannot enforce CORSIA on routes operated by non-EEA carriers not involving airports in the EEA, and so States should be incentivised to apply CORSIA in a meaningful manner. The carbon costs of the options covered are unlikely to lead to significant competition distortion between airports as passenger hubs or freight hubs.

As Europe and other countries and regions transition to climate neutrality, C0WIDE, followed by C1BASE and C3CLEAN, with the highest coverage of flights by the EU ETS, have the greatest potential to support the deployment of new, low carbon solutions. This will reduce the costs of transition and boost the competitiveness of European airlines as carbon budgets or amount of greenhouse gas that can be emitted whilst meeting the goals of the Paris Agreement gradually decline to zero.

For CORSIA implementation options, opinions differed between and within stakeholder groups. For business associations, the most preferable options were CORSIA ONLY and MIX option with 33% of responses for each option. The least preferable options were ETS full legal scope and MIX BIS with 33% of responses for each option. For public authorities, 30% found CORSIA ONLY the most preferable option, and 40% found CORSIA ONLY the least preferable option. For NGOs, EU ETS full legal scope was the most preferable option with 89% of responses, and CORSIA only the least preferable option with 44% of responses. 

Some stakeholders from business associations including the aviation industry make arguments for the importance of a harmonised coexistence of EU ETS and CORSIA, focusing especially on the level playing field between EEA and non-EEA airlines and the need to avoid more exemptions for the aviation sector. These stakeholders, with similar views presented in position papers, believe the aviation rules review should prevent and remove market distortion between EEA and third country carriers; prevent double regulation of emissions; ensure long-term regulatory stability by preventing international opposition; minimize deviation from CORSIA or the EU ETS principles; limit the increase in administrative burden; and limit the increase in cost (especially regarding the impact of COVID-19).

7.2.2.2.Auctioning share increase options

The option that maintains a share of free allocation for airlines, option A4RED, would partially maintain the current methodology of free allocation. The current methodology of free allocation is based on historical emissions and has the potential to create competitive distortion between incumbent and newcomer airlines. Option A1FULL removes the competitive distortion as all airlines are treated the same. The other options would lead to same result as A1FULL, but over a longer period of time.

Stakeholders’ views were divided on the question of auctioning share increase. Immediate full auctioning was the most preferred option in 28 responses, and status quo was the most preferred option in 18 responses out of 79. At the same time, immediate full auctioning was the least preferred option in 33 responses and status quo was the least preferred option in 25 responses out of 87.

Most of the respondents supporting immediate full auctioning are EU citizens and NGOs. Respondents choosing status quo were dominantly aviation industry respondents i.e. beneficiaries of free allocation.

Several stakeholders make the argument that the inclusion of free allocation was originally included in the original EU ETS on aviation to protect against the risk of carbon leakage, but that there is no risk of carbon leakage with the today’s level playing field and high compliance with the EU ETS rules, especially for intra-EU flights.

The business sector argued that following the current decline in the aviation sector, a reduction of free allowances would severely limit the sector’s ability to recover. The business sector also argued to retain free allocation for the part of the emissions subject to market distortion, especially referring to the feeder flights into intra-EEA hubs. One public authority remarked that a combination of ‘status quo’ and ‘phase out’ could be combined, where status quo is maintained for a few years to provide stability and time for recovery before the phase out process is launched.

7.2.3.Auction revenues

Option A1FULL combined with option C0WIDE yields the largest revenues from auctioning aviation allowances and the auctioning of general allowances additionally demanded by the aviation sector. For other policy option combinations, auctioning revenues are dependent on the timeline of increased auctioning share and on the extent of the ETS coverage. Option C2CONLY removes all aviation auctioning revenues from Member States’ budgets or from EU own resources.

7.2.4.Social impacts

The modelling suggests that, among the policy options explored, and when taking into account the effect of revenue recycling, the option of extending the EU ETS to cover all flights (Option C0WIDE) would have the greatest positive impact on EU27 employment and GVA. The full-scope CORSIA scheme (Option C2CONLY) is associated with the weakest, albeit still positive, macroeconomic outcomes, while the other options with a mix of CORSIA and ETS scopes are expected to have broadly similar intermediate outcomes. However, the variation in expected macroeconomic effects between policy options is small. For example, aggregate EU27 employment is projected to be just over 50,000 workers higher by 2035 in Option C0WIDE than in option C2CONLY (a difference of around 0.02%).

