UPDATE ON EUROPEAN EFFORTS TO INCLUDE

UNCLAS SECTION 01 OF 05 STATE 001023

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON ETRD SENV EU
SUBJECT: UPDATE ON EUROPEAN EFFORTS TO INCLUDE
INTERNATIONAL AVIATION AND MARITIME EMISSIONS IN THE
EUROPEAN EMISSIONS TRADING SCHEME.

REF: A. 06 STATE 190254

B. 06 STATE 188369

C. 07 STATE 83246

D. 07 STATE 141724


1. (U) This is an action request. See paragraph four.


2. (SBU) SUMMARY. On October 24, 2008 European Ministers
officially adopted a Directive to include international
aviation in the European Union (EU) Emissions Trading Scheme
(ETS). All flights arriving and departing from EU airports,
including those of non-EU airlines, will be covered by the
scheme. EU Member States must transpose the Directive into
their domestic legislation by January 2010, and
implementation will begin in 2012, with airlines required to
provide baseline emissions data in 2009.


3. (SBU) European officials claim this will spur the
international community to address greenhouse gas emissions
from aircraft more quickly. They anticipate changes in U.S.
climate change policy under the new Administration and may
appear to assume that this would entail support for inclusion
of international aviation in the EU ETS. This assumption is
flawed: no matter what decisions the U.S. may take to address
greenhouse gas emissions, there is strong bipartisan
opposition to the EU unilaterally imposing its emissions
trading scheme on U.S. air carriers. The longstanding U.S.
view ) shared by a majority of non-EU countries ) is that
inclusion of one country's airlines in another country,s
trading scheme must be accomplished on the basis of mutual
consent and agreement between governments. End Summary.


4. (U) ACTION REQUEST: Department anticipates that this
dispute will be at the forefront of aviation policy in the
coming year as well as an underlying part of ongoing climate
negotiations. Below is a review of U.S. actions and
positions that EU Posts may draw on in discussions with host
government officials. We encourage reporting on any
developments to Washington agencies. Please contact
EEB/TRA/OTP Megan Walklet-Tighe or EUR/ERA Ben Rockwell with
any questions.


5. (U) The EU is also contemplating action in the maritime
domain. Information and an update are found at paragraphs
26-29.

BACKGROUND ) The EU Proposal
--------------


6. (U) Under significant political pressure "to do something
about aviation emissions," during the past three years the
European Commission developed a legislative proposal that
unilaterally extends the EU ETS to international civil
aviation. At each step of the process, the United States and
other countries have expressed deep concerns, citing, among
many issues, the inconsistency with EU Member State
international legal obligations under the Convention on
International Civil Aviation ("Chicago Convention"),and
violation of bilateral air services agreements, including the
U.S.-EU Air Transport Agreement signed in April, 2007
(Reftels A & B). Despite strong international opposition, the
EU has brushed off the concerns of the rest of the world,
adopting EC Directive (Doc. 3647/08) on October 24th to
include international aviation in the EU ETS.


7. (U) The Directive covers all flights arriving at and
departing from EU airports, including those of non-EU
airlines. Each airline will be required to surrender
allowances for the total emissions of each flight, from
departure to arrival. For example, for a flight from Los
Angeles to London, the GHG emissions attributed to that
flight while in U.S. domestic airspace and in international
airspace over the high seas ) in addition to emissions
generated while within EU airspace - will count toward the

STATE 00001023 002 OF 005

SUBJECT: UPDATE ON EUROPEAN EFFORTS TO INCLUDE
INTERNATIONAL AVIATION AND MARITIME EMISSIONS IN THE
EUROPEAN EMISSIONS TRADING SCHEM
total emissions of that flight. Both EU and non-EU carriers
will receive a certain number of allowances free of charge
each year. Initially, overall emissions will be capped at the
equivalent of 97% of average annual emissions generated
between 2004 -2006, and the "free" allowances will be limited
to 85% of that total. Carriers will be expected to buy any
additional allowances they need via auction and via the
trading market. Over time, the percentage of emissions
allowed will fall, and the percentage of free allowances will
decrease; it is expected carriers will eventually have to buy
and sell 100% of their allowances. Recent industry estimates
project the costs will reach as much as 6.7 billion dollars a
year.

