The Implications of the ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) for the Effectiveness of the EU’s Emissions Trading System (EU ETS) in the International Aviation Industry

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The Implications of the ICAO’s Carbon Offsetting and

Reduction Scheme for International Aviation (CORSIA)

for the Effectiveness of the

EU’s Emissions Trading System (EU ETS)

in the International Aviation Industry

L. Hagendijk

12426318

University of Amsterdam

European Union Law

Supervisor:

dr. L.J. Ankersmit

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Abstract

This research aims to determine the extent to which the entering into force of the Carbon Offsetting and Reduction Scheme (CORSIA) of the International Civil Aviation Organization (ICAO) in 2021 could undermine the effectiveness of the European Union’s Emissions Trading System (EU ETS) in so far as the latter includes international aviation by means of Directive 2008/101/EC. In order to analyze both mechanisms and assess their (non-)compatibility, EU primary and secondary legislation, international agreements, literature and case law have been examined. This contribution starts with the EU’s objectives in combatting climate change and the effects of the EU ETS in the aviation industry. Thereafter, a description of the international agreements in the field of environmental cooperation is given, followed by an examination of the development and functioning of CORSIA. Subsequently, a comparison has pointed out that these schemes are inherently different; while the former system constitutes a carbon market where the total amount of emission allowances is capped and permits can be traded against increasingly higher prices, the latter creates the opportunity to compensate emissions exceeding the baseline by investing in sustainable programs. Since CORSIA is applicable to all international flights, flight routes between two States within the European Economic Area will be covered by both the EU ETS and CORSIA. In this respect, Article 2(2) of the Kyoto Protocol foresees in the ICAO’s mandate to regulate international aviation, but a closer analysis of this provision shows that its ambiguous formulation renders the nature of the mandate unclear. It follows that the nature of the ICAO’s authority is not exclusive, which implies that both systems can exist simultaneously, and that the provision cannot be considered directly effective. Regarding the baseline of CORSIA that is to be applied, the levels of 2019 will be used in light of the COVID-19 pandemic that has already greatly affected aviation in 2020. Finally, it has been indicated that the possible future acceptance of international credits for partial compliance with the EU ETS would increase the risk of double counting emissions reduction. Even though the double counting of reduction units is highly problematic from an environmental perspective, it does not necessarily influence the extent to which aircraft operators comply with the EU ETS. As long as these credits are correctly exchanged for emission permits and airlines surrender sufficient allowances to meet their obligations, the fact that the same credit counts towards compliance with CORSIA does not undermine the EU ETS’ effectiveness. Still, it should be noted that this conclusion does, unfortunately enough, not alter the fact that such processes render CORSIA’s added value in terms of environmental protection very much limited.

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Introduction

“The UN aviation agency’s planned scheme for offsetting emissions from international flights will supplement, not replace, the European Union carbon market”1 (emphasis added), is what the Transport Commissioner of the European Union (EU) reported recently. With this statement, she referred to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) of the International Civil Aviation Organization (ICAO), an United Nations (UN) specialized agency that has authority in the field of international aviation. In 2017 the ICAO presented a global scheme to aid airlines in offsetting carbon emissions, which will entry into force in 2021 and will be applicable to all international flights – thus including flights between EU Member States. Over the last two decennia, the EU has constituted an EU wide Emissions Trading System (EU ETS) that reduces the emission of global greenhouse gases (GHG emissions) by creating a carbon market where emission allowances can be traded. With the arrival of CORSIA, environmental groups and EU lawmakers have become concerned that the European Commission will exclude aviation from the EU ETS. The message of the Transport Commissioner is clear: “CORSIA will not put the ETS at stake. It will not replace the ETS. It will complement the ETS”.2

Still, the question remains how these two schemes will exist side by side. First of all, an offsetting scheme like CORSIA operates in a completely different manner than a trading system like the EU ETS does. While CORSIA focusses on compensating or mitigating aviation emissions, the EU ETS aims to reduce the amount of emissions by gradually increasing the price of emission permits. Secondly, it is debatable whether the EU could, under the Kyoto Protocol, be legally bound to comply with the ICAO’s standpoint that CORSIA is to be the only scheme applying to CO2 emissions from international aviation.3_{If such would be the case, the} EU would have to limit the scope of the EU ETS significantly. In the situation that the EU ETS remains unchanged like the Transport Commissioner stated, the EU would have to accept the fact that two schemes are applicable to certain flight routes. However, the latter option could lead to the double counting of emissions reduction in a situation where international credits, generated by offset programs under CORSIA, would be admissible for compliance with a

1_{M. Strauss & K. Abnett, ‘Global airline CO2 scheme will supplement, not replace EU carbon market:}

Commission’ (11 May 2020) Reuters <www.reuters.com/article/us-climate-change-eu-aviation/global-airline-co2-scheme-will-supplement-not-replace-eu-carbon-market-commission-idUSKBN22N2JL> accessed 1 June 2020.

2_ibidem.

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certain part of the required allowances under the EU ETS. Thirdly, even if the entering into force of CORSIA would not have an impact on the effectiveness of the EU ETS, such developments may well be troublesome from an environmental point of view.

As the ICAO has outlined in its latest annual report, airline passenger traffic, also called revenue passenger kilometres (RPKs), increased with 7.1% in 2018 when compared to 2017 and shows an upward trend in this regard.4 The aviation sector is growing at an unprecedented fast rate – it is estimated to expand with an RPK growth of 145% by the year 2034.5 At the same time, aviation constitutes a significant contributor to GHG emissions that are the root cause of climate change. Already in 2014, the Intergovernmental Panel on Climate Change referred to air transport explicitly when warning that “without aggressive and sustained mitigation policies … emissions could increase at a faster rate than emissions from other energy end-use sectors”.6_{In 2016, aviation emissions represented approximately two percent of all} global CO2 emissions, which is expected to more than double by 2050.7_{Therefore, it is evident} that a well-functioning global scheme for the reduction of aviation emissions is needed. Still, it is important to examine whether CORSIA indeed constitutes such an effective scheme, especially now that it could have the potential of limiting the EU ETS’ effectiveness. Therefore, the research question of this contribution is as follows: “To what extent could the EU ETS, in

so far as it includes international aviation under Directive 2008/101/EC, be undermined in its effectiveness by the ICAO’s CORSIA?”.

This research is based on EU primary and secondary legislation, international agreements, literature and case law. Especially the EU directives that constitute the EU ETS for aviation have been assessed in-depth, as well as multiple international treaties and protocols that provide the legal framework for international cooperation against climate change. Case law of the European Court of Justice (ECJ), predominantly regarding the relationship between European legislation and international obligations, and a collection of literature have been examined in order to point out whether the entering into force of CORSIA, an international mechanism that will apply within the EU as well, could undermine the EU ETS’ effectiveness.

4_{ICAO Annual Report of 2018, ‘The World of Air Transport in 2018’ ICAO}

<www.icao.int/annual-report-2018/Pages/the-world-of-air-transport-in-2018.aspx> accessed 4 June 2020.

