EU Emissions Trading System

The European Union Emissions Trading System (EU ETS), established in 2005, stands as the world’s first and largest international emissions trading system, regulating approximately 40% of the EU's emissions. It is a crucial element of the EU’s strategy to address climate change, serving as the primary mechanism for reducing greenhouse gas emissions where this can be done in the most cost-effective manner.

As of January 1, 2012, the EU ETS has extended its coverage to include emissions from aviation. This expansion encompasses all aircraft operators with flights to, from, and within Europe, irrespective of their country of registration, except for those that are exempt.

Cap and Trade Mechanism

The EU ETS operates on the ‘cap and trade’ principle. The total amount of greenhouse gases that can be emitted is restricted by a cap that aligns with the EU’s climate targets. This cap is reduced annually to ensure a progressive decrease in emissions over time. Starting from 2021, which marks the beginning of phase 4 (2021-2030), the annual linear reduction of the aviation cap is set at 2.2%.

Each emission allowance grants its holder the right to emit one metric ton of carbon dioxide. Regulated companies must surrender emission allowances equivalent to their CO2 emissions from the previous year. Trading occurs because some participants have a surplus of emission allowances, while others are short of allowances.

Distribution of Emission Allowances

From 2013 to 2023, 82% of emission allowances were allocated for free, based on verified tonne-kilometre data submitted for 2010. Additionally, 15% of the emissions cap was auctioned, and 3% were reserved for future distribution to rapidly growing aircraft operators and new entrants.

Starting in 2024, the free allocation of emission allowances is being gradually phased out. The allocation will be reduced to 75% in 2024 and to 50% in 2025. Starting in 2026, all allowances will be auctioned, with the exception of 20 million allowances, which will be distributed free of charge to commercial aircraft operators using Sustainable Aviation Fuel (SAF). Additionally, 5 million allowances will be allocated to an innovation fund.

It is important to note that the distribution of free allowances in 2024 and 2025 does not follow the previous method based on tonne-kilometre data from 2010. Instead, the distribution is based on verified 2023 emissions, a method known as grandfathering.

Scope of the EU ETS

The European Union Emissions Trading System (EU ETS) has three distinct geographical scopes: full scope, extended full scope, and reduced scope.

Full Scope

The 'full scope' is utilized to determine if an aircraft operator qualifies as a small emitter, allowing them to use a simplified emissions estimation method instead of calculating emissions based on actual fuel consumption. This scope includes all flights departing from and arriving at aerodromes located within the European Economic Area (EEA), excluding flights from Switzerland and the United Kingdom. The EEA also encompasses the territories of Ceuta, Melilla, Aland Islands, Jan Mayen, and the nine EU outermost regions: Canary Islands, French Guiana, Guadeloupe, Martinique, Mayotte, Réunion, Saint-Martin, Azores, and Madeira. All other European overseas territories are not part of the EEA.

Extended Full Scope

To determine whether an aircraft operator has reporting and surrender obligations under the EU ETS, the 'extended full scope' is considered. This scope combines 'full scope' flights with flights from Switzerland (beginning 1 January 2020) and the United Kingdom (beginning 1 January 2021) to the EEA.

Reduced Scope

The 'reduced scope' encompasses all flights that require reporting and for which emission allowances must be purchased and surrendered. This includes all flights within the EEA, as well as flights from the EEA to Switzerland and the United Kingdom. It is important to note that while aircraft operators participating in the program must report emissions from flights between EU outermost regions and the EEA, as well as flights from EU outermost regions to Switzerland or the United Kingdom, this requirement does not apply to flights between an airport located in an EU outermost region of an EU member state and the same member state, flights between airports located in the same EU outermost region, or flights between two EU outermost regions that belong to the same EU member state.

Who must participate?

All aircraft operators are required to participate unless they fall below the de-minimis threshold. An aircraft operator is exempt from the EU ETS if their emissions from the extended full scope are:

• Commercial operators (AOC holder): Emissions of less than 10,000 tons of CO2 in a calendar year or operating fewer than 243 flights per period for three consecutive four-month periods.
• Non-commercial operators: Emissions of less than 1,000 tons of CO2 in a calendar year.

Furthermore, the EU ETS exempts the following flights:

• flights performed exclusively for the transport, on official mission, of a reigning Monarch and his immediate family, Heads of State, Heads of Government and Government Ministers, of a country other than a EEA member state, where this is substantiated by an appropriate status indicator in the flight plan
• military, customs and police flights
• search and rescue, firefighting, humanitarian and emergency medical service flights provided these flights were authorized by the appropriate competent authority
• flights performed exclusively under visual flight rules
• circular flights
• training flights performed exclusively for the purpose of obtaining a licence, or a rating in the case of cockpit flight crew where this is substantiated by an appropriate remark in the flight plan provided that the flight does not serve for the transport of passengers and/or cargo or for the positioning or ferrying of the aircraft
• public service flights (under certain conditions)
• flights performed exclusively for the purpose of scientific research or for the purpose of checking, testing or certifying aircraft or equipment whether airborne or ground-based
• flights performed by aircraft with a certified maximum take-off mass of less than 5,700 kg

Please bear in mind that the flight exemptions listed above shall not be considered when assessing whether the de minimis threshold is exceeded.

Sustainable Aviation Fuel

What is Sustainable Aviation Fuel?

Sustainable Aviation Fuel (SAF) is a renewable jet fuel that serves as an alternative energy source to conventional aviation fuel. SAF is environmentally beneficial as it significantly reduces the carbon emissions of aircraft. It is derived from agricultural waste or feedstock, such as used cooking oils, fats, municipal solid waste, and forestry residues.

Claiming Emission Reductions Under EU ETS

Aircraft operators who purchase or use SAF can reduce their annual reportable emissions under the EU ETS by claiming emission reductions in their Annual Emissions Report (AER). If claiming such reductions, the AER must be verified by an accredited independent verifier, and the operator must provide the necessary documentation to support the emission reduction claim.

Before claiming a SAF reduction under the EU ETS, an aircraft operator must first amend its Emissions Monitoring Plan (EMP) to include SAF-related information and obtain approval from the respective competent authority. The SAF being claimed must meet the RED II Sustainability Criteria to be zero-rated. Essential documentation includes the Proof of Sustainability (PoS), issued in accordance with one of the voluntary sustainability schemes recognized by the European Commission, and can be obtained from the fuel supplier along with fuel invoices.

It is important to note that emissions reduction can only be claimed from the SAF uplift of a reportable flight under the EU ETS ("reduced scope"). Any remaining SAF may also be claimed provided that the subsequent flight’s destination is an EEA state and no uplift of jet aviation fuel occurred between flights; otherwise, it is considered lost. Finally, the aircraft operator must ensure there is no double counting of SAF with other GHG regulation systems.

Obligations under the EU ETS

If your flight department is required to participate in EU ETS, you must:

• submit an annual emissions monitoring plan for approval to your competent authority
• monitor emissions in accordance with your approved monitoring plan, EU and national law
• (if required) send your annual emissions report to an accredited EU ETS auditor for verification
• submit to your competent authority an annual emissions report by 31 March of the year following the monitoring year
• open a Union Registry account
• purchase and surrender emission allowances equivalent to the number of reduced scope emissions by 30 September of the year following the monitoring year
• keep all ETS relevant records for a minimum of 10 years

* List of EU Member States: Austria, Belgium, Bulgaria, Cyprus, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden.