1. An Introduction to Market-based Measures
Sam Brand
Environment Officer, ICAO
I was hired in 2011 as a permanent staff member of ICAO to work specifically on the application of Market-based Measures in international aviation. ICAO has been conducting research into MBM since the 1990’s. MBMs have been successfully applied to other modes of transportation and I bring some experience to their application in other modes of transportation.

2. Outline Climate Change Emissions Why Market-based Measures?
What is a Market-based Measure?
Taxes and Charges
Offsetting and Emissions Trading
Work at ICAO
My objective in this presentation is to provide an overview of why MBM are being considered for international aviation, what they are and how they work.
I will address:
Climate Change Emissions in a very general sense.
Why Market-based Measures
What is a Market-based Measure
Taxes and Charges
Offsetting and Emissions Trading
Advantages and Disadvantages of different MBMs
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

3. Climate Change Emissions
GHGs
From a climate change perspective, where emission are reduced or absorbed and where emissions occur makes no difference.
This is because the entire atmosphere around the earth is affected by the total amount of greenhouse gases.
The impact of a higher rate of greenhouse gases in the atmosphere is that the earth’s warmth is unable to escape into space, this traps heat and results in increases in global temperatures; that’s why it is called the greenhouse effect. [This increase in greenhouse gases in the atmosphere does the same thing that glass does in a greenhouse, it holds in the warmth while the suns rays continue shine.]
International aviation addresses CO2 emissions exclusively. The primary greenhouse gas emissions from aircraft engine emissions are CO2, and water, or water vapour, [the remaining GHGs make up less than 1 percent of the remainder (NOx, CO, SOx, VOC, particulates].
It is important to understand that international and domestic emissions are treated differently. Under the Kyoto Protocol emissions that are generated from flights that occur within States are captured as part of the national inventories. International emissions are not reported as part of domestic emissions and ICAO is addressing these emissions.
CO2 emissions from aircraft are calculated from the amount of fuel burned in the aircraft, one tonne of kerosene burned results in the emission of tonnes of CO2.
Today it is estimated that the atmosphere contains 32 per cent more carbon dioxide than it did at the start of the industrial era (Suzuki).
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

4. Why MBMs
Emissions from international aviation are expected to rise as a result of global development and the growing global economy.
This is due to several reasons: there are limited alternative technologies that can reduce CO2 emissions in aviation given both safety considerations and the fact that kerosene in aircraft can not easily be substituted by electric power, or energy sources that can be used by other modes of transport.
Emissions in 1990 where similar in size to the Netherlands. In 2005 they had grown to a size similar to France. In 2020, international aviation emissions are forecasted to be the size of Canada.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

5. Emission Forecasts
So what is expected to happen to greenhouse gas emissions generated from international aviation after 2020?
As you saw yesterday, aviation emission trends include a range of forecasts based on different scenarios. In the most likely scenario, the benefits of new technologies and improved operations have been calculated to estimate what emission trends will look like over time.
Even with contributions from technology and operations, emissions could grow between 200 and 300 Mt in the medium term and between 500 and almost 800 Mt in the long term from what emissions are expected to be in 2020.
So to answer the question, why do we need MBM, part of the answer is the level of emissions we are expected to face in the future. It will not be possible to reduce these emissions with only operational or technology measures.
I should note that some of this gap between 2020 emission levels and forecasted growth could also be addressed by the introduction of alternative fuel.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

6. Types of MBM - Definitions
Taxes & Charges
Offsets
Emission Trading
In terms of defining MBM ICAO has considered three types:
ICAO has specific well established definitions for taxes and charges and I will describe these
Offsets and Emission Trading, I will explain each of these separately in more detail.
In considering the development of a global MBM scheme, taxes and charges were considered MBMs because they create a market signal by adding a cost to operate and this can impact emission levels.
However, offsetting and emission trading schemes create a market, also called a carbon market, which is something taxes and charges do not.

7. Chicago Convention, Article 24 (customs, fuel)
Taxes
ICAO has developed unique definitions that are set out in our policies and guidelines.
A tax is a levy that is designed to raise national or local government revenues that are generally not applied to civil aviation in their entirety or on a cost-specific basis.
Chicago Convention, Article 24 (customs, fuel)
As mentioned ICAO has its own definitions of taxes.
It is worth noting that under the Chicago Convention, Article 24, there is an exemption from customs duties and other similar duties on any fuel retained on an aircraft arriving from an international flight.
Given that taxes have in impact on the cost of air travel any taxes applied to international aviation were considered an MBM. The concept of a carbon tax was an early consideration for international aviation but this concept was not supported.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

8. Chicago Convention Articles 15 (airport and navigation services)
Charges
A charge is a levy that is designed and applied specifically to recover the costs of providing facilities and services for civil aviation.
Chicago Convention Articles 15 (airport and navigation services)
The Chicago Convention does not directly address the subject of environmental taxes on international air transport.
Under Article 15 of the Convention contains detailed provisions regarding the use of airport and air navigation service charges. Essentially this article requires that any charges be applied in a non-discriminatory manner to “only for services and functions which are provided for , directly related to, or ultimately beneficial for, civil aviation operations”.
The concept of a carbon charge, or levy, was an early consideration for international aviation but this concept was not supported.

9. These emission units can be bought, sold or traded
Offsets
Emissions in one sector or location are offset by reducing emissions in a different sector or location
Standard measurement used is one tonne of CO2, or CO2 equivalent, equates to one emission unit or credit
These emission units can be bought, sold or traded
There are quality assurance measures to assure actual reductions
The basics of offsetting are that:
Emissions in one sector or location are offset by reducing emissions in a different sector or location
Standard measurement used is one tonne of CO2, or CO2 equivalent, equates to one emission unit or credit
These emission units can be bought, sold or traded
There are quality assurance measures to assure actual reductions

10. Offsetting - How It Works (3)
Major rehabilitation and retooling create emission reduction opportunities Offsetting acts as incentive to reduce emissions Ability to create offsets creates a carbon market
To explain offsets, I am going to use an example from power generation.
When a coal powered generation plant needs to rehabilitate its infrastructure, the opportunity to create offset credits acts as an incentive to upgrade the plant to emit less.
Under UNFCCC rules, for example, I can apply to have the rehabilitation project on my coal plant formally recognized and documented for the emissions reductions it creates. Emissions are measured before and after the rehabilitation project to estimate the amount of reduced/avoided emissions.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

11. How It Works (3)
$30 Million to upgrade to Coal $50 Million to upgrade to Natural Gas (NG) $20 Million additional investment Coal emissions = 10 Mt/year NG emissions = 5 Mt/year 5 Mt/ year = credits $50 Mil. ÷ 5 Mt = $10/credit
Here’s how it works. If in burning coal to generate power I create 1200 grams of CO2 per kWh and in burning natural gas I create 600 grams of CO2 per Kwh, I can create emission credits if I convert my plant to natural gas. However, I will have to invest in new equipment and my plant will need to be modified to accommodate natural gas rather than coal in the production of electricity.
Let’s assume a regular upgrade of my plant at the end of its current infrastructure cycle would cost $30 million and to convert to natural gas will cost $50 million.
If I invest $50 million in the upgrade and I go from emitting 10 million tonnes of emissions per year to 5 million tonnes of emissions per year, I will receive 5 million offset credits per year because, as we said, each tonne is worth one credit.
This means if I divide my $50 million investment by the 5 million credits I receive, it costs me $10 for each credit,
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

12. How It Works (3)
Carbon Credit Cost = $10/tonne Carbon Credit Sale = $5/tonne $5 x 5 Million credits = $25 Million Cost to add NG = $20 Million Potential Profit = $5 Million
If I can sell the credit on the carbon market for $5 per tonne I can cover half the cost of my $50 million investment. If the original upgrade would have cost me only $30 and now I can sell my credits and make $25 million, I get an extra $5 million above the additional $20 million I put into the plant.
In this way, offsetting acts as an incentive to reduce carbon because I can sell the credits into a carbon market.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

13. Offsetting & the Carbon Market
Supply and Demand for Credits
International Aviation & the Carbon Market
Encouraging New Technologies
So now that I have just spent $50 million dollars to convert the plant, that I could have upgraded to coal for $30 Million, how am I sure that someone will pay me for these offset credits?
First let me say that the exchange of credits between buyers and seller is what we refer to as the carbon market. And it operates the same way as any other market. There are exchanges that track buyers and sellers and offer services for purchasing or selling credits. Other presenters in this session will explain the carbon market in more detail. But I want to make a couple of comments about the market from an aviation perspective.
So, the power generator knows there will be a market for his credits partly because of the cost of reducing emissions in other sectors.
Research by the International Air Transport Association (IATA) has estimated replacing an engine on an aircraft for the purposes of reducing emissions will amount to approximately $1000 per tonne. This calculation is based on the amount of carbon that is reduced by replacing the engines divided by the cost of the new engines. Admittedly, this is one of the most expensive options available to aviation; however, less cost options such as upgrading or retrofitting engines are still $200/tonne.
The carbon market provides international aviation with a cost effect way of offsetting their emissions at much lower cost per tonne.
This example also works with new more expensive technologies. In the coal plant example, if the plant owner decides there is not enough money to make a $20 Million conversion to NG, it may still be possible to invest in newer less emitting equipment that costs an additional 10% above traditional equipment if the higher cost of equipment can be offset using credits.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

14. Aviation Offsetting Scheme
Established sector baseline – eg. carbon neutral growth from 2020
Participant share of baseline
Reporting of emissions
Participant decisions – offset, emission reduction
Offsetting could provide international aviation with an option of developing a MBM scheme for the sector.
In such a case, a baseline would be established for the sector, possibly CNG from 2020.
Emission levels are established for each participant based on their share of the baseline.
Each year participants report their emissions.
Participants have an obligation to cover emissions above the baseline. Participants can do so by purchasing offsets.
However, participants can also decide to reduce emissions internally. For example, by purchasing winglets for their aircraft. The decision on how to address emissions may be influenced by the price of carbon credits. If credits are expensive, it may be more cost effective to reduce costs internally.
If credits are $10/tonne and winglets will reduce emissions by 100,000 tonnes, you could spend $1 million on winglets and reduce your emissions for the same cost as buying credits. However, it credits are $9/tonne you could by 100,000 credits for $900,000 and save yourself $100,000.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

15. Emissions Trading – Cap & Trade
A cap is placed on absolute emissions eg. carbon neutral from 2020
Allowances are created for each tonne of carbon below the cap
Participants are allocated a portion of the allowances based on their share of total emissions
Allowances can be bought sold and traded
Emission trading works on a similar concept to offsetting, where the market is leveraged to create the lowest possible cost for reducing emissions.
A cap is placed on absolute emissions eg. carbon neutral from 2020
Allowances are created for each tonne of carbon below the cap eg. a total emission level of 650 Mt
Participants are allocated a portion of the allowances based on their share of total emissions
Allowances can be bought sold and traded
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

16. Surplus of allowances can be sold or banked for future years
ETS – How It Works (2)
Participants included under the scheme monitor and report their emissions
The number of allowances equal to the emissions generated are surrendered
Those capable of making emission reductions relatively inexpensively can do so; and
Surplus of allowances can be sold or banked for future years
The basics for ETS are that:
Participants included under the scheme monitor and report their emissions
Participants surrender allowances equal to the emissions they create
Those capable of making emission reductions relatively inexpensively can do so; and
Surplus of allowances can be sold or banked for future years
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

17. The ETS creates an incentive to reduce emissions
ETS – How it Works (2)
The ETS creates an incentive to reduce emissions
Participants who face higher costs to reduce emissions also have an advantage
An ability to leverage investment is created
Similar to the coal plant offsetting example, incentives are created to reduce emissions in an emission trading scheme. Under an ETS, the plant receives allowances for the emission below the cap. The coal plant can upgrade to NG and as a result of its reduction in emissions, it does not need all the allowances it has been issued. It is possible to sell some of its allowances on the carbon market and, similar to the offsetting example, this will help pay for the cost of the upgrade on lower emissions.
The carbon market is created in an ETS because those who can reduce inexpensively can sell their surplus allowances to those face higher costs for reducing emissions. If you are a participant who’s emissions are growing and who is unable to reduce costs without large scale upgrades to infrastructure and equipment, it is less expensive to purchase allowances in the carbon market. In the case of international aviation were costs per tonne can be over $100, it may be an advantage to purchase allowances rather than reducing emissions.
One element of MBMs that I didn’t mention in my description of offsetting is the ability to use these mechanisms (in both offsetting and ETS) to leverage investment in upgrading projects or significant equipment upgrades. The fact that MBMs create value means that projects that reduce emissions can secure financial capital more easily and probably more inexpensively than without an MBM. For example, if an investor knows that a project can generate capital through the sale of credits or allowances this is an asset that can help the project secure financing.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

18. Linked to targeted reduction level
MBM - Considerations
Linked to targeted reduction level
Low cost reductions for the aviation sector
Flexibility for market conditions (unlike tax)
Funds flow out of the sector
Administration of the scheme
One of the benefits of MBMs are that they are linked to a targeted reduction level which gives us greater certainty that we will reduce emissions.
MBMs lower the cost of reducing emissions for the aviation sector, and in fact MBMs help ensure that emissions targets for all sectors can be reached at the lowest cost because the carbon market acts to share the cost of emission reductions across all the participants, rather than making everyone reduce regardless of their costs.
There is a great benefit in the fact that MBMs reflect market conditions. If the economy grows quickly the price of credits or allowances will be high because emissions grow as the economy grows. However, is the economy cools the price of carbon falls and is less of a drag on the economy when things are tougher. This flexibility for market conditions is not reflected in taxes which remain the same regardless of the economic conditions.
One criticism for aviation is that funds flow out of the sector; this is true, however, we need to decide how much the sector is willing to pay to reduce emissions.
MBMs have an administrative burden and it can be complicated to reach agreement on the rules of a scheme, as we have seen in ICAO.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

19. ICAO’s Work on a Global Scheme
Exploring feasibility
De Minimis Study
Design Features
Quantitative Analysis
Findings
As I mentioned in my opening slide, ICAO has been studying and researching the application of MBMs to international aviation since the 1990s. At the last General Assembly in 2010, ICAO Council was asked to explore the feasibly of a global MBM scheme and to develop a framework for MBMs. Over the past three years, the Secretariat, with the support of MBM Experts from around the world has been undertaking these tasks.
In 2011 a study was conducted on the potential distortions created by MBMs that were not applied across all participants in a global scheme. It confirmed that market distortions could be significant.
In exploring the feasibility of a global scheme an array of design features have been considered including who would be the participant in a global scheme, how an emissions target would be established and allocated between participants, possible approaches to monitoring, reporting and verifying emissions, as well as how to accommodate the special circumstances and respective capabilities of States.
In addition to evaluating the design features of MBMs, work was undertaken on the potential economic costs and environmental benefits for the aviation industry. There was agreement that MBM could reduce emissions at a relatively low cost compared to the cost of reducing emissions within the sector.
There were not significant differences between offsetting and emissions trading for international aviation. The impacts on regions of the world was generally consistent.
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

20. MBMs benefit sectors facing higher reduction costs
Summary
International aviation greenhouse gas emissions are expected to continue rising
MBMs are intended to support the lowest possible cost to reduce emissions in aviation, and all sectors
MBMs benefit sectors facing higher reduction costs
There many factors that need to be assessed when considering MBMs for international aviation
ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013

21. ICAO Symposium on Aviation and Climate Change, "Destination Green", ICAO Headquarters, Montréal, Canada, May 2013