THE U.S. POSITION - Legal Analysis
--------------


8. (U) The EU plan is not only unworkable, it is unlawful.
It violates EU Member States' international legal obligations
under the Chicago Convention, and violates certain aspects of
the U.S. - EU Air Transport Agreement, which is being
provisionally applied as of March 30, 2008.


9. (U) Article 15 of the Chicago Convention prohibits
imposition of "fees, dues or other charges" on airlines
solely for the "right of transit over or entry into or exit
from (a State's) territory of any aircraft of a contracting
State." By requiring the surrender of valuable emissions
allowances simply for the right to land or depart an EU
airport and threatening to bar air carriers from the EU for
non-participation, the EU proposal is directly contrary to
Article 15.


10. (U) The EU has argued that Article 11 of the Chicago
Convention supports its approach by providng that "(s)ubject
to the provisions of this Convention, the laws and
regulations of a contracting State relating to the admission
to or departure from its territory of aircraft ... shall be
complied with by such aircraft upon entering or departing
from or while within the territory of that State." This
interpretation ignores the explicit requirement that the
relevant laws and regulations be consistent with other
provisions of the Convention, including Article 15, and is
overbroad. Charging for aviation emissions emitted over the
high seas, other countries' territories as well as over EU
states is not related to admission to EU territory. This
interpretation implies that adoption of other laws of the
admitting state ) such as its labor laws ) could be used as
a condition of use of its airports.


11. (U) Moreover, emissions trading systems impose costs
without providing any services, and can limit a carrier's
operations. As such, they are inconsistent with key
provisions of the U.S.-EU Air Transport Agreement. The
Agreement restricts user charges to the full cost of
providing services and prohibits the unilateral imposition of
limits on the volume of traffic, frequency or regularity of
service, or the aircraft types operated.


12. (U) In addition to the legal issues, the EU legislation
is fundamentally flawed in several other respects. First, it
places the bulk of liability for greenhouse gas emissions
from aviation on the airlines, taking little account of
well-documented inefficiencies in the European air traffic
system and their contribution to excess fuel burn. Second,
it does not preclude EU Member States from levying additional
charges or taxes even if a foreign airline participates in
the ETS. Hence, a foreign airline could pay two or three
times for the same ton of CO2 emissions. Finally, the
revenues generated from auctions of allowances are expected
to go into the general revenue streams of EU member states
with no obligation to improve aviation efficiency or address
climate change issues.

Prospects Under the New U.S. Administration
--------------


13. (U) Public perception and political attitudes in the EU
suggest that the EU is counting on the new U.S.
Administration to bring about a change in the U.S. position

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SUBJECT: UPDATE ON EUROPEAN EFFORTS TO INCLUDE
INTERNATIONAL AVIATION AND MARITIME EMISSIONS IN THE
EUROPEAN EMISSIONS TRADING SCHEM
on this issue. While President-elect Obama endorsed the
concept of cap and trade for greenhouse gas emissions as a
Senator and during the campaign, he has taken no positon on
unilateral inclusion of aviation in the ETS. There is clear
bipartisan support (including through a sense of the Congress
resolution) that unilateral inclusion is not acceptable.
Influential members of Congress from both parties, including
the Chairman of the House Transportation and Infrastructure
Committee, will continue in leadership roles next year. Some
have suggested that the EU's actions threaten to undermine
the U.S.-EU trade relationship. Many also recall the dispute
with the EU over "hushkitted" aircraft ) when the EU sought
to unilaterally ban certain aircraft from operating within
the EU. This resulted in the United States taking legal
action at the International Civil Aviation Organization
(ICAO) and the EU being forced to repeal its legislation and
replace it with legislation consistent with the Chicago
Convention.

ICAO - A Global Approach
--------------


14. (U) The EU's action undermines ongoing work in ICAO. A
global response is the most appropriate and effective
solution to reduce aviation emissions and ICAO is the
appropriate forum for such discussions. ICAO has been
working to develop guidance on how to manage international
aviation emissions for several years. The United States and
much of the rest of the world believe inclusion of foreign
airlines in emissions trading systems must be on the basis of
mutual consent between governments. This position was
endorsed at the September 2007 Triennial ICAO Assembly; the
U.S., with the support of an overwhelming majority of ICAO
contracting States, successfully included language in the
Assembly Resolution that urged States not to implement an
emissions trading scheme on other States' aircraft except on
the basis of mutual agreement (Reftels D & E). The Europeans
) specifically the 42 countries comprising the EU and the
European Civil Aviation Conference (ECAC) ) nevertheless
entered a formal "reservation," based on their view that the
EU has the right to apply market-based measures (both
emissions trading and greenhouse gas emission charges) on all
operators of all States operating to, from, or within their
territories.


15. (U) The Assembly also agreed to develop a comprehensive
plan on international aviation and climate change, including
formation by the ICAO Council of a senior-level "Group on
International Aviation and Climate Change" (GIACC). The
GIACC will develop a framework to limit or reduce
international aviation's greenhouse gas emissions based on a
global aspirational goal, likely linked to fuel efficiency
improvements, to be achieved through voluntary measures,
technological advances, operational measures, positive
economic incentives and market-based measures. The ICAO
Council will convene a high level meeting in advance of the
next (2010) Assembly to present the program and
recommendations from GIACC for ICAO review.


16. (SBU) The GIACC - which is comprised of 15 countries:
Australia, Brazil, Canada, China, France, Germany, India,
Japan, Mexico, Nigeria, Russia, Saudi Arabia, South Africa,
the United States, and the United Kingdom - has met twice
since the 2007 Assembly. At the most recent meeting in July,
there was broad consensus on developing a global fuel
efficiency goal for international aviation. Developing
countries, however, are pressing to be exempted from taking
any action, and other countries, particularly the Europeans,
are pushing for more stringent measures beyond a fuel
efficiency goal. While a positive outcome on fuel efficiency
looks possible, consensus on applicability and further
measures will likely be difficult. The next meeting is
scheduled for February 2009.


17. (SBU) The EU touts the need for a global solution to
climate change and aviation emissions, and purports to "lead
the way" toward a global framework with the EU ETS. However,
statements by EU officials downplaying the ICAO process and
the continued progression of EU legislation suggest they
intend to go their own way no matter what is decided on an

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What is the U.S. Doing?
--------------


18. (U) The U.S. is an active participant in negotiations at
ICAO. The U.S supports achievement of a performance-based
approach at GIACC where countries agree on goals for the
global aviation system and each country decides what measures
are most cost-effective for achieving those goals.


19. (U) Underpinning the U.S. position is the environmental
program that is part of the U.S. Next Generation Air
Transportation (NextGen) Plan. This includes a systematic
and comprehensive approach to dealing not only with aviation
greenhouse gas emissions, but also with aviation noise and
air quality issues. Dealing with the challenges of aviation
and climate change include work on: better scientific
understanding of aviation's impact on the environment,
modernization of air traffic management technology and
procedures, development of new lower-emissions and
energy-efficient technologies for aircraft and engines, and
identification and development of environmentally friendly,
commercially viable alternative fuels. We are working to
advance efforts in all of these areas and are partnering with
like-minded states and industry around the world to promote
emissions reductions. Indeed, the U.S. aviation industry has
already pledged to improve energy efficiency by 30% by 2025.


20. (U) In the last 40 years, global aviation fuel efficiency
has increased 70 percent and is expected to improve a further
25 percent by 2020. As fuel bills represent 25-30 percent of
airline operating costs (the single largest cost for U.S.
carriers),strong incentives already exist for reducing fuel
use. In fact, unlike EU airlines, U.S. operators have
actually reduced their carbon footprint. Over the last seven
years, U.S. air carriers have burned less fuel annually than
in 2000, resulting in 77 million fewer tons of carbon
emissions or the equivalent of removing two million cars from
the road annually. While burning 3 percent less fuel, U.S.
operators have grown, flying 20 percent more revenue
passenger miles over the same period.


21. (U) Air traffic management modernization holds major
near and medium-term promise for efficiency gains and,
therefore, reductions in carbon emissions. Both the United
States and the EU have undertaken modernization initiatives.
These include plans to accelerate our major air traffic
control initiatives, US NextGen and EU SESAR, to develop
greener transatlantic flights faster over the next two years.


22. (U) More efficient aircraft and engine technology can
offer important gains in the medium and long terms.
Legislation before Congress, with bipartisan support,
proposes a program to encourage the uptake of R&D results
into more environmentally friendly aircraft and engine
designs, similar to the EU's Clean Sky Joint Technology
Initiative. Some new technologies that could be retrofitted
to current aircraft may reduce fuel burn by seven to ten
percent per aircraft, offering significant promise.


23. (U) The United States has also launched the Commercial
Aviation Alternative Fuel Initiative (CAAFI) to explore the
use of alternative fuels to reduce aviation emissions
impacts, both local and global. Comprised of air carriers,
manufacturers, airports, energy suppliers and distributors,
and academic institutions, CAAFI has set goals to identify
and have approved for use by civil aviation a synthetic fuel
in the first half of 2009, a 50 percent bio-fuel by the end
of 2010, and a 100 percent bio-fuel by the end of 2013.
Several European research institutes and companies have
joined us in this effort, and Boeing and Virgin Atlantic have
undertaken an important project in this area as well.


24. (U) In sum, the U.S. believes that through a combination
of enhanced air traffic management, improved aircraft
technology, and alternative fuels it can achieve
carbon-neutral growth of its aviation sector in the next
decade. These and other examples show there are alternatives
to imposing punitive measures on an industry that is already

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DOUBTS FROM NEW MEMBER STATES AND TRANSPORT OFFICIALS
--------------


25. (SBU) The EU may make further changes to the provisions
concerning aviation in their climate action plan. One thing
that has become clear: many of the newer member states and
those that are remote (e.g., Cyprus and Malta) or have remote
territories (e.g., Portugal, Greece, France and Spain) have
registered strong concerns regarding possible adverse affects
to their economies. Moreover, as the directive falls within
the jurisdiction of the Commission's DG-Environment, member
states' environment ministries, and the European Parliament's
Environment Committee, officials in transport ministries and
the aviation industry continue to express doubt, albeit
quietly, as to the likely effectiveness of the directive.
Increasingly, they see it as costly without providing
benefit, but are officially toeing the EU line. As this
issue develops in the New Year, posts are encouraged to take
advantage of any opportunities that arise where doubts about
the EU's aviation proposal are expressed to make some of the
key points outlined above.


A NOTE ABOUT MARITIME EMISSIONS
--------------


26. (SBU) The European Parliament is also actively focusing
on emissions from the maritime sector, and is seeking to
include international shipping in the EU ETS. It has
indicated it may be prepared to wait for the process in the
International Maritime Organization (IMO) to play out;
however, we anticipate that anything short of a global ETS
will be insufficient. We are concerned that should the EU
include international shipping in their ETS, it will
short-circuit any possible agreement in the IMO.


27. (SBU) In October, the IMO Marine Environment Protection
Committee (MEPC) made good progress on technical standards
that could be incorporated into future mandatory greenhouse
gas regulations: a design index to measure and regulate
energy efficiency (i.e., CO2) of new ships, an operational
index to measure CO2 output of existing ships in actual
conditions, and best practices. Developing countries,
however, held up political agreement on next steps based on
their belief that action in IMO will set an adverse precedent
in the United Nations Framework Convention on Climate Change
(UNFCCC) negotiations. They demand that any new regulations
should not apply to developing countries.


28. (SBU) The United States supports mandatory, global action
but we believe that IMO should first focus on operational and
technological efforts for energy efficiency in order to
facilitate developing country involvement. The IMO will work
further on the technical measures at an intersessional
meeting in March 2009, with a view towards adoption at the
next MEPC meeting in July 2009. At the July meeting, the
MEPC will also discuss market-based measures, including an
emissions trading system and a levy on bunker fuel.


29. (SBU) Continued opposition by developing countries to
any mandatory requirements that apply to their ships could
well stymie the IMO, as would their insistence that any
action in IMO be consistent with the UNFCCC's common but
differentiated responsibilities (CBDR) -- an approach
fundamentally inconsistent with IMO's principle of no more
favorable treatment.
RICE