At the EU aggregate level, employment in air transport is projected to be lowest in option C0WIDE while staying at a similar and slightly higher level for all other options. The impact on air transport GVA, however, is more in line with the whole economy impact, with option C0WIDE expected to generate the most positive outcome and option C2CONLY the least positive. The difference in impact on GVA and employment implies that where taxation and regulation result in lower demand for air transport, workers are likely to take a hit while airline operators have more options to maintain profits such as cutting back on intermediate purchases and investment.

The modelling shows that household impacts are mainly due to recycling of auctioning revenues. Policy options with higher auctioning shares, most prominently A1FULL, the option with immediate full auctioning, are more likely to yield positive impacts to low-income households in the form of lower income taxes or income transfers.

7.2.5.Administrative effort

7.2.5.1.CORSIA implementation options

Option C1BASE represents the least administrative costs (the current level). Options C0WIDE and C2CONLY are the next lowest costs as airlines are subject only to one regulation (i.e. only one MRV regime applies), followed by option C3CLEAN where either CORSIA or EU ETS applies on a specific route. Options C4MIX is likely to have the highest administrative costs due to the increased complexity of applying CORSIA and EU ETS on the same routes. Eurocontrol can effectively support the reporting and compliance process for all options, therefore this does not influence the relative ranking.

7.2.5.2.Auctioning share increase options

The bulk of the administrative burden is linked to the mere existence of free allocation, not to the level of free allocation. Therefore, the only difference in administrative effort between the options on increasing the auctioning share is whether there is free allocation or not. Accordingly, option A1FULL means the least administrative effort, while the other options maintain the current level at least for a certain transition time (A2SWIFT, A3SLOW), or perpetuate it (A0BASE, A4RED).

7.2.6.Outermost regions

The overall macroeconomic impacts of the different options, when evaluated through impacts on the aviation sector, fuel supply sectors, and through linked supply chains and associated multiplier effects, are relatively small: less than 0.05% in terms of both value added and employment in all cases at the EU27 level. The impacts are similarly small in the outermost regions, once a regionalisation method is applied to convert MS impacts: differences are always smaller than 0.1% between any of the options.

However, it is important to note that this presents only a partial analysis of the expected effects; there are changes in flight frequency and capacity as a result of different policy options, and these will affect the connectivity between regions and countries. Although modelling such effects is beyond the scope of this analysis, it is reasonable to expect that such impacts may be more substantial, in macroeconomic terms, than the changes felt through the aviation sector and associated supply changes.

7.3.Coherence

This section looks at the coherence of policy options with both EU and international policies.

EU policies

The European Green Deal calls for all sectors to contribute to the target of climate neutrality by 2050. To achieve economy-wide climate neutrality, at least a 90% reduction in EU transport emissions is needed by 2050 and aviation needs to contribute to these significant reductions. In the European Green Deal, the Commission recalled that “the price of transport must reflect the impact it has on the environment and on health”. This must be taken into account when considering options for the implementation of CORSIA and reducing the share of free allocation of EU allowances to airlines. The Impact Assessments on Aviation Taxation and the revision of the Energy Taxation Directive are also important contributions to ensuring the price of aviation promotes this economy-wide effort.

In September 2020, the European Commission adopted the 2030 Climate Target Plan, to raise the EU's ambition from reducing greenhouse gas emissions from 40% to at least 55% below 1990 levels by 2030. In December 2020, the European Council confirmed the EU’s target for 2030, endorsing a net domestic reduction of at least 55% in economy-wide emissions below 1990 levels:

‘To meet the objective of a climate-neutral EU by 2050 in line with the objectives of the Paris Agreement, the EU needs to increase its ambition for the coming decade and update its climate and energy policy framework. To that end, the European Council endorses a binding EU target of a net domestic reduction of at least 55% in greenhouse gas emissions by 2030 compared to 1990. It calls on the co-legislators to reflect this new target in the European Climate Law proposal and to adopt the latter swiftly.’

