UK ETS – aviation emissions post-Brexit

Introduction
Scheme linked to EU ETS as United Kingdom leaves
Simplified UK ETS
UK ETS and CORSIA
Aligning MRV requirements with EU ETS and CORSIA
Differing compliance periods
Next steps


Introduction

In June 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published its preferred approach to carbon pricing. The government aims to implement a UK emissions trading system (UK ETS) in January 2021 following Brexit that is linked to both the European Union Emissions Trading Scheme (EU ETS) and the Swiss Emissions Trading Scheme (Swiss ETS) and is at least as ambitious in terms of scope and subject to the same cap as the EU ETS, proportional to the United Kingdom's current share of the EU ETS cap (as if the United Kingdom had remained in the EU ETS following Brexit).

This article outlines aviation-specific considerations of the proposed UK ETS and the interaction of the proposed scheme with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), the International Civil Aviation Organisation's (ICAO's) market-based mechanism for offsetting emissions from aviation.

Scheme linked to EU ETS as United Kingdom leaves

The UK government's preference is for a scheme linked to the EU ETS. A linked scheme would ensure allowances in each system that are recognised by the other and is particularly relevant to the aviation sector, as many aircraft operators that would participate in the UK ETS are likely to participate in the EU ETS as well. The United Kingdom's intention is for the aviation monitoring, reporting and verification process (MRV), free allocation methodology and exemption rules to mirror those outlined in the EU ETS Phase IV (2021-2030).

Pursuant to the United Kingdom's agreement to withdraw from the European Union, UK aircraft operators that currently participate in the EU ETS must comply with their EU ETS obligations for the transition period (ending 31 December 2020). From January 2021, the United Kingdom will be obliged to enforce obligations arising under the EU ETS from 2020 and surrender applicable allowances by 30 April 2021. Access to UK-administered EU ETS accounts in the EU ETS's registry (the registry) will remain to facilitate this.

Following this date, operators, owners and financiers with access to an account in the UK section of the registry should plan for this access to be lost and information on an operator's compliance with the EU ETS in the UK section of the registry will likely be unavailable.

Simplified UK ETS

In the UK ETS, aircraft operators will have to open accounts in a new UK registry. In order to simplify compliance, the UK government would prefer a reporting arrangement where aircraft operators would be administered by only one state – either the United Kingdom or a state in the European Economic Area – to ensure an airline would only have to deal with one authority for compliance and one account for allowances.

The UK ETS aims to cover domestic UK flights, flights from the United Kingdom to the European Economic Area and flights from the United Kingdom to Switzerland. The aviation component of the emissions cap would be calculated to ensure it is at least as ambitious as the proportional share of the EU ETS cap for the United Kingdom with respect to aviation emissions. Similar to the EU ETS, the UK ETS aims to apply to aircraft operators regardless of their home country or the state of registration of the application.

UK ETS and CORSIA

As the United Kingdom will also participate in CORSIA, aircraft operators potentially face obligations under multiple emissions reductions schemes from 2021. UK aircraft operators are currently reporting emissions for CORSIA to the Environment Agency and complying with MRV requirements for CORSIA in relation to international flights. The only additional requirement for the UK ETS would be to report emissions on domestic flights. Non-UK aircraft operators would need to report their UK ETS emissions, in addition to their national reporting. Sharing of data between states is the preferred policy option of the United Kingdom to ensure this process is simplified.

CORSIA requires qualifying aircraft operators to offset the increase in international aviation emissions above 2019 levels, at least during the first three years of CORSIA (this can be changed by the ICAO's assembly). In effect, this means if aviation emissions do not rise in 2021 compared with 2019 levels, airlines will have no offset obligations under CORSIA.

CORSIA covers only international flights whereas the UK ETS will cover domestic flights and those to the European Economic Area and Switzerland. The UK government is considering postponing the annual compliance deadline for aircraft operators by at least one year (and possibly up to 2025 to align with CORSIA and account for amendments to MRV requirements in the interim), allowing aircraft operators to use CORSIA offset units to meet the UK ETS obligations and share data between states to reduce the burden airlines face in order to comply with both CORSIA and the UK ETS.

Aligning MRV requirements with EU ETS and CORSIA

Given the risk that MRV requirements will differ between the multiple emissions offsetting schemes applicable to aircraft operators, the European Union has consulted on amending the EU ETS MRV regulations to take into account the CORSIA Standards and Recommended Practices (SARPs) in time for the 2019 to 2020 monitoring phase. The United Kingdom's proposal is to align the UK ETS MRV rules with EU ETS (as amended in light of CORSIA) to ensure aircraft operators only face one set of MRV regulations going forward.

The first phase of the UK ETS will run from January 2021 to December 2030. Given the European Union's forthcoming review of the CORSIA SARPs, the United Kingdom has proposed to split aviation into two sub-phases:

• Phase 1(a) from 2021 to 2023 (to mirror CORSIA's pilot phase which the UK will participate in; and
• Phase 1(b) from 2024 to 2030.

The aim of this split is to ensure that the UK ETS has flexibility to incorporate the amended MRV rules. Measures will also be taken to ensure aircraft operators will not have to submit two sets of allowances or offset credits for the same emissions (eg, international flights from the United Kingdom to the European Economic Area and Switzerland and vice versa, which will fall within the scope of CORSIA, the EU ETS and the UK ETS).

Differing compliance periods

While the EU ETS and the proposed UK ETS will consist of one-year compliance cycles, under CORSIA, operators will not need to offset emissions until 2025. The United Kingdom is therefore considering postponing the deadline of surrendering credits under the UK ETS to 2025 to ensure that operators will not pay twice for the same emissions. Also under consideration is whether an aircraft operator would be able to use CORSIA-eligible credits to meet its UK ETS obligations. Given the United Kingdom's commitment to be at least as ambitious as the EU ETS, it will be interesting to see whether this ambition extends to matching the European Union's requirements for surrendering credits.

Next steps

As the BEIS report only outlined the UK government's preferred policy option following consultation, legislation will now need to be presented and passed in the United Kingdom and agreement must also be reached with the European Union and Switzerland for any inter-linking agreement with the EU ETS and the Swiss ETS.

As COVID-19 has already significantly impacted the aviation industry and will likely continue to do so into 2021 and beyond, emissions targets and scope under each of the EU ETS, the UK ETS and CORSIA are likely to be further questioned by the industry given the financial consequences on a sector that has been particularly impacted by the pandemic.

For further information on this topic please contact John Pearson or Rebecca Green at Vedder Price LLP by telephone (+44 20 3667 2900) or email (jpearson@vedderprice.com or rgreen@vedderprice.com). The Vedder Price LLP website can be accessed at www.vedderprice.com.