5_{N.J. Chalifour & L. Besco, ‘Taking Flight: Federal Action to Mitigate Canada's GHG Emissions from}

Aviation’ (2016) 48 Ottawa Law Review, no. 2, p. 579.

6_{R. Sims e.a., ‘Transport. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working}

Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change’ (2014) Cambridge University Press, p. 603.

7_{N.J. Chalifour & L. Besco, ‘Taking Flight: Federal Action to Mitigate Canada's GHG Emissions from}

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The first chapter of this contribution will describe the EU objectives for climate change protection and the way the EU ETS adds to achieving these goals. The development and current functioning of the EU ETS will be discussed, as well as the specific obligations for the aviation industry that flow from it. In the second chapter, the responsibilities of the ICAO and the events that led to the adoption of CORSIA will be outlined. In this respect, both the obligations under CORSIA for the aviation industry and related measures introduced by the ICAO will be taken into account. Subsequently, in the third chapter the relevance of CORSIA for the EU ETS will be examined. This part will get into an analysis of, predominantly, the Kyoto Protocol and will address the question whether the provisions therein can render the EU bound to comply with the measures taken by the ICAO. Regarding the effect of these measures, a distinction will be made between international and domestic aviation. The fourth chapter will start with addressing the difficulties surrounding the establishment of CORSIA’s baseline in light of the COVID-19 pandemic. Thereafter, the admissibility of international credits under the EU ETS and the consequences of double counting emissions reduction will be assessed. Ultimately, an answer will be formulated to the question whether CORSIA could potentially undermine the effectiveness of the EU ETS.

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Chapter 1 – European Union Emissions Trading System (EU ETS)

1.1. EU objectives for climate change protection

For years now, the EU has taken upon itself a leading role in the field of combatting climate change and, more specifically, GHG emissions. Already in 1992, with the entering into force of the Maastricht Treaty, the strengthening of EU environmental policy and the promotion of international measures addressing environmental problems at the regional or global level became part of the EU’s mandate.8 The continuing lack of a worldwide effort inspired the EU in 2009 to lead by example and introduce the so-called ‘20-20-20 targets’.9 These strategies aimed for reducing CO2 emissions (-20%), increasing the use of renewables (+20%) and improving energy efficiency (+20%) in the EU by 2020. This contribution will focus on the first area of EU policy illustrated by the introduction of the EU ETS, which is often viewed as the EU’s flagship instrument in its attempts to reduce GHG emissions.10

While multiple schemes for trading emissions have been established in and outside Europe, the EU ETS was the first to focus predominantly on CO2 emissions.11 In March 2000, the European Commission initiated the creation of the EU ETS with its Green Paper on greenhouse gas emissions trading within the EU (Green Paper).12 In its Green Paper, the Commission outlined that the trade in emissions forms “a scheme whereby companies are allocated allowances for their emissions of greenhouse gases according to the overall environmental ambitions of their government, which they can trade subsequently with each other”.13 The scheme is introduced in the Member States in 2003 by means of a directive, which entered into force in 2005.14 Especially installations from the industrial and electricity sectors fall within its scope.15

8_{A.M. Sbragia, ‘Institution-building from below and above: the European Community in Global Environmental}

Politics’ (1998) Department of Political Science and Center for West European Studies, University of Pittsburgh, p. 11.

9_{A.J. Mulder, ‘CO2 emissions trading in the EU: Models and policy applications’ (2016) University of}

Groningen, p. 3.

10_{F.J. Convery, ‘Origins and developments of the EU ETS’ (2009) 43 Environmental Resource Economics,}

p. 391-412.

11_{A.J. Mulder, ‘CO2 emissions trading in the EU: Models and policy applications’ (2016) University of}

Groningen, p. 4.

12_{Green Paper COM/2000/0087 of the European Commission of 8 March 2000.} 13_{ibid, chapter 3.}

14_{Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a}

scheme for greenhouse gas emission allowance trading within the Community.

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Emissions caused by aviation were included in the EU ETS in 2008 and these provisions became active in 2012.16 The ultimate goal of the EU ETS follows from the directive itself, which states that it “establishes a scheme for greenhouse gas emission allowance trading within the Community … in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner”.17 In 2009, the EU adopted a directive for the improvement and extension of the emissions trading scheme.18 With that, it expressed the aim to provide for “the reductions of greenhouse gas emissions to be increased so as to contribute to the levels of reductions that are considered scientifically necessary to avoid dangerous climate change”.19

Due to its limited relevance in the context of this research, the industrial and energy sectors will not be examined substantively in the following paragraphs. In order to provide an answer to the research question and indicate whether the EU ETS could be undermined in its effectiveness by CORSIA in the field of international aviation, a detailed examination of the functioning of the EU ETS is indispensable. Therefore, the next paragraph will address the effects of the EU ETS by outlining how its functioning has developed over time and, subsequently, examining the specific obligations that flow from this scheme and are specifically applicable to the aviation industry.

1.2. The effects of the EU ETS

1.2.1. The development and functioning of the EU ETS

As described in the previous paragraph, the EU ETS constitutes a controlled system of tradable GHG-allowances, of which allowances for CO2 emissions form the largest part. Companies that fall within the scope of the EU ETS may only emit to the extent that they possess the required allowances. Any failure to surrender sufficient allowances at the end of the year results in a penalty of EUR 100 for each tonne of excess carbon dioxide.20 Thereby, an emission ceiling or so-called ‘cap’ has been set.21 The total amount of permitted emissions is divided in emission

16_{Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending}

Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community.

17_{Article 1 of Directive 2003/87/EC.}

18_{Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive}

2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community.

19_{Article 1 of Directive 2009/29/EC.} 20_{Article 16(3) of Directive 2003/87/EC.}

21_{M. Mûuls e.a., ‘Evaluating the EU Emissions Trading System: Take it or leave it? An assessment of the data}

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allowances that represent a certain quantity of emissions; one emission allowance represents one ton of carbon dioxide.22 The number of permits that become available every year decreases linearly.23 Because a scarcity of allowances will lead to a higher price, the expectation has been that the carbon market would continue to innovate. Naturally, participants would try to avoid buying allowances at increasingly high prices and “as emissions trading will induce competition between companies to find cost-effective ways to reduce their emissions, an additional boost will be given to environmentally friendly technologies”.24

The idea behind this scheme comes down to achieving emission reductions where they can be realized in a most ‘inexpensive’ manner. Since the EU ETS installed a common carbon price across the EU and a limited amount of allowances, all actors at the EU carbon market can determine for themselves the opportunity-cost of emitting CO2.25 It thus creates an incentive to weigh out the benefits of either emitting CO2 and buying the required emission allowances, or reducing the emissions and paying the associated costs. During the first phase of the EU ETS (2005 to 2007), the testing phase, at least 95% of the emission allowances had to be allocated free of charge. In the second phase (2008 to 2012) this percentage was set at 90% of all permits.26 Member States were requested to lay down a plan for the allocation of the majority emission allowances, the remaining permits could be traded at the carbon market.27

A review done in 2007 showed that “a more harmonised emission trading system is imperative in order to better exploit the benefits of emission trading, to avoid distortions in the internal market and to facilitate the linking of emissions trading systems”.28 Therefore, pending the third phase (2013 to 2020) and the coming fourth phase of the EU ETS (2021 to 2030) the Member States enjoy far less leeway at the national level, for the Commission moved to a more central approach of the distribution of allowances.29 As of 2013, the Commission itself allocates the emission permits, predominantly at auction and with the use of benchmarks.30 As a

22_{Article 3(a) of Directive 2003/87/EC.}

23_{G. Perino, ‘New EU ETS Phase 4 rules temporarily puncture waterbed’ (2018) 8 Nature Climate Change,}

issue 4, p. 262.