Subsequently, the Union and its Member States submitted this revised economy-wide target for 2030 as its nationally determined contribution (NDC) to the Paris Agreement. The EU ETS facilitates the EU meeting its NDC commitment by ensuring all ETS sectors contribute in an efficient and cost-effective way. The EU ETS for other sectors is also now being reviewed to be consistent with the domestic 55% reduction for 2030 and economy-wide climate neutrality by 2050. The communication on the 2030 climate ambition requires that “in accordance with its international commitment to economy-wide action under the Paris Agreement, the EU should continue to regulate at least intra-EU aviation emissions in the EU ETS” 120 . It is also important to ensure consistency with the Climate Law, which is enshrining economy-wide climate neutrality in Union law for no later than 2050. The scope of the Climate Law covers all emissions regulated in Union law, including emissions from aviation that are the subject of this Impact Assessment.

As was already the case for the existing 40% target for 2030, a domestic reduction of at least 55% means that offset credits resulting from emissions reductions outside the EU should not be used towards this target. This argues against C4MIX, where CORSIA is used to cover intra-EEA emissions.

Given the limited impact of the various options on direct emissions from the aviation sector, it is necessary to look at the impacts of the various policy options on the complementary measures that support further emission reductions in the sector, including the transition to sustainable alternative fuels.

With respect to the decarbonisation of aviation through the uptake of SAF, the revision of the EU ETS for aviation is coherent with the ReFuelEU Aviation initiative. ReFuelEU Aviation would aim at encouraging the uptake of SAF by airlines, through actions on both the supply and demand sides. All policy options proposed for the revision of the EU ETS for aviation provide incentives for the use of SAF. In particular, all policy options will contribute to bridging the price gap between conventional and alternative fuels. The ReFuelEU assessment projects a SAF share of 4-8% in 2030. The effective fuel price to airlines will therefore be higher, but with limited impact: while the ICF study a high oil price reduces intra-EEA RPK by about 4%, the corresponding impact of ReFuelEU is likely to be only around 1%. ReFuelEU policies should also lead to a greater number of EU ETS biofuel recognitions, but emissions would nevertheless remain well above the cap. Overall this may lead to a small increase in net CO2 emissions on EU ETS routes, 121 and decreases on any routes where the SAFs mandate applies but the EU ETS does not.

With respect to the taxation of aviation, the ongoing revision of the Energy Taxation Directive would also contribute to achieving the EU’s climate policy objectives. Different policy options are being considered in relation to the air transport sector, including the introduction of intra-EU harmonized fuel tax and/or a harmonized ticket tax. These measures are likely to increase the price incentives to switch to SAF by ensuring that ticket and fuel prices reflect costs of climate impacts and other costs to the environment. All policy options are coherent with the ongoing revision of the Energy Taxation Directive.

Considering the developments in the years following the adoption of the Energy Efficiency Directive (i.e. 2013-2018), transport energy consumption rose by 33 Mtoe explaining 87% of the gap (38 Mtoe) to the EU final energy consumption target in 2020. Aviation, accounting for a growing proportion of overall EU energy consumption (over 5%), alone would explain over 27% of this gap. On aviation, world demand for air transport has more than doubled since 2000. It is worth noting that the growth in aviation energy consumption would be much higher without energy efficiency improvements. While policy and industry’s efforts have shown concrete improvements over the past years (for example fuel burn per passenger has dropped by 24% from 2005 to 2017), these benefits have been outpaced by the sustained growth in traffic. 122 As the EU increases the ambition towards 2030 and 2050 and the economy recovers from COVID-19, energy efficiency efforts will have to be increased also in the aviation sector.

International climate action

The EU is committed to promoting global climate action through multilateral cooperation. Working with third countries to support implementation of the Paris Agreement is a fundamental part of EU Climate Diplomacy under the European Green Deal. The EU’s nationally determined contribution to the Paris Agreement reflects the EU’s climate ambition and is the cornerstone of EU participation in international climate action. High ambition is also the driver in EU’s participation in CORSIA.

Under all scenarios considered in the analysis underlying this impact assessment, emissions from international aviation rise to levels in the order of 1 billion t CO2 by 2035 (the current end date of CORSIA). Emissions from domestic flights, which are over 40% of the global total, are not covered by CORSIA, which aims at carbon-neutral growth of international aviation only from 2019.

CORSIA’s current aim, carbon-neutral growth of international aviation emissions above 2020 levels, is not ambitious enough to deliver a significant contribution from the international aviation sector towards the Paris Agreement’s global goal. However, if fully implemented, CORSIA would stabilize aviation emission levels at global scale. At the same time, the risk of double counting (in particular as countries include aviation in domestic reduction targets while selling offsetting credits), and hence, undermining of NDC or Paris Agreement achievements, needs to be addressed at international level. The likely partial participation in CORSIA and inefficient enforcement further increase uncertainties related to the aviation sector’s contribution to global emission reductions.

Through its participation in international market mechanisms, the EU was a large source of demand for carbon credits. In the light of the EU’s experience with international credits and in line with the EU contribution to the Paris Agreement, no international credits can be used after 2020 in the EU ETS. The decisions that the EU takes about which offsets or credits could or could not be used to meet EU targets, send a strong message to other parties on the level of ambition and safeguards needed for the future development of offsets and credits for implementation of the Paris Agreement. Decisions on the use of CORSIA eligible credits for intra-EU emissions, such as in option C4MIX, need to carefully balance the benefits to multilateral action on international aviation against the risks of undermining the EU’s leadership on environmental integrity for the international carbon market and weakening the ambition of climate policies in countries combining domestic action with sale of credits.

The EU needs to remain consistent with its high climate ambition and support for multilateral climate action. This can be done by maintaining the necessary EU policy space to ensure credible NDC achievement while participating and implementing CORSIA and encouraging wide participation by others.

EU Member States have notified differences in their implementation of CORSIA due to the need not to invalidate existing Union law, in particular Directive 2003/87/EC 123 , as well as to safeguard the roles of the EU co-legislator. Options that would equal to non-implementation of CORSIA (C0WIDE and C1BASE) would therefore not raise legal concerns, but would be politically undesirable if other countries including the US and China are implementing.

The implementation of CORSIA depends on legislative action by third countries, and hence entails some uncertainty; this needs to be kept under scrutiny. Continued participation in CORSIA is also not guaranteed, as countries can withdraw and, as noted, can make it challenging to ensure equal treatment on certain routes. It is important to note that the EU ETS has ensured equal treatment on routes and a high level of compliance based on oversight by Member States and the Court of Justice of the European Union.

Quality of offsets and their robust accounting are central to the overall environmental integrity of CORSIA. Therefore, even under option C3CLEAN it is proposed to build further on the ICAO list of eligible credits, for airlines subject to EU jurisdiction. To this end, in order to ensure that the EU’s implementation of CORSIA supports the Paris Agreement goals and gives incentives for broad participation in CORSIA, the EU should only accept offsets as compliance credits under CORSIA that meet the following three conditions:

-credits are from projects in countries that are party to the Paris Agreement;

-credits are from projects in countries that participate in CORSIA; and

-double-counting of credits is avoided.

Other states should be encouraged to implement CORSIA also in this way. If this would not be the case, European airlines would potentially be put at a disadvantage. The way to avoid this would be to provide EU airlines an exemption from CORSIA compliance obligations on routes where there would not be equal conditions of competition, if there was a risk of meaningful divergence of costs.

In the open public consultation, stakeholders were asked to provide their opinion on whether market-based measures like the EU ETS and CORSIA should be combined with other policies. A majority of respondents (82%) agreed with the statement, most supportive groups being business associations, companies or business organisations, and EU citizens. Among other measures, stakeholders argued for governmental support in aircraft technology, operational and infrastructure development and SAF deployment. Taxation measures were however criticized for being environmentally inefficient and for tax revenues not being directed towards decarbonisation of the sector.

7.4.Conclusions

The above comparison shows that while ETS price incentives are orders of magnitude more meaningful than the price of CORSIA quality offsets, the overall environmental impact at global level across policy options is limited as the EU ETS has a limited geographical scope. This is shown in Table 7.1.

Table 7.1 Estimated net global aviation CO2 emissions in 2030. The results are the nominal or central values. They assume ‘initial assumed implementation’ of CORSIA- that means implementation of CORSIA by the 88 states listed on the ICAO website in December 2020. These include the US, but exclude countries that have opposed CORSIA: Brazil, China, India, Russia, Vietnam. (Extract from Table 6.1)

However, there are significant differences between the options as regards the contribution to the EU’s emission reduction target. There are also considerable differences in terms of revenues stemming from the different policy option combinations, as CORSIA, by design, does not generate any public revenue from airlines.

The effectiveness of the CORSIA implementation choice is not entirely in the hands of the EU regulators, option C3CLEAN is the one showing the best impacts with an active foothold in the CORSIA setup.

The comparison of the analysed options shows a strong case for moving to full auctioning from the date of entry into force of the revised legislation. While free allowances have been allocated notably to address potential adverse competitiveness impacts and carbon leakage, they constitute a derogation from the ‘polluter pays’ principle. The ICF Study suggests a low risk of carbon leakage when increasing the auctioning share. Switching to full auctioning implies stabilising the cap for aviation at current levels as auctioning is currently a fixed percentage of free allocations. This would maintain current levels of environmental integrity, and be subject to the linear reduction factor, as already required by the co-legislators and as is the case for all other operators in the EU ETS. The fastest possible abolition of free allocation in the EU ETS would reinforce its environmental integrity (by fully implementing the ‘polluter pays’ principle) and thus support maintaining its coverage for intra-EEA flights, instead of introducing CORSIA there.

The interlinkage and supportive incentives for emission reductions coming from other policy instruments that should ensure the contribution to the Climate Target Plan, like RefuelEU and the revision of the taxation of aviation fuels, should be ensured throughout the legislative process.

8.Preferred option

When proposing its updated 2030 greenhouse gas emissions reduction target of at least 55% 124 , the European Commission also described the actions across all sectors of the economy that would complement national efforts to achieve the increased ambition. A number of impact assessments have been prepared to support the envisaged revisions of key legislative instruments.

Against this background, this impact assessment has analysed the various options through which a revision of EU ETS in respect of aviation could effectively and efficiently contribute to the delivery of the updated target as part of a wider “Fit for 55” policy package.

Methodological approach

Drawing conclusions about preferred options from this analysis requires tackling two methodological issues.

First, as often the case in impact assessment analysis, ranking options may not be straightforward as it may not be possible to compare options through a single metric and no option may clearly dominate the others across relevant criteria. Ranking then requires an implicit weighting of the different criteria that can only be justifiably established at the political level. In such cases, an impact assessment should wean out as many inferior options as possible while transparently provide the information required for political decision- making.

Secondly, the package involves a high number of interlinked initiatives underpinned by individual impact assessments. Therefore, there is a need to ensure coherence between the preferred options of various impact assessments.

Policy interactions

Given the complex interdependence across policy tools and the interplay with the previous methodological issue outlined above, no simultaneous determination of a preferred policy package is thus possible. A sequential approach was therefore necessary.

First, the common economic assessment 125 , 126 underpinning the “Communication on Stepping up Europe’s 2030 climate ambition” looked at the feasibility of achieving a higher climate target and provided insights into the efforts that individual sectors would have to make. It could not, however, discuss precise sectoral ambitions or detailed policy tools. Rather, it looked at a range of possible pathways/scenarios to explore the delivery of the increased climate ambition. It noted particular benefits in deploying a broad mix of policy instruments, including strengthened carbon pricing and increased regulatory policy ambition.

An update of the pathway/scenario focusing on a combination of extended use of carbon pricing and medium intensification of regulatory measures in the economy, while also reflecting the COVID-19 pandemic and the National Energy and Climate Plans, confirmed these findings.

Taking this pathway and the Communication on Stepping up Europe’s 2030 climate ambition as central reference, individual impact assessments for all “Fit for 55” initiatives were then developed with a view to provide the required evidence base for the final step of detailing an effective, efficient and coherent “Fit for 55” package.

At the aggregate level, these impact assessments provide considerable reassurances about the policy indications adopted by the Commission in the Communication on Stepping up Europe’s 2030 climate ambition. This concerns notably a stronger and more comprehensive role of carbon pricing, energy efficiency and renewable energy policies, land sector, and the instruments supporting sustainable mobility and transport. These would be complemented by a carbon border adjustment mechanism and phasing out of free allowances. This would allow to continue to address the risk of carbon leakage in an efficient manner. It would also preserve the full scope of the Effort Sharing Regulation for achieving the increased climate target.

Various elements of the analyses also suggest that parts of the revenues of a strengthened and extended ETS should be used to counter any undesirable distributional impacts such a package would entail (between and within Member States). While the best way to do this is still to be determined, this would seem a superior alternative to foregoing the relevant measures all together or simply disregarding the uneven nature of their distributional impacts. Under both these alternatives, the eventual success of any package proposed would be at risk.

Preferred policy options

Preliminarily assuming this fact and the analysis above as the framework for the aggregate “Fit for 55” package, the specific analysis carried out in this impact assessment comes to the main following conclusions and would suggest the following preferred policy options for the revision of the EU ETS in respect of aviation:

Since 2012, the EU ETS has been an effective and demonstrated policy instrument incentivising emission reductions in the aviation sector in Europe while also maintaining equal competition of airlines on the routes covered. Mitigation measures are solid and demonstrated under the EU ETS. Maintaining non-regression means preferring policy options that do not result in a reduced or abolished environmental ambition within the EU ETS (i.e. other than C2CONLY, C4MIX, C5MIX2).

It needs also to bear in mind that the EU wants to provide a constructive international signal and wants the CORSIA global emission scheme to succeed and deliver meaningful emission reductions. Therefore, policy options that do not apply CORSIA at all (C0WIDE, C1BASE) should not be the preferred option.

Considering these two important elements the preferred option is option C3CLEAN. This option maintains the EU ETS for the current intra-European scope and introduces CORSIA for extra-European flights to and from third countries which participate in the scheme. CORSIA Units should come from countries covered by the Paris Agreement, which implement CORSIA, and double-counting should be excluded to preserve the environmental integrity. C3CLEAN option will maintain both domestic ambition with a successful carbon scheme while providing a constructive international signal.

For increasing the auction share, the investigated aspects favour full auctioning of allowances for aviation to align the coverage of intra-European flights in the EU ETS with the “Fit for 55” ambition because of the limited risk of carbon leakage (low probability of changing/diverting route driven by climate policies) as well as the opportunity cost pass through that takes place. The rate of phase out of free allocation is subject to political decision to be taken.

9.How will actual impacts be monitored and evaluated?

The Commission will continue to monitor and evaluate the implementation and results of the proposed initiative (C3CLEAN and A1FULL). In particular, the effectiveness of the proposed initiative in achieving the policy objectives identified in Chapter 4 will be assessed with the help of a set of indicators, as proposed in the table below.

The EU ETS implementation provides transparent information that allow, by large, monitoring the abovementioned objectives; for CORSIA, the ICAO Secretariat is expected to provide information on global aviation emissions.

The general policy objective of ensuring aviation's contribution to reducing the impacts of climate change and meeting corresponding climate targets (Objective 1) will be monitored on a yearly basis through the information provided by compliance data under the EU ETS and CORSIA.

More specifically, under the EU ETS, every year, aircraft operators report their emissions and surrender the corresponding amount of allowances. Compliance actions take place electronically through the Union Registry, which allows collecting individual and aggregated information, and Member States have an established track record of enforcement on a level-playing field basis. The Union Registry also includes data on the allocation issued under the EU ETS. The data easily allow the monitoring and evaluation of the extent to which the aviation sector is contributing to meet the EU climate targets either by reducing emissions or through the purchase of units from other sectors under the EU ETS cap for stationary installations, as well as the economic impacts it represents. The Commission will assess those aspects in its reports, including its annual Carbon Market Report.

