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Aviation in the EU Emission Trading SchemeSophie Hagège, M&A PartnerJune 3, 2010

KEY LEGAL CONSIDERATIONS GOVERNINGKEY LEGAL CONSIDERATIONS GOVERNINGTHE NEXT GENERATION AIR TRANSPORT SYSTEMTHE NEXT GENERATION AIR TRANSPORT SYSTEM

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EU ETS Legal Framework

Started on January 1, 2005 (test Phase I) Phase II covers 2008-2012 Covers more than 10,000 industrial installations within the EU (mostly

energy, iron, cement, glass, ceramics , pulp, paper and board) Each industrial operator receives EU Allowances from its member state

corresponding to its emission reduction targets Obligation to surrender a number of EU Allowances (EUA) corresponding

to actual emission level for the previous year If actual emissions are higher, the operators can either buy EUA or face a

penalty of Euro 100 per ton of CO2 exceeding their annual targets and exceeding emissions are added to the reduction obligations for the following year

Phase III energy package: reductions of GHG emissions by 20% or 30% in the event an ambitious agreement is reached on Kyoto II

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Aviation in the EU ETS - Legal Framework

Directive 2008/101/EC of the European Parliament and of the Council of November 19, 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas (“Directive 2008/101”)

Commission Decision of April 16, 2009 amending Decision 2007/589/EC as regards the inclusion of monitoring and reporting guidelines for emissions and tonne-kilometre data from aviation activities

Commission Decision of June 8, 2009 on the detailed interpretation of the aviation activities listed in Annex I to Directive 2003/87/EC of the European Parliament and of the Council

Commission Regulation (EC) No 748/2009 of August 5, 2009 on the list of aircraft operators which performed an aviation activity listed in Annex I to Directive 2003/87/EC on or after 1 January 2006 specifying the administering Member State for each aircraft operator (“Regulation 748/2009”)

Transposition deadline by EU member states: February 10, 2010

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Scope

Airline operators of flights to, from and within the EU whatever their nationality (i.e., either EU-based or foreign)

The Directive will be applicable to operators or owners of passenger and cargo flight aircrafts with a maximum take-off weight of more than 5,700 kg ("Aircraft Operators")

Exemptions:• military, police, customs and rescue flights• flights on state and government business• training or testing flights will be exempted• commercial air operators with very low traffic levels (emitting

less than 10,000 tons of CO2/year or fewer than 243 flights per period for 3 consecutive 4-month period)

Each Aircraft Operator will be administered by a single member state regarding emissions from the total of its flights to, from and within the EU

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Allocation of Aviation Emissions Allowances

Initial quantity of emission allowances allocated will be equivalent to 97% of the historical aviation emissions (equivalent to the average of the annual emissions in the calendar year 2004, 2005 and 2006)

Cap to be lowered to 95% from 2013 to 2020 (this percentage may be reviewed as part of the general review of the EU emissions trading directive)

Aircraft Operators will receive 85% of their emission allowances for free in 2012 (this percentage will be reduced from 2013 as part of the general review of the EU Emission Trading Directive)

The remaining 15% will be auctioned

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Allocation of Aviation Emissions Allowances Allocation of emission allowances will be determined by the total

amount of ton km of an Aircraft Operator in the base year 2010 (i.e., product of distance and payload) and a benchmark factor

The number of emission allowances per Aircraft Operator will be limited to 1,000,000

A special reserve of free allowances (representing 3% of overall allowances) has been included for new entrants and very fast growing airlines

An exemption has also been introduced for commercial air operators with very low traffic levels (emitting less than 10,000 tons of CO2 a year)

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Aircraft Operators Obligations

Obligation to surrender one emission allowance for every ton of CO2 emitted on flights to, and within the EU within the mandatory deadlines

Obligations may be fulfilled by aircraft operators by:

• directly reducing their emissions

• selling and/or buying allowances on the EU market or from other parties subject to the EU ETS

• by obtaining offset allowances under certain limits

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Allowances Offset

Permissible use of emission credits from emissions reduction projects (CERs from clean development mechanisms or ERUs from joint implementation projects) under the Kyoto Protocol, up to 15% of the number of emission allowances they are required to surrender

From 2013, permissible banking of CERs and ERUs issued from eligible emissions reduction projects for the 2008-2012 period which have not been used during such period to the extent provided by article 11a of Directive 2003/87

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Non-compliance Penalties

Penalties of €100 per ton of CO2 exceeding the annual target, and

Deduction of exceeding emissions from allowances for the following calendar year

Publication of the names of aircraft operators in breach of requirements

At the request of a MS, the EU Commission may adopt a decision to impose an operating ban on breaching aircraft operators if other enforcement measures have turned ineffective