24_{Green Paper COM/2000/0087 of the European Commission of 8 March 2000, par. 8.}

25_{M. Mûuls e.a., ‘Evaluating the EU Emissions Trading System: Take it or leave it? An assessment of the data}

after ten years’ (2016) Grantham Institute, no. 21, p. 4.

26_{Article 10 of Directive 2003/87/EC.} 27_{Directive 2009/29/EC, consideration 13.} 28_{ibid, consideration 8.}

29_{Commission Decision of 5 September 2013 concerning national implementation measures for the transitional}

free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council.

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consequence, an greater number of allowances is being traded at the carbon market instead of allocated free of charge.

Nevertheless, a significant category of permits is still being distributed for free in order to minimize the risk of ‘carbon leakage’. This process refers to certain EU carbon-intensive sectors involved in global trade moving their production - and with that their emissions - to a country outside the EU.31 Such a process would put the EU in a position to re-import the emissions it was seeking to reduce in the first place, now that actors from third countries with less strict legal limits to the emission of CO2 can generate their products less expensively and enjoy a competitive advantage.32 Aiming to avoid such negative effects on the environment and the European economy, the Commission introduced a list of exposed sectors in 2013 stipulating that these particular industries receive emission allowances free from charge. To that end, the Commission draws up a specific carbon leakage-decision for harmonised free allocation.33 These free permits will gradually be reduced to zero from 2026 till 2030.34

Another important intervention in the EU ETS was the introduction of the Market Stability Reserve (MSR). The decision to create such a MSR was made in 2015 and operates from 1 January 2019.35 The function of the MSR is to protect the EU ETS against unexpected fluctuations in the demand of emission allowances by decreasing the supply. Since the demand for permits has been relatively low for a long time and the emission target has been ‘overachieved’, the following devaluation of the permits has prompted the Commission to propose an MSR.36 Each year, 12% of the total amount of allowances for auction should be transferred to the reserve.37 Removing this surplus increases the relative scarcity of allowances and pushes up the price. While the total amount of permits stays the same, the so-called ‘waterbed effect’ occurs; putting pressure on the waterbed changes the division of the water, but it does not affect the amount of water the bed actually holds.38

31_{E. Palacková, ‘Saving face and facing climate change: Are border adjustments a viable option to stop carbon}

leakage?’ (2019) 18 European View, no. 2, p. 149.

32_{ibid, p. 150.}

33_{Article 10a of Directive 2009/29 EC.} 34_{Article 10b(4) of Directive 2018/410/EC.}

35_{Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the}

establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC; see especially Article 1.

36_{B. Knopf e.a., ‘The European Emissions Trading System (EU ETS): ex-post analysis, the market stability}

reserve and options for a comprehensive reform’ (2014) Nota Di Lavoro 79.2014, p. 2.

37_{Article 1(5) of Decision (EU) 2015/1814.}

38_{G. Perino, ‘New EU ETS Phase 4 rules temporarily puncture waterbed’ (2018) 8 Nature Climate Change,}

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Within the aviation industry, at first the EU ETS was applicable to all flights departing from or arriving at an aerodrome in a Member State of the European Economic Area (EEA), irrespective of the nationality of the airline operating the flight.39 The only flights that are exempted from the EU ETS are those operating limited services like airlines from developing countries.40 Under the expanded scheme, operators in the aviation sector are enabled to buy emission permits on the open carbon market just like other enterprises. However, unlike companies in the industrial and electricity sectors, aviation operators are only allowed to sell their surpluses to other aviation operators.41 In total, the EU ETS originally affected roughly 4.000 aircraft operators from 150 different countries.42

When it comes to flights that depart from one EU Member State and arrive at a location within another Member State, there is no discussion as to the question whether the EU ETS is applicable or not. However, the EU’s decision to unilaterally apply the EU ETS to flights departing from and arriving at third countries gave rise to a fierce debate about the legality of this extension of the scheme. Since the full amount of CO2 emitted during the entire length of the flight was being charged - even those parts of the flight outside the EU airspace and over the high seas - many States started legal disputes arguing that this expansion of the EU ETS violated their sovereignty.43

One landmark case ruled upon by the ECJ was the so called ATAA case, where the EU ETS’ legality was challenged by the Air Transport Association of America - amongst others - on the ground that the EU ETS breached international law and, more specifically, the principle of territoriality. In this context, the ECJ had to answer the preliminary question whether “the principle of customary international law that each State has complete and exclusive sovereignty over its airspace” and that ”no State may validly purport to subject any part of the high seas to its sovereignty” could render Directive 2008/101/EC invalid.44_{The ECJ answered this question} in the negative and held that the Directive “does not infringe the principle of territoriality or the sovereignty which the third States from or to which such flights are performed have over the airspace above their territory, since those aircraft are physically in the territory of one of the

39_{Directive 2008/101/EC, consideration 16.} 40_{ibid, consideration 18.}

41_{E. Denza, ‘International aviation and the EU carbon trading scheme: comment on the Air Transport}

Association of America case’ (2012) 37 European Law Review, no. 3, p. 2.

42_{U.M. Erling, ‘International Aviation Emissions Under International Civil Aviation Organization’s Global}

Market Based Measure: Ready for Offsetting?’ (2017) 42 Air & Space Law, no. 1, p. 10.

43_{ibid, p. 10-11.}

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Member States of the European Union and are thus subject on that basis to the unlimited jurisdiction of the European Union”.45 Essentially, the ECJ justified the unlimited territorial jurisdiction of Member States on the ground that European environmental policy strives to guarantee a high level of protection in light of Article 191(2) TFEU.46 Thus, according to the ECJ, international flights have to abide by the criteria EU law established. The response to this controversial ruling will be discussed in the next chapter.

45_{Case C-366/10 Air Transport Association of America [2011], para. 125.} 46_{ibid, para. 128.}

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Chapter 2 – Carbon Offsetting and Reduction Scheme (CORSIA)

2.1. International cooperation against climate change

Cooperation between States in the field of international aviation started in 1944 with the conclusion of the Convention on International Civil Aviation, also referred to as the Chicago convention. The Chicago convention entered into force in 1947 and has as its goal “to develop the principles and techniques of international air navigation and to foster the planning and development of international air transport”.47 Under international law, the ICAO is an UN specialized agency and the EU is not a member thereof.48 Consequently, the EU has no voting rights and therefore is not represented when votes are taken.49 The ICAO was established by the Chicago Convention50 and consists of a sovereign Assembly of the contracting States, a Council that elects the President and a Secretariat.51 It focusses primarily on technical and economic issues like the safety of civil aviation, the capacity and efficiency of air navigation, the security and facilitation of air transport and, finally, the protection of the environment.52 While the ICAO is concerned with environmental protection too, it is important to note that this was never one of the predominant objectives from the start.53

The first significant international convention that is specifically created with the aim to protect the environment was introduced by the UN in 1992 and is called the United Nations Framework Convention on Climate Change (UNFCCC).54 The EU agreed with this international pact and is a party to it as well.55 The specific objective of the UNFCCC is to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”.56_{In 1997, the Kyoto} Protocol was adopted in order to impose certain quantitative obligations on the parties to the

47_{Article 44 of the Convention on International Civil Aviation.}

48_{U.M. Erling, ‘How to Reconcile the European Union Emissions Trading System (EU ETS) for Aviation with}

the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)’ (2018) 43 Air & Space Law, no. 4&5, p. 373.

49_ibidem.

50_{Article 43 of the Convention on International Civil Aviation.}

51_{R. Abeyratne, ‘Key Legal Issues in ICAO: A Commentary and Review’ (2019) 44 Air & Space Law, no. 1, p.}

54, footnote 2.

52_{ibid, p. 65, footnote 39.}

53_{See for example Article 44 sub a to sub i of the Convention on International Civil Aviation, where the main}

objectives of the ICAO are listed. Environmental protection is not explicitly mentioned.

54_{United Nations Framework Convention on Climate Change of 9 May 1992.}

55_{Decision (EU) 94/69/EC of the Council of 15 December 1993 concerning the conclusion of the United Nations}

Framework Convention on Climate Change.

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UNFCCC regarding the amount of GHG emissions that are allowed.57 Since the EU is a party to the Kyoto Protocol as well, it officially implemented its provisions into EU law.58 Finally, during the conference of the parties in 2015, a new UN environment agreement was drafted; the famous Paris Agreement. It particularly aims to “strengthen the global response to the threat of climate change … by holding the increase in the global average temperature to well below 2°C above pre-industrial levels”.59 The Paris Agreement has been implemented by the EU.60 This development of important accords being concluded at the international level is representative for an increased awareness of the need to combat climate change.

Even though the EU is a member of the UNFCCC, the Kyoto Protocol and the Paris Agreement, it remains difficult to address international aviation emissions by means of EU measures. As explained before, the EU is no member to the Chicago convention and therefore has no voting rights in the ICAO. Nevertheless, the authority regarding international flights has been transferred to the ICAO with the entering into force of the Kyoto Protocol.61_{In other} words, only purely domestic aviation is still subject to the UNFCCC – a convention where the EU actually is a party to. Therefore, the following paragraph will examine which measures have been taken by the ICAO for the reduction of emissions from international aviation.

2.2. ICAO measures for the reduction of aviation emissions

2.2.1. The events that led to the adoption of CORSIA

As explained before, the ruling given by the ECJ in the ATAA case that international flights have to comply with the EU ETS was a controversial one.62 It has been received with much criticism from many non-EU countries. For example, in reaction to the ATAA ruling, the American government adopted the ‘EU ETS Prohibition Act’ that rendered the participation of American airlines in the EU ETS illegal.63 Ultimately, in 2012, the pressure at the international level motivated the EU to issue the ‘Stop the Clock’ decision and restrict the EU ETS’ scope of application to intra EU flights for a period of one year. At the time, the Commissioner for

57_{Article 3 of the Kyoto Protocol.}

58_{Decision (EU) 2002/358/EC of the Council of 25 April 2002 concerning the approval, on behalf of the}

European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder.

59_{Article 2(1)(a) of the Paris Agreement.}

60_{Decision (EU) 2016/1841/EC of the Council of 5 October 2016 on the conclusion, on behalf of the European}

Union, of the Paris Agreement adopted under the United Nations Framework Convention on Climate Change.

61_{Article 2(2) Kyoto Protocol. See paragraph 3.1 for an elaboration on this provision.} 62_{See paragraph 1.2.2 for the exact ruling given by the ECJ.}

63_{S. 1956 - European Union Emissions Trading Scheme Prohibition Act of 2011. Public Law No: 112-200}

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Climate Action stated: “The EU has always been very clear: nobody wants an international framework tackling CO2-emissions from aviation more than we do. Our EU legislation is not standing in the way of this. On the contrary, our regulatory scheme was adopted after having waited many years for ICAO to progress”.64

After many negotiations, in 2013, the ICAO finally agreed to develop a global market based mechanism (MBM) for the reduction of aviation emissions by 2016. In short, the idea behind MBM’s is to put a price on carbon and, consequently, to make emitting large amounts of CO2 nonviable for the industry concerned. Besides creating this financial incentive to reduce the carbon footprint, MBM’s allow enterprises to engage in cooperation within the industry or even with other sectors.65 Emissions trading systems like the EU ETS can also be considered a MBM, the function of which has already been explained in paragraph 1.2.1. In addition, the ICAO developed a ‘basket of measures’ that include operational improvements, advancement in the field of technology and the use of alternative fuels.66_{These measures should altogether} contribute to the achievement of ‘carbon-neutral growth’ from 2020.

Since the ICAO promised to come forward with a global MBM, the EU decided to extend its ‘Stop the Clock’ decision to 2016.67_{When, in 2017, the ICAO actually presented} their MBM, the EU once again extended the limitations on the scope of the EU ETS that render it only applicable to flights within the EEA to - at least - 2024.68 As it turned out, the ICAO’s MBM consists of a global carbon offsetting scheme: CORSIA.69 With the implementation of CORSIA the ICAO aims to make the increase of aviation after 2020 carbon neutral. CORSIA will inter into force in 2021 and its voluntary pilot phase will last till 2027.70 From 2027 to 2035, participation will be mandatory for States with a Revenue Tonne Kilometers of more than 0.5% in 2018.71 In simpler words, those States that reach a certain level of aviation activity.72

64_{Memo from the European Commission titled: ‘Stopping the clock of ETS and aviation emissions following}

last week's International Civil Aviation Organisation (ICAO) Council’, released: Brussels, 12 November 2012.

65_{H. Hameed, ‘Cutting Global Aviation Emissions: How important is a Global Market Based Measure in}

Mitigating Aviation's Carbon Footprint?’ (2016) 65 ZLW 518, p. 522.

66_{M.M. Jensen, ‘Ready for Takeoff: Embarking on a Journey to Regulate Aircraft Greenhouse Gas Emissions at}

Home and Abroad' (2018) 42 Vermont Law Review 833, p. 840.

67_{Press Release by the European Commission titled: ‘The Commission welcomes agreement on global aviation}

emissions deal’, released: Brussels, 4 October 2013.

68_{A. Murphy, ‘Why ICAO and CORSIA cannot deliver on climate – A threat to Europe’s climate ambition’}

(2019) Transport & Environment, p. 6.

69_{Resolution A40-19 of the ICAO Assembly: Consolidated statement of continuing ICAO policies and practices}

related to environmental protection – Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

70_{Article 9(a) of Resolution A40-19.}

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CORSIA thus constitutes an inherently different system than a trading scheme such as the EU ETS does. In order to be able to ultimately compare the two in the fourth chapter of this research, the following paragraph will address the way in which offsetting schemes function, what their benefits and disadvantages are and, more importantly, the obligations that flow from CORSIA and will be imposed on the aviation sector.

2.2.2. The obligations under CORSIA for the aviation industry

CORSIA entails the offsetting of carbon emissions, which means “purchasing carbon credits to nullify or equalize the amount of emissions produced by a business”.73_{It is important to stress} beforehand that an offsetting scheme seeks to compensate or mitigate aviation emissions, it does not primarily aim to reduce them. The reduction itself has to come from, amongst other things, new aircraft technologies and the use of biofuels to a greater extent.74 The main advantage of an offsetting scheme like CORSIA is the fact that it is much simpler to incorporate than a trading system, for offsets can be traded by means of already existing instruments.75 There is no need to form a new, complex system especially for the trade in carbon emissions. However, it remains necessary to establish clear criteria on the basis of which offsets revenues generated will be acceptable.76 These offset quality criteria are indeed developed by the ICAO, together with the establishment of a Technical Advisory Body that is charged with the task to examine whether certain proposed offset programs comply with these criteria.77

Since the initial idea was to use 2020 as base year, enterprises in the aviation industry would be required to offset their emissions that exceed 2020 levels from 2021 onwards. These levels would be calculated in light of both the growth of the aviation sector itself and of the individual operator’s emissions.78_{The implications of the COVID-19 pandemic for determining} these levels will be addressed in the fourth chapter of this contribution. Furthermore, CORSIA will only cover those routes between two States that decide to participate in this scheme. The pilot phase will apply from 2021 to 2023, solely for States that voluntarily sign up for this phase.

74_ibidem. 75_ibidem. 76_{ibid, p. 527.}

(2019) Transport & Environment, p. 3.

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During the first phase, from 2024 to 2026, participation will also be voluntary for States.79 Besides that, there are certain exemptions to the mandatory participation from 2027 to 2035 where, for example, least developed countries are concerned.80 These elements make it more difficult to point out how many enterprises will be subjected to CORSIA the coming years.

It has been argued that any MBM, but in particular a carbon offsetting scheme, is “just a ‘grappling’ measure that makes people feel good without really changing the fundamental dynamics of the industry”.81 ICAO decisions are not legally binding on the States involved, nor does the ICAO possess any enforcement mechanism to guarantee compliance with the scheme. After all, CORSIA is “a consensual result of political compromises which has no legal effect”.82 Whether CORSIA’s effects will, nevertheless, have an impact on the functioning of the EU ETS will be discussed in the following chapter.

79_{Resolution A40-19 of the ICAO Assembly, consideration 9, sub a and b.}

Home and Abroad' (2018) 42 Vermont Law Review 833, p. 844.

81_{R. Abeyratne, ‘Carbon Offsetting as a Trade Related Market Based Measure for Aircraft Engine Emissions’}

(2017) 51 Journal of World Trade, no. 3, p. 429.

82_{R. Abeyratne, ‘Carbon Offsetting as a Trade Related Market Based Measure for Aircraft Engine Emissions’}

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Chapter 3 – The relevance of CORSIA for the EU ETS

3.1. Article 2(2) Kyoto Protocol

The division of competences in the field of international aviation centres around Article 2(2) of the Kyoto protocol that complements the UNFCCC, for it states that “the Parties included in Annex I shall pursue limitation or reduction of emissions of greenhouse gases … from aviation and marine bunker fuels, working through the International Civil Aviation Organization and the International Maritime Organization, respectively”. In other words, it stipulates that the authority to regulate international flights lies with the ICAO.

All of the EU Member States - as members of the ICAO - have ratified CORSIA and with that, consented to the viewpoint of the ICAO that CORSIA is to be “the only global market-based measure applying to CO2 emissions from international aviation so as to avoid a possible patchwork of duplicative State or regional MBMs, thus ensuring that international aviation CO2 emissions should be accounted for only once”.83 Even though the EU itself has not ratified CORSIA, it has to respect the authority of the ICAO because the EU is still a party to the UNFCCC and the Kyoto Protocol. In the preamble to the Directive that amended the original EU ETS, the EU indeed recognized the ICAO’s authority regarding international aviation.84 The Paris Agreement of 2015 does not change anything in this respect, for the Kyoto Protocol has no expiry date and exists alongside the Paris Agreement.85

The EU’s responsibility towards international law is also reflected in the EU Treaties. First of all, Article 3(5) TEU expresses this responsibility by stating that, amongst others, the Union “shall contribute to peace, security, the sustainable development of the Earth … as well as to the strict observance and the development of international law, including respect for the principles of the United Nations Charter”. This ‘constitutional openness’ of the EU towards international law has been recognized by the ECJ several times in its case law, for example when it referred to international law as “an integral part” of EU law.86_{Additionally, Article}

83_{Consideration 18 of Resolution A40-19 of the ICAO.} 84_{See preamble 8-9 of Directive 2008/101/EC.}

86_{See for example Case C-181/73 Haegeman v Belgium [1974], para 5; Case C-104/81 Kupferberg v}

Hauptzollamt Mainz [1982], para 13; Case C-162/96 Racke v Hauptzollamt Mainz [1998], para 46; Case C-308/06 Intertanko et al v Secretary of State for Transport [2008], para. 38; Case C-366/10 Air Transport Association of America [2011], para. 73 and 101.

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216(2) TFEU stipulates that international agreements “are binding upon the institutions of the Union and on its Member States”. It follows that the EU is, even on the basis of EU primary law itself, legally bound to international agreements it is a party to such as the Kyoto Protocol. Yet, a closer analysis of the specific wording of Article 2(2) of the Kyoto Protocol shows that the provision is not entirely clear as to the exact obligation that rests on the EU in this respect.

First of all, it has been argued that Article 2(2) of the Kyoto Protocol “does not give any hints as to whether the transfer of responsibility is to be understood as so exclusive that … signatories would be prevented from taking their own unilateral steps to regulate international aviation emissions”.87 During the negotiation of the Kyoto Protocol, developing countries emphasized the importance of objective and fair criteria that could guarantee an adequate sharing of the burden that comes with climate change mitigation.88 This led to differentiated binding targets for the States party to the Kyoto Protocol parties, but emissions caused by international transport turned out to be much more difficult to allocate.89_{Since it is nearly} impossible to clearly separate these emissions and attribute them to either the State where an aircraft departs from or to the State where it arrives at, the negotiators of the Kyoto Protocol decided to refer the issue to the ICAO for further elaboration on the matter.90

However, neither Article 2(2) nor any other provision in the Kyoto Protocol provides more information as to how this cooperation between the ICAO and the contracting parties should take place. It does not expressly preclude States from combatting climate change either. On the contrary, the Kyoto Protocol foresees in a legal basis for the EU ETS in Article 17, which allows the parties included in Annex B to “participate in emissions trading for the purposes of fulfilling their commitments”. Moreover, Article 2(2) does not point out what instruments States can resort to when the ICAO does not present a suitable strategy within a given timeframe, or when States deem a proposed measure of the ICAO insufficient.91

88_{A.S. de Oliveira e.a., ‘The Climate Change Convention and its Kyoto Protocol as action drivers’ in F.W.}

Frangetto, A.P. Beber Veiga and G. Luedemann (eds), Legacy of the CDM: lessons learned and impacts from the Clean Development Mechanism in Brazil as insights for new mechanisms (Institute for Applied Economic Research 2019), p. 26.

89_{L.P.J. Groome, ‘Environmental protection by ICAO: an assessment of the legal framework towards measures}

to reduce greenhouse gas emissions in the international civil aviation sector’ (thesis, University of Pretoria 2018), p. 11.

90_{L. Hermwille, ‘Offsetting for International Aviation: the State of Play of Market-Based Measures under}

ICAO’ (2016) Wuppertal Institute for Climate, Environment and Energy, p. 2.

91_{M. Petersen, ‘The Legality of the EU’s Stand-Alone Approach to the Climate Impact of Aviation: The Express}

Role Given to the ICAO by the Kyoto Protocol’ (2008) 17 Review of European, Comparative and International Environmental Law, no. 2, p. 202.

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The ambiguous formulation of Article 2(2) that States shall be ‘working through’ the ICAO renders the nature of this mandate unclear. This does, at the very least, not “lend particular weight to the view that the mandate for the ICAO is exclusive” 92 – it merely shows the intention of the parties to cooperate through the ICAO in an attempt to address the allocation of international emissions. The application of the EU ETS to international flight routes within the EEA, simultaneously with the ICAO’s CORSIA, would only be in violation of Article 2(2) if the contracting parties to the Kyoto Protocol had expressly given the ICAO an exclusive mandate and had thereby waived their competence to apply individual measures in this field.93 Such an interpretation of Article 2(2) would be inconsistent with the “overall purpose of the Protocol to tackle climate change in an effective way”, which could most efficiently be done by means of a “binding obligation for the Kyoto signatories to approach this issue, and additionally highlighting the importance of supplementary cooperation with the ICAO”.94_In fact, this is precisely what Article 2(2) stipulates.

It follows that the EU would not violate the Kyoto Protocol when the EU ETS remains applicable to international flights within the EEA simultaneously with the ICAO’s CORSIA. The co-existence of the two schemes is compatible with the abovementioned interpretation of Article 2(2) of the Kyoto Protocol, now that the EU would comply with its obligation to tackle climate change while at the same time respecting and engaging in supplementary cooperation with the ICAO. Still, it is important to discuss whether Article 2(2) of the Kyoto Protocol could be used in legal proceedings in order to challenge Directive 2008/101/EC. If Article 2(2) of the Kyoto Protocol should be considered as having direct effect, it would enable individual parties to challenge the validity of the EU ETS’ extension to aviation in court.

Traditionally, a particular provision of EU law or international law can only be considered directly effective if three conditions are fulfilled: “first, the EU must be bound by the treaty; second, the relevant treaty provision must be sufficiently clear, precise and unconditional to be capable of direct application; and third, direct effect must not be precluded by the “nature and structure” or “broad logic” of a treaty”.95_{The application of these criteria to} Article 2(2) of the Kyoto Protocol points out that, regardless of whether the other requirements

92_{M. Petersen, ‘The Legality of the EU’s Stand-Alone Approach to the Climate Impact of Aviation: The Express}

Role Given to the ICAO by the Kyoto Protocol’ (2008) 17 Review of European, Comparative and International Environmental Law, no. 2, p. 202.

93_{ibid, p. 203.} 94_{ibid, p. 204.}

95_{K.S. Ziegler, ‘The Relationship between EU Law and International Law’ (2016) University of Leicester}

School of Law Research Paper, no. 15-04, p. 7-8. See also Case C-308/06 Intertanko et al v Secretary of State for Transport [2008], para. 45.

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are met, at least the second criterion for establishing direct effect will in all probability not be fulfilled if the ECJ would have to rule on this issue in a case pending before the court. The vague phrasing of “working through the ICAO” as laid down in Article 2(2) of the Kyoto Protocol can hardly be considered as a sufficiently clear, precise and unconditional formulation. Therefore, individual parties will in all probability not be able to rely on Article 2(2) of the Kyoto Protocol when aiming to challenge the extension of the EU ETS as regulated by Directive 2008/101/EC.

3.2. Domestic and International aviation within the EEA

3.2.1. Domestic flight routes

With regard to purely domestic aviation - flight routes that cover a geographical scope within the external borders of a particular State - CORSIA does, in principle, not affect the functioning of the EU ETS. This is primarily by reason of the doctrine of State sovereignty under international law, which grants each State the authority to exercise its powers and adopt unilateral measures within its territory to the exclusion of other States.96 Consequently, only the State itself can decide to be subjected to certain international agreements or treaties. The UNFCCC remains the applicable convention for domestic aviation, now that the introduction of Article 2(2) of the Kyoto Protocol only foresees in the transfer of authority to the ICAO regarding international flights. It follows that EU Member States are - at least under international law - free to regulate their own domestic aviation, since the ICAO’s CORSIA does not apply to these flight routes. Still, as Member States of the EU, these States have to comply with the obligations that flow from the EU ETS first and foremost.

It should be emphasized that CORSIA does not in any way prevent EU Member States from implementing its standards and declaring it applicable to emissions from domestic aviation as well. Whether EU Member States are willing to do so is still unclear at this moment, but they might prefer a uniform system that regulates both international and domestic aviation emissions.97 Especially the differences between developed and developing States on economic issues could proof problematic in this regard, for they have caused the slow progress of the

96_{Md. Tanveer Ahmad, ‘Evaluating the Effectiveness of the European Union Emissions Trading System to}

Reduce Emissions from International Civil Aviation’ (2015) 11 McGill International Journal of Sustainable Development Law and Policy, no. 1, p. 133.

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ICAO in creating a global solution for the reduction of aviation emissions over the past years.98 Already in 2013, the European Commission recognized that negotiations for the development of a global MBM were complicated due to divergent views on, amongst others, the principle of ‘common but differentiated responsibilities and respective capabilities of States’99_{as laid down} in Article 3(1) of the UNFCCC.

In all probability, these economic differences between States will also influence competing preferences for the applicability of either the EU ETS or CORSIA, which could undermine the coherence of the EU as a whole. Nevertheless, because of its greater relevance in the context of this research, the subsequent paragraphs will focus on the consequences of CORSIA for the EU ETS where flights between two or more EEA-States are concerned.

3.2.2. International flight routes

From 2021 onwards, all international flights will be covered by CORSIA, including flight routes within the EEA. This includes both international flights from an EEA State to a EEA State (also called a third country) and vice versa, and international flights from one non-EEA State to another. Since the EU reduced the scope of the EU ETS with the ‘Stop the Clock’ decision in 2012 and extended this reduction to 2024, the EU ETS will remain applicable only to flights within the EEA while CORSIA will regulate all international flights. This decision of the EU is quite understandable, now that the EU’s previous decision to limit the scope of the EU ETS was largely based on the ICAO’s promise to develop a global MBM for the reduction of emissions caused by international aviation.100

If the EU would extend the EU ETS’ scope once again by including flights to and from non-EEA States in the EU ETS, even though the ICAO has kept its promise and adopted CORSIA in the meantime, the EU would not act in accordance with its previous decision to respect the ICAO’s competence in the field of international aviation and possibly provoke tremendous political opposition. On the other hand, replacing the EU ETS with the ICAO’s CORSIA could endanger the achievement of the EU’s reduction goals for 2030. A significant part of the EU’s contribution to the Paris Agreement consists of its ‘40% target’ by which the

98_{Md. Tanveer Ahmad, ‘Evaluating the Effectiveness of the European Union Emissions Trading System to}

Reduce Emissions from International Civil Aviation’ (2015) 11 McGill International Journal of Sustainable Development Law and Policy, no. 1, p. 132; see especially paragraph 2.2.1 for the events that led to the adoption of CORSIA by the ICAO.

99_{European Commission Impact Assessment of 16 October 2013 accompanying the proposal for a Directive of}

the European Parliament and of the Council amending Directive 2003/87/EC, p. 10.

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EU has agreed to reduce at least 40% of the emissions that are covered by the EU ETS in 2030 as compared to 2005.101 It is highly debatable whether the EU will achieve these objectives - let alone reach even higher goals - under the full application of CORSIA, for the environmental impact of both schemes may not be comparable.

Regarding the application of CORSIA and the EU ETS simultaneously to international flight routes between two or more EEA-States, the difficulty lies in the ICAO’s statement that “MBMs should not be duplicative and international aviation CO2 emissions should be accounted for only once”102 – an aim that is difficult to achieve when CORSIA and the EU ETS are permitted to be in effect side by side. Now that all parties to the Paris Agreement have set emissions reduction targets for themselves, mechanisms have to be put in position to ensure that a certain emission reduction is not claimed by multiple parties; a process called ‘double counting’.103_{For example, when an airline buys a reduction for compliance with CORSIA, that} same reduction should not count towards the target of the host country of that airline.104 Effective checks to preclude such from happening have not been introduced yet, even though double counting emissions reduction is undesirable when striving for adequate environmental protection. Whether the implementation of CORSIA into EU law and the potential double counting of emissions reduction influence the effectiveness of the EU ETS, will be examined in the following chapter.

101_{Commission of the European Union, 15 July 2015. Proposal for a Directive of the European Parliament and}

of the Council amending Directive 2003/87/EC to enhance cost-eﬀective emission reductions and low-carbon investments.

102_{Resolution A39-3 of the ICAO Assembly: Consolidated statement of continuing ICAO policies and practices}

related to environmental protection – Global Market-based Measure (MBM) scheme.

103_{See paragraph 4.2.2 for a discussion of multiple ways in which the process of double counting can occur.} 104_{A. Murphy, ‘Why ICAO and CORSIA cannot deliver on climate – A threat to Europe’s climate ambition’}

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Chapter 4 – CORSIA’s influence on the effectiveness of the EU ETS

4.1. CORSIA’s baseline

With the entering into force of CORSIA, the ICAO aims to compensate the emissions that go beyond the 2020 baseline in order to achieve carbon neutral growth from 2021 onwards. Obviously, the COVID-19 pandemic has already had a huge influence on the aviation emission levels of 2020 and will in all probability continue to have a diminishing effect on these levels during the rest of the year. According to the most recent estimates of the International Air Transport Association (IATA), the amount of emissions in 2020 could drop to the level of emissions caused by airlines 25 years ago.105 The IATA’s calculations show that the average of all emissions caused by aviation in 2019 and 2020 combined will be equivalent to the total amount of emissions in 2010.106 Besides that, the International Council on Clean Transportation (ICCT) foresees that “it could take at least four years to return to the level of demand for international aviation seen prior to COVID-19, and even longer to return to the same growth rate that was previously expected”.107

Now that the CORSIA baseline of 2020 will turn out to be approximately 30% more stringent than expected and airlines are obliged to offset emissions in excess of the baseline, IATA shares its concerns that States will withdraw from the voluntary phase of CORSIA “in order to safeguard the interests of their national air transport systems and global connectivity”.108_{All EU Member States have declared to apply CORSIA voluntarily from 2021} onwards109, but it remains to be seen if all States will stay true to their earlier decisions. As a solution, the IATA recommends a pragmatic approach: using the emission levels of 2019, because “CORSIA was never envisaged as a mechanism for financing the carbon markets beyond what is necessary to offset the sector’s emissions above the baseline”.110

105_{IATA, ‘COVID-19 and CORSIA: Stabilizing net CO2 at 2019 “pre-crisis” levels, rather than 2010 levels’}

(19 May 2020).

106_ibidem.

107_{B. Graver, ‘COVID-19’s big impact on ICAO’s CORSIA baseline’ (26 May 2020) The International Council}

on Clean Transportation <https://theicct.org/blog/staff/covid-19-impact-icao-corsia-baseline> accessed 10 June 2020.

(19 May 2020).

109_{Declaration of directors general of civil aviation of EU Member States and the other Member States of the}

European Civil Aviation Conference: adhering to the global market-based measure (GMBM) scheme from the start of 3 September 2016.

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In contrast, the ICCT points out that a baseline set on 2019 levels would not accomplish much, now that it could take at least four years to reach pre-COVID-19 demand levels. After all, if the demand for aviation does not return to 2019 levels the coming years, there will be no obligation for airlines to offset emissions during the voluntary phase of CORSIA that lasts till 2027.111

The EU Council turned out to agree with IATA, for it adopted the position that “the amended baseline period for the emission values used to calculate growth factors should refer to 2019 emission levels”.112 Finally, on 30 June 2020, the ICAO decided in line with IATA and the EU Council that “the value of 2019 emissions shall be used for 2020 emissions to avoid inappropriate economic burden on the aviation industry, for the CORSIA implementation during the pilot phase from 2021 to 2023”.113 Whether additional safeguards will be introduced in light of the COVID-19 pandemic remains to be seen.

4.2. Double counting international credits under the EU ETS and CORSIA

4.2.1. The use of international credits within the EU ETS

As explained in paragraph 3.1, the EU ETS constitutes a cap-and-trade system for emission allowances on the basis of Article 17 of the Kyoto protocol. Yet, the EU has also given airlines the possibility to acquire and surrender international credits (also ‘carbon credits’) in sustainable projects, mostly established in developing countries. Already in 1997 during the adoption of the Kyoto Protocol to the UNFCCC, the ‘Certified Emission Reductions’ (CERs) and ‘Emission Reduction Units’ (ERUs) were introduced.114_{These international credits can be} acquired through two mechanisms, respectively the Clean Development Mechanism (CDM) and Joint Implementation (JI), and aircraft operators were allowed to use them to offset a certain part of their emissions.115 The so-called ‘linking Directive’ of 2004 foresaw in “linking the Kyoto project-based mechanisms to the Community scheme” which “gives the opportunity to use emission credits generated through project activities eligible pursuant to Articles 6 and 12

111_{B. Graver, ‘COVID-19’s big impact on ICAO’s CORSIA baseline’ (26 May 2020) The International Council}

on Clean Transportation <https://theicct.org/blog/staff/covid-19-impact-icao-corsia-baseline> accessed 10 June 2020.

112_{Press release of the European Council, ‘Aviation emissions: EU adopts its position on adjusted CORSIA}

baseline to take account of the consequences of COVID-19 pandemic’ (9 June 2020)

<www.consilium.europa.eu/en/press/press-releases/2020/06/09/aviation-emissions-eu-adopts-its-position-on-adjusted-corsia-baseline-to-take-account-of-the-consequences-of-covid-19-pandemic/> accessed 18 June 2020.

113_{W. Raillant-Clark, ‘ICAO Council agrees to the safeguard adjustment for CORSIA in light of COVID-19}

pandemic’ (30 June 2020) ICAO <www.icao.int/Newsroom/Pages/ICAO-Council-agrees-to-the-safeguard-adjustment-for-CORSIA-in-light-of-COVID19-pandemic.aspx> accessed 19 July 2020.

114_{Article 3(10)(12) of the Kyoto Protocol provides the Parties with the possibility to acquire these units.} 115_{Article 9 of Directive 2003/87/EC.}

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of the Kyoto Protocol in order to fulfil Member States' obligations in accordance with Article 12(3) of Directive 2003/87/EC”.116 In this context, the main advantage of linking offset credits with the EU ETS was considered to be the inducement of lowering the demand for emission allowances and, subsequently, lowering their price.117 Hence, it reduces cost.

After having used carbon credits to offset a certain amount of their emissions, operators were obliged to surrender allowances to cover the remaining emissions under the EU ETS. At first, it was up to the Member States themselves to stipulate in their national allocation plans what percentage of the allowances could be surrendered in the form of CERs and ERUs.118 In 2009, the Directive to improve and extend the GHG emission allowance trading scheme replaced Article 11a (an article that was added to Directive 2003/87/EC by Directive 2004/101/EC) with more strict provisions regarding the use of carbon credits under the EU ETS. First of all, Article 11a(7) ruled that “once an international agreement on climate change has been reached, only credits from projects from third countries which have ratified that agreement shall be accepted in the EU ETS from 1 January 2013”.

In addition, Article 11a(8) now stated that till 2020 operators are only permitted to use CERs and ERUs to “either the amount allowed to them during the period from 2008 to 2012, or to an amount corresponding to a percentage, which shall not be set below 11%, of their allocation during the period from 2008 to 2012, whichever is the highest”, whereas the percentage for aircraft operators “shall not be set below 1,5 %, of their verified emissions during the period from 2013 to 2020”. The applicable rules for determining the amount of eligible credits for individual operators and aircraft operators up to 2020 are set out in the Commission Regulation of 2013, which marked the start of phase 3 of the EU ETS (from 2013 to 2020).119 It is important to note that CERs and ERUs are not considered to be compliance units during phase 3, instead operators have to request the Union Registry to exchange these credits for EU ETS allowances up to their entitlement limit as laid down in the Commission Regulation.120

116_{Directive 2004/101/EC of the European Parliament and of the Council amending Directive 2003/87/EC}

establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms, consideration 3.

117_{R. Trotignon, ‘Combining cap-and-trade with offsets: lessons from the EU-ETS’ (2012) 12 Climate Policy,}

no. 3, p. 274.

118_{Article 11a(1) of Directive 2004/101/EC.}

119_{Commission Regulation (EU) 1123/2013 of 8 November 2013 on determining international credit}

entitlements pursuant to Directive 2003/87/EC of the European Parliament and of the Council, consideration 1 and 2.

120_{Articles 58 to 61 of Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry}

pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and (EU) No 1193/2011.

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In 2018, three years after the adoption of the EU’s 2030 climate and energy policy framework121 and the Paris Agreement, another Directive amending Directive 2003/87/EC entered into force.122 With this amendment Article 11a(8) and (9) were revoked123, although Article 11(7) of the EU ETS Directive remains applicable. Now that an international agreement on climate change is indeed achieved by means of the Paris Agreement, according to Article 11a(7) only international credits from offset generating projects in third countries that have ratified the Paris Agreement will be accepted for the offsetting of a certain percentage of emissions under the EU ETS. However, EU law provisions that further regulate the amount and kind of credits that would be accepted from 2021 onwards are lacking, since the EU legislator has not introduced replacing provisions for Article 11a(8) and (9).

According to the Commission there is a possibility that international credits will not be accepted at all in the near future, for “the EU has a domestic emissions reduction target and does not currently envisage continuing the use of international credits for EU ETS compliance after 2020”.124_{Still, if the EU decides to continue the use of credits for partial compliance with} the EU ETS, Article 6(2) of the Paris Agreement points out that the parties “where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions … shall apply robust accounting to ensure, inter alia, the avoidance of double counting”. In other words, parties that invest in sustainable projects under the CDM and exchange the credits that are generated by it have a responsibility under the Paris Agreement to establish accounting frameworks in order to avoid double counting.

Since it is not clear whether the EU is going to accept international credits for partial compliance with the EU ETS from 2021 onwards, this will ultimately depend on the way in which CORSIA is going to be implemented in the EU legal order. Whether the admissibility of international credits within the EU ETS could lead to the double counting of emissions reduction will be examined in the following paragraph.

121_{See paragraph 3.2.2.}

122_{Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending}

Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814.

123_{Consideration 27 of Directive (EU) 2018/410.}

124_{European Commission, ‘Use of international credits’}

The Implications of the ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) for the Effectiveness of the EU’s Emissions Trading System (EU ETS) in the International Aviation Industry