The monitoring and reporting mechanism for CORSIA is already in place in the EU, and EU-based airlines’ emission reports have already been made public. The CORSIA registry has been established, which should provide information on its functioning at global level.

Market analysts regularly closely follow various aspects of the carbon market and its functioning; the Commission will continue to monitor this work. In addition, through regular contacts with stakeholders the Commission is alert to their views and concerns about the functioning of the EU ETS.

The impact of this initiative in relation to Objective 2 (i.e. leading international action, building alliances with the like-minded, maintaining competitiveness and ensuring a level-playing field in the sectors affected by the initiative, such as air transport services and tourism) will be monitored through the indicators described in the table above. With respect to the policy objective of encouraging third countries to take meaningful actions will require a qualitative assessment rather than a quantitative one. The Commission will closely follow the international developments in the coming years, including the implementation by third-countries of CORSIA and the establishment of national emissions trading systems. As regards the policy objective of ensuring a level-playing field, the Commission will regularly carry out studies in order to assess the risk of competition distortions caused by this policy initiative. In relation to the policy objective of maintaining competitiveness of the relevant sectors, market analysts regularly closely follow various aspects of the EU carbon market and their impact on the competitiveness of these relevant sectors. The Commission will continue to monitor their work. The Commission also entertains regular contacts with stakeholders and is alert to their views and concerns about the functioning of the EU ETS.

The initiative will be periodically evaluated in light of its operational objectives. In particular, it is recommended that the Commission reports regularly on international developments to the European Parliament and the Council, and makes proposals, as appropriate, to adapt the EU system to these developments (e.g. with a view to preserving competitiveness of EU airlines).

Annex 1: Procedural information

Lead DG, Decide Planning/CWP references

The Directorate-General (DG) for Climate Action has led the preparation of this initiative and the work on the Impact Assessment in the European Commission. The planning entry was approved in Decide Planning under the reference PLAN/2019/5485. It is included in the 2021 Commission Work Programme 127 under the headline ambition ‘European Green Deal’ and the policy objective ‘Fit for 55 package’.

Organisation and timing

The planned adoption date (Q2 2021) was included in the Commission Work Programme and has remained unchanged.

The Inter-service Steering Group (‘ISSG’) was set up by the Secretariat-General to assist in the preparation of the initiative. The representatives of the following Directorates General participated in the ISSG work: SG, LS, AGRI, BUDG, COMM, COMP, CNECT, DEFIS, DGT, DIGIT, EAC, ECFIN, ECHO, EMPL, ENER, ENV, ESTAT, FISMA, FPI, GROW, HOME, HR, IAS, INTPA, JRC, JUST, MARE, MOVE, NEAR, OLAF, REFORM, REGIO, RTD, SANTE, TAXUD, TRADE.

A total of 4 ISSG meetings took place. The ISSG discussed the draft contractor study on 22 September 2020, the questionnaires for the open public consultation on 13 October 2020, the concept of the impact assessment on 14 December 2020, and the draft impact assessment report on 9 March 2021.

Consultation of the Regulatory Scrutiny Board

The Regulatory Scrutiny Board (RSB) received the draft version of this impact assessment report on 18 March 2021. The RSB meeting took place on 14 April 2021. On 19 April 2021, the RSB gave a positive opinion on the report, with reservations. The RSB made three main observations:

·The report is overly complex and does not clearly identify the political choices for the decision makers. It does not describe well the constraints imposed by the EU’s international commitments. It does not present a clear intervention logic.

·The report does not assess the proposed initiative in the context of parallel initiatives pursuing similar objectives. It does not sufficiently reflect the impact of the multiple initiatives on the aviation sector.

·The impact analysis does not compare well the merits of the retained policy options and does not sufficiently take into account the views of the different stakeholder groups. The report does not identify who will be affected and how. It does not present the main costs and benefits of the preferred options.

The RSB also made a number of recommendations, which were addressed in this impact assessment report as follows: