For many operators—and particularly those in business aviation—the European Union's Emissions Trading System (ETS) is the poster child for good intentions gone terribly awry. The EU's goal was to stimulate adoption of a worldwide system for curbing aircraft emissions. And while there has been some movement in that direction, what has been created is a convoluted market in carbon credits that favors small airlines, severely penalizes business jets and has raised the specter of an international trade war. Resolution may come this year. Or not.

ETS was to be an interim measure to goad the International Civil Aviation Organization (ICAO) into mitigating aviation's contribution to greenhouses gases, but now in its first year of implementation it has been met with a mix of derision and anger both outside and within the EU.

While harsh on business aviation, the principal insult of the carbon trading program is its “extra-territorial” provision. This calls for visiting airlines and business aircraft to be accountable for their CO2 emissions not just in EU member-country airspace, but all the way from their points of origin and return.

The program requires operators to purchase carbon credits at the end of each year of flights to and from Europe to offset their aggregate CO2 emissions in metric tons for the previous 12 months, with the provision of some free allowances

Among critics of the policy is the General Aviation Manufacturers Association (GAMA) whose senior vice president for international and environmental affairs, Ed Smith, says the association “has come out very clearly in opposition to the extra-territorial reach of the ETS directive. This is the objection that the rest of the world has, as well. China and India outright forbade their airlines to comply.”

So did Russia. Meanwhile, U.S. Congress last year passed a law giving the Transportation Department the authority to forbid American operators from complying with ETS if it determines this is in the public interest. President Barack Obama signed it in December.

The way the ETS program was set up, at the end of 2013 and thereafter, operators would apply their baseline data from 2012 operations to a formula calculating how much CO2 they emitted during the year, which would then determine how many credits they would have to buy, or the free allowances for which they could qualify the following year.

The issue of so-called “free” allowances is the other sticking point with business aviation, as airlines and private operators are not treated equally. Under ETS there is a maximum allowance of CO2, below which are free credits, or allowances. When emissions exceed that cap, the operator must purchase offsetting credits on the international carbon-trading market.

This “di minimis threshold” was established for commercial operators of 10,000 metric tons per year, or alternately, if they make fewer than 243 flights for three consecutive four-month periods, or about one roundtrip per day.

However, Kurt Edwards, director general of the International Business Aviation Council (IBAC), notes that no di minimis thresholds apply to private operators. Rather, the EU devised a formula whereby business aircraft operators could theoretically earn up to 97% of their baseline allowances.

But, as Edwards puts it, “the criteria for whether those are useful to business aviation is dissuasive, as it is based on 'ton-kilometers' of your payload: passengers or weight, if carrying cargo. Some business aviation operators that explored this option received only 4-5% of the potential 97%. . . . So, it effectively renders the entitlement to the free credits useless for business aviation operators.”

Then, as European Business Aviation Association (EBAA) President Brian Humphries notes, “The administrative cost of being in the system exceeds the cost of carbon trading, an expensive bureaucratic process for a small emitter.” And because of the expense, time and complexity of applying for the small percentages of free allowances they can harvest, Humphries claims many business jet operators eschew the system and simply pay the full carbon trading cost for their emissions.

“It's all to do with the calculation methodology,” he says. “Airlines get 80-90% of their allowances free, and we get hardly anything.”

Smith adds, “There are some concessions for small operators in the compliance mechanism which were welcome, but not enough to counterweigh the heavy administrative burden required to comply with it.”

The main ETS concession allows small emitters to use Eurocontrol's en route navigation services charging data by which they extrapolate the necessary numbers rather than engage in the full record-keeping and verification called for in ETS regulations.

Nevertheless, Smith maintains that ETS makes no sense when applied to business aircraft since “the environmental benefit is so small it is out of all proportion to the administrative cost.”

Humphries says EBAA and its members “hope the EU ETS will go away, and we will have a proper market-based system. If not, we are pressing for more equitable treatment—there should be a 10,000-ton di minimis exception for everyone. A clunky old Dash 100 Boeing 747 can make 243 flights in four months and be treated as a de minimis operator, and a noncommercial operator can make one flight and they're in—so the system is very unfair.”

IBAC's Edwards notes, “It's remarkable the level of discrimination implicit in the directive, especially given that the EU has a requirement that its regulations be proportionate to their impacts on economic activity, and the ETS directive is inconsistent with that requirement. It is something the EU needs to look at as part of the general review of the directive in 2014, if not sooner.”

“We want a global system, but just in case [the present ETS program] stays, in the next legislative period, we will fight for more fair treatment for business aviation,” Humphries says. “Today, what we have is not acceptable.”

In implementing the ETS, the EU did not anticipate the intensity of the pushback from foreign airlines and their respective governments, airframe and engine builders. One notable example of the pressure exerted on the EU was a claim by Airbus that China would cancel orders for new European jetliners because of its displeasure with ETS.

Because the ETS had been passed into law by the European Parliament, the confederation was duty-bound to enforce it. That meant if a foreign operator refused to comply with ETS—even per government decree—the EU theoretically could impound its aircraft. And then presumably, governments of the affected operators would quite likely reciprocate.

All this came to a head in December 2012 when Connie Hedegaard, European commissioner for climate action who is also a member of the EU commission, called for a temporary “derogation,” or relaxation, of some ETS provisions for a one-year period. Under the derogation, the extra-territorial rule would be dropped, but ETS would remain in effect for intra-EU operations of both domestic and visiting operators.

Even though the derogation took effect last December, it was not until April 24 that the move to “stop the clock” was published in the EU's official journal.

The Parliament's Environment Committee has made it clear that the derogation could be extended beyond a year if the triennial ICAO Assembly, convening in September in Montreal, achieved “substantial progress” in its stated goal of developing a global standard for aviation carbon mitigation.

EBAA CEO Fabio Gamba says the commission stopped the clock on ETS because of the pressure they were under and the derogation was “the logical consequence that approaching the deadline for surrendering the emissions data and purchasing the permits had created.

“The closer to the deadline, the more nervous a lot of countries like the U.S., Russia, China and India were becoming. So they went out of their way to retaliate. It became a very difficult climate,” he says. “So the European Commission came up with this last-ditch attempt to reconcile.”

The “bottom line,” Gamba believes, is that “the commission is now in a predicament, as they are under the scrutiny of the European Parliament and the member states. They don't want an international battle—they want to avoid it at all costs. They are not eager to have a status quo ante imposed by September. What the Parliament only cares about is that the EU is respected as an international partner, and they don't like [the fact] that everyone is laughing at the commission.

“What they want is that aircraft be less polluting,” he went on. “They always said their goal has been to move toward a global standard, and because so little progress was made by ICAO 10 years ago, they came up with their own measure to, in effect, force ICAO to act. They have also maintained that if an international agreement were clinched, the ETS would be dropped, and the EU would then happily abide with the international agreement. That was always clear from the beginning.”

And, he notes, the imposition of ETS did accelerate action within ICAO since climate change is on the agenda for its assembly this fall.

Neither the derogation nor an ultimate sunset for the European ETS lets aviation off the hook in terms of reducing its contribution to carbon emissions (currently only 2% of global totals, but predicted to increase as airline fleets expand). To that end, ICAO has advanced a four-pillar strategy around which to wrap a global standard toward the goal of achieving a 50% reduction in CO2 emissions from aviation by 2050.

“We are supporting the ICAO process,” GAMA's Smith said, adding that “it is important that the industry as a whole support improving aviation's environmental performance and appropriate market-based measures. As manufacturers, we are responsible for one of the four ICAO pillars: technology improvements in engines, aerodynamics and avionics.”

The other three pillars are market-based measures: carbon trading; development and deployment of alternative aviation fuels; and infrastructure and operational improvements including the air-traffic management modernization programs underway in Europe, the U.S. and elsewhere.

“Market-based measures should be a temporary measure until the positive impacts of the other three pillars are fully deployed and have the planned effect on reducing emissions,” Smith continued.

For business aircraft operators, ETS compliance can be expensive. EBAA's Gamba says small operators can spend €50,000-100,000 ($65,000-139,000) annually just on additional administrative costs, exclusive of buying carbon credits. For large fleet operators such as NetJets and Jet Aviation, he notes, program compliance is markedly more costly.

Reacting to complaints about the program's excessive administrative costs borne by business aircraft operators, the commission has hired PwC to analyze the situation and present recommendations to greatly reduce the burden. That final report in expected in June.

Regardless, the end of the current system cannot come fast enough for Gamba. He says in addition to ETS penalizing business aircraft operators, the provisions and procedures are so convoluted that not even EC members understand how it works.

What ETS has demonstrated is the wrong way to go about emissions reduction, according to Gamba, a sentiment shared by Edwards. “We're fine with having market-based measures,” he says, “as long as they're simple and reasonable.”