ALLOCATION. Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and

ALLOCATION Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

IMPRINT German Emissions Trading Authority (DEHSt) at the Federal Environment Agency Bismarckplatz 1 14193 Berlin Phone: +49 (0) 30 8903 5050 Fax: +49 (0) 30 8903 5010 Internet: www.dehst.de/en E-mail: emissionstrading@dehst.de Status: 04/2012

CONTENT 1 Aviation in Emissions Trading...5 2 Flights Subject to Emissions Trading...6 2.1 Scope...6 2.2 Aircraft Operators Receiving Free Allocation...11 3 Allocation...16 3.1 Basis of Allocation...16 3.2 Analysis...18 4 Emissions... 23 4.1 Legal Basis... 23 4.2 Analysis... 24 5 Comparison of Allocation and Emissions... 26 5.1 Distribution... 26 5.2 Comparison Based On Operator Categories... 27 5.3 Extent of Burden on Small Emitters... 29 5.4 Extent of Burden on End Consumers...31 5.5 Measuring Regulation Induced Effects on Competition... 32 6 Final Comments... 34 7 Appendix... 35 7.1 Allocation List... 35 7.2 Abbreviations and Acronyms... 45 7.3 List of Illustrations... 46 7.4 List of Tables... 47 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 3

4 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

1 AVIATION IN EMISSIONS TRADING Aviation is crucial to global social and economic interaction. However, with aviation s steadily increasing share in mass transportation, its problematic aspects come into focus. These include high noise levels around airports and a major increase in greenhouse gas emissions with significant repercussions on the climate. Including aviation 1 in the European Emissions Trading Scheme (EU ETS), as established in the Emissions Trading Directive 2, will lead to effective climate protection while highlighting the significance of aviation. From 2012, commercial as well as non-commercial aircraft operators must surrender emission allowances for each tonne of carbon dioxide emitted as a result of their activities. The cap (upper limit of emission budget) for 2012 is set at 97 percent and for 2013-2020 at 95 percent of historic emissions of a baseline period (average of 2004-2006). In 2012, 85 percent and in 2013-2020 82 percent of the cap will be allocated free of charge. The remainder - minus a three-percent annual reserve from 2013 - will be auctioned. Surrender obligations can be met using aviation or stationary emission allowances and, to a limited extent, credits from project-based mechanisms (JI and CDM). All aircraft operators who carried out an activity subject to emissions trading in 2010 were entitled to apply for a free allocation of emission allowances. In order to receive these allowances, aircraft operators had to submit not only their annual emissions report, but also a one-off report on their transport volume, the 2010 tonne-kilometre report by 31/03/2011. The tonne-kilometre report also served as application for the free allocation of emission allowances. In the tonne-kilometre report, each aerodrome pair, including the payload transported (passengers, luggage, cargo and mail) and the distance had to be specified. The same report structure was used for the emissions report, where fuel consumption and the resulting carbon emissions had to be reported. The applications for free allowances from aircraft operators administrated by the Germany were checked by the competent authority, the German Emissions Trading Authority (DEHSt) at the Federal Environment Agency by 30/06/2011 and sent on to the European Commission. Based on the reported transport volume from all applications passed on by Member States and historic emissions, the Commission calculated a benchmark for the free allocation of emission allowances for 2012 and for 2013-2020. Individual allocations are determined by multiplying this benchmark with the relevant transport volume of each operator. The formal allocation decision by the DEHSt and the allocation notice was sent out to all aircraft operators receiving an allocation by 23/12/2011. In addition, an allocation list (Appendix 1) was published. At the beginning of this report, we first identify the sectors of aviation included in emissions trading. It can be shown that aviation includes a wide variety of different aircraft operators and business models, resulting in the need for multifaceted analysis in this report. Our objective is to establish a sophisticated picture of the distribution of emissions and allocations and the burdens and possible competitive distortions that may result from that. 1 Aviation was included in emissions trading through 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 2 Directive 2003/87/of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 5

Table 1: Main results Not all sectors of aviation are within the scope of the Emissions Trading Directive (see Chapter 2.1) Of the 409 aircraft operators administrated by Germany, 134 did apply for a free allocation. 129 Operators are receiving free allocation. They are very heterogeneous in size, business model and average flight distance (see Chapter 2.2). One half of the free allocation will be issued to just four of the 129 operators receiving free allocations. Although 57 percent of operators receiving free allocation come from the non-commercial sector, they receive less than one percent of the total allocation. This is because their transport volume is smaller by a factor of 133 than that of commercial operators (see Chapter 3.2). Emissions per transported tonne of payload range between 0.5 kg and 70 kg CO2/ km, with the average fuel consumption per passenger ranging between 2.6 l/100 km and 280 l/100 km (see Chapter 4.2.3.). The benchmark-based allocation led to excess and shortfall of allowances, compared to the annual emissions. The cover ratio (allocation volume for 2012 in relation to emissions in 2010) varies between 0.95 and 177.10 percent (see Chapter 5.1 and 5.2). The possible financial burden for end consumers (passengers) is moderate. Under certain assumptions, e.g. for capacity use, it will be between 0.15 and 2.50 Euros per flight, depending on distance (see Chapter 5.3.3). The difference in the allocation of free allowances to operators does not represent a significant competitive distortion. However, the benchmark-based approach reflects differences in efficiency between operators within the same or in contrast to other aviation business models (see Chapter 5.5). 2 FLIGHTS SUBJECT TO EMISSIONS TRADING 2.1 SCOPE 2.1.1 Aviation Classification from an Emissions Trading Perspective In principle, all aircraft operators whose aircraft depart or land within the territory of the European Economic Area (territory of EU Member States plus Iceland, Norway and Liechtenstein) take part in the European Emissions Trading Scheme according to the Emissions Trading Directive. However, exceptions exist for various aviation sectors that are included in emissions trading to a larger or lesser extent. For the sake of a uniform use of terminology in this report, Figure 1 shows a diagram of the classifications in aviation. This diagram will be the basis on which the involvement of the different aviation sectors will be discussed. In connection with Chapter 2.1.2, it will define which type of aircraft operators are included in emissions trading and receive an allocation and therefore be the subject of analysis in this report. 6 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

Civil Aviation MTOM < 5.7 t MTOM > 5.7 t Commercial Aviation Non-Commercial Aviation Commercial Aviation Non-Commercial Aviation Scheduled Flights Corporate Flights Scheduled Flights Corporate Flights Flights on Demand Training Flights Flights on Demand Training Flights Motor Flights Air Taxis Motor Flights Glider Flights Other Flights Other Flights Other Flights Figure 1: Simplified Aviation Classification from an Emissions Trading Perspective In order to be able to use established international definitions in the following chapters, Table 2 complements the Emissions Trading Directive s definition by introducing globally valid definitions by the International Civil Aviation Organization (ICAO) and the International Business Aviation Councils (IBAC). Please note that German aviation legislation does not always have equivalents. Table 2: Internationally established Definitions in the Context of Aviation Classification Commercial Aircraft Operator (Emissions Trading Directive) Commercial air transport operator means an operator that, for remuneration, provides scheduled or non-scheduled air transport services to the public for the carriage of passengers, cargo or mail. 3 Commercial Aircraft Operator (European Union Aviation Legislation) No undertaking established in the Community shall be permitted to carry by air passengers, mail and/or cargo for remuneration and/or hire unless it has been granted the appropriate operating licence. 4 The operating licence includes the Aircraft Operator Certificate (AOC). Commercial means the transport of passengers, cargo or mail against remuneration 5. 3 Appendix 1 Part 2 Nr. 33 of the German Greenhouse Gas Emissions Trading Act (TEHG) and Art. 3 letter p Emissions Trading Directive 4 Article 20 Section 4 Aviation Act in connection with Regulation (EC) No. 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community 5 Article 11 Section 1 Ordinance on the Inspection of Aircraft and Aeronautical Equipment (example) Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 7

Scheduled Air Service (International Civil Aviation Organization) ( ) an air service open to use by the general public and operated according to a published timetable or with such a regular frequency that it constitutes an easily recognizable systematic series of flights ( ) 6 Business Aviation (International Business Aviation Council) Three different categories 7 : Commercial: Aircraft flown for business purposes by an operator having a commercial operating certificate. Typically these are on-demand charters ( air taxis ), fractional operators, ( ) Corporate: Non-commercial operations with professional crews employed to fly the aircraft (e.g. corporate fleets) Owner-operated: Aircraft flown for business purposes by the owner of the aircraft In Figure 1, the commercial category has a sector commercial flight on request and Corporate figures as Corporate flights, whereas owner-operated is not included due to the graphic rendition. Air taxis are defined as a type of on-demand air service usually performed by small-capacity aircraft in a very similar way to an automobile taxi service. Or in some cases, a service operated on a scheduled basis with stops made only at points where passengers and cargo are picked up or discharged. 8 The differences in the definitions of commercial aircraft operators in Table 2 are remarkable. The German TEHG and the Emissions Trading Directive take the view that the flight services must be available to the public.in contrast, the European aviation legislation definesnecessary preconditions which must be fulfilled for commercial aviation to take place (e.g. an aircraft operator certificate). The question whether such flights are carried out is irrelevant. Thus, a commercial aircraft operator (as defined by the aviation legislation of the European Community) can be defined as non-commercial from an Emissions Trading Directive perspective, as long as the flights are not offered to the public. From an Emissions Trading Directive view, the possession of an AOC is a necessary, but not a sufficient condition to be classified as commercial operator. This distinction can be important for possible exemptions from emissions trading. 6 International Civil Aviation Vocabulary (ICAO), 2nd edition, Montreal 2001 7 Business Aviation Safety Brief (IBAC), Summary of Global Accident Statistics, 1998-2002, Issue 2, March 2004 8 ICAO DOC 9626, Montreal 2004 8 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

2.1.2 Exemptions from Emissions Trading There are exemptions from the general emissions trading obligation mentioned in Chapter 2.1.1 (see Table 3). Table 3: Simplified and abridged List of Flights outside the Scope of TEHG 9 Official flights of reigning monarchs, heads of state, heads of government/government ministers of non-member states of the European Economic Area Agreement Military flights in military aircraft, customs and police flights Search and rescue missions, firefighting flights, humanitarian missions and medical emergency flights Flights performed under visual flight rules Round trips Training flights Flights for scientific research or for checking, testing or certifying aircraft or equipment Flights of aircraft with a certified maximum take-off mass of less than 5,700 kg Flights performed in the framework of public service obligations, on routes within outermost regions, or on routes where the capacity offered does not exceed 30 000 seats per year Flights by commercial aircraft operators if 10 the aircraft operator carries out fewer than 243 flights per period for three consecutive four-month periods; or the aircraft operator carries out flights with total annual emissions lower than 10 000 tonnes of carbon dioxide per year. The effects of the exceptions listed in Table 3 will be illustrated in the following examples: Flights of aircraft with a certified maximum take-off mass (MTOM) of less than 5,700 kg Aircraft meeting these specifications are found in Business Aviation (especially in the air taxi segment). In non-commercial aviation, this may include many private aircraft (e.g. small motor aircraft, gliders). Flights under visual flight rules, rescue, police, military and research flights Visual flight rules apply for example to private pilots in non-commercial aviation. Further exemptions apply to rescue flights (e.g. carried out by business aviation companies) and flights for research (e.g. surveying flights) are also exempt from emissions trading. Whereas the maximum take-off mass (MTOM) is a limitation that exempts all flights of a particular aircraft, the exemptions mentioned in this example only apply to specific flights. Thus, a flight of a research aircraft into the area to be surveyed may be subject to emissions trading, while the actual surveying flight (together with the scientists)is not. The flight to which the exemption applies must be exclusively dedicated to a specific purpose, e.g. research. Flights by commercial aircraft operators with fewer than 243 flights per period for three consecutive four-month periods or emissions of less than 10,000 tonnes of carbon dioxide (CO 2 ) per year Flights by a commercial aircraft operator with fewer than 243 flights in three subsequent fourmonth periods or less than 10,000 tonnes of carbon dioxide (CO 2 ) emissions per year are outside the scope of the Emissions Trading Directive, regardless of the size of the aircraft or the type of flight 11. 9 Appendix 1 Part 2 No. 33 TEHG 10 This exemption does not apply to flights exclusively carried out for the transport of reigning monarchs, heads of state, heads of government/government ministers of non-member states of the European Economic Area Agreement travelling in official function. 11 Flights of Heads of State from EEA countries excepted Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 9

As a consequence, even airlines using large aircraft with considerable carbon dioxide emissions can be exempt, as long as the number these flights subject to emissions trading is not exceeded.. For this reason, some sectors of commercial aviation in Figure 2 have been partially hatched. Figure 1 is now extended by the most important exemptions (Figure 2) to give an overview of the aviation areas subject to emissions trading that will be the subject of this report. Civil Aviation MTOM < 5.7 t MTOM > 5.7 t Commercial Aviation Non-Commercial Aviation Commercial Aviation Non-Commercial Aviation Scheduled Flights Corporate Flights Scheduled Flights Corporate Flights Flights on Demand Training Flights Flights on Demand Training Flights Motor Flights Air Taxis Motor Flights Glider Flights Other Flights Other Flights Other Flights Figure 2: Degree of inclusion in emissions trading (blue colour indicates exemption from emissions trading) 2.1.3 Administering States Every aircraft operator within the scope of the Emissions Trading Directive must be assigned to an Administering Member State. For commercial aircraft operators based in an EU Member State, the Administering Member State is the state that issued the operating licence for the operator. This procedure is not necessarily followed as far as non-commercial aircraft operators within the EU and operators based outside the EU are concerned. In these cases, the Member State in which the assigned estimated emissions from the aircraft operator in a baseline year are highest will be the Administering Member State. The baseline year is normally 2006 and for aircraft operators that started operations after 01/01/2006, the baseline is their first year of activity. Assigned aviation emissions are emissions produced during aviation activities with departures from a Member State or arrivels from third-party countries at aerodromes on the territory of a Member State. Aircraft operators are assigned to Administering Member States on the basis of emission estimates from EUROCONTROL s air traffic control data. Each aircraft operator has thus been assigned to one EU Member State. The List of Administering Member States 12 has been compiled and published by the European Commission. It lists aircraft operators who were involved in aviation activities from 01/01/2006 and are potentially within the scope of the Emissions Trading Directive. Aircraft operators not included in the German Administering Member States list, but in possession of a German operating licence have been assigned to Germany. The following explanation of the allocation process refers to operators assigned to Germany as Administering Member State only. 12 Regulation (EU) No. 394/2011 of April 20th 2011 (current List of Administering States) 10 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

2.2 AIRCRAFT OPERATORS RECEIVING FREE ALLOCATION This section focuses on aircraft operators receiving regular free allocation of emission allowances. After looking at the number of applications submitted (in relation to the List of Administering Member States), various other characteristics such as country of origin and type of activity will be considered. Not all aircraft operators assigned to a state according to the List of Administering Member States mentioned in Chapter 2.1.3 are subject to emissions trading. If, for example, an operator can prove that their own aircraft is used outside Europe only and flew across Europe only once in the past (before 2010) in a ferry flight, the operator can be exempt from the duty to submit a monitoring plan. 13 Figure 3 shows the current allocation status of aircraft operators assigned to Germany. Of the aircraft operators for whom the DEHSt is the competent authority, all major airlines met their obligations in time. In total, approximately 99 percent of aviation emissions have been covered. 416 aircraft operators administered by the DEHSt 409 on German List of Administering States 4 Operators have now been transferred to the Icelandic List of Administering States 3 Operators with German operating licence Transport Volume Monitoring plans tonne-kilometre 150 Tonne-kilometre reports (Applications for free allocation) 144 129 operators entitled to allocations 3 operators not subject to emissions trading in 2010 7 operators did not specify a transport volume 4 operators have been transferred to the Icelandic List of Adminstering Member States 1 application rejected because of time lapse Emissions Monitoring plans annual emissions 161 Emission reports 158 Discrepancy with number of monitoring plans: due to insolvency, exemptions and non-conformity Exemptions 58 (verified by DEHSt) Not recognised as operator, no responsibility 41 (verified by DEHSt) No administration record 156 No permission to enter the airspace, termination of operation etc. Figure 3: Status of assigned aircraft operators, based on List of Administering Member States In the following, the evaluations refer only to aircraft operators receiving free allocation. 13 All aircraft operators participating in emissions trading are under obligation to compile a plan for the monitoring and calculation of their carbon dioxide (CO 2 ) emissions at the beginning of each trading period. Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 11

2.2.1 Grouping according to seat of registration Figure 4 shows the number of flights with allocation-relevant transport volume according to the aircraft operator s country of origin. The country of origin is the country of the entrepreneur s domicile. Most flights were carried out by operators originating from Germany, Turkey, the United States and the Russian Federation. Figure 4: Number of flights with allocation-relevant transport volume according to the aircraft operator s country of origin Figure 5 shows the number of aircraft operators receiving free allocation according to country of origin. With 48 percent, Germany has the largest share by far because an EU Member State is always the Administering Member State if it issued an operation licence to an aircraft operator. As Figure 5 only shows the number of aircraft operators, no conclusions can be drawn on traffic flows (flights). By assigning an operator to a country of origin, all flights to other countries that are subject to emissions trading are assigned to the country of origin. Example: A flight from Istanbul to Berlin by an Egyptian airline assigned to Germany s List of Administering States would thus be considered to be traffic into Egypt. However, looking at the number of aircraft operators, the major share is based in Germany and the remainder is distributed over a wide spectrum of countries. 12 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

Number of aircraft operators applying for free allocation 60 55 50 45 40 35 30 25 20 15 10 5 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 3 7 7 7 23 62 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Figure 5: Number of airline operators receiving free allocation, sorted according to country of origin 2.2.2 Commercial Status While in Figure 1 subdivisions in aviation were chosen that clarified to what degree they were included in the emissions trading scheme, Chapter 2.1.2 emphasized the aspect of commerciality. Figure 6 shows the share of the respective groups, based again on the total number of aircraft operators receiving free allocations. In numbers, 57 percent of aircraft operators are commercial, while in terms of transport volume data from 2010, a different picture arises. Non-commercial aircraft operators provided less than one percent of the transport volume. Chapter 3.2.2 will look at the implications of this observation. 74 57% 55 43% 63,014,293,712 >99% 9,056,729 <1% commercial non-commercial Figure 6: Proportions of commercial and non-commercial aircraft operators receiving free allocation (left) and their respective share of the total transport volume for the reporting year 2010 (right) Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 13

2.2.3 Average Flight Distance This section looks at operators according to their average flight distance for allocation-relevant flights during the reporting year 2010 (see Figure 7). The range (shown in navy) is defined by the distance from the left to the right black line. It is calculated by subtracting the minimum distance (319km) from the maximum distance (9,103 km). The resulting difference is 8,784 km. This is roughly the great circle distance between Berlin and Bangkok. At first glance, the range is quite wide, but the position of the median (1,684, green) and the width of the box(difference between lower and upper quartile, light blue and red) which represents the middle 50 percent of data indicates distances between 816 (light blue) and 3,340 km (red). The distribution is not symmetrical, but skewed to the right - i.e. the majority of flights is within the typical short and mid-distance range. Range Median Lower Quartile Upper Quartile Datenreihen5 Datenreihen6 Datenreihen7 Datenreihen8 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 average flight distance [km] Figure 7: Box-Whisker-Plot showing the average distance of flights by all aircraft operators receiving free allocations for the reporting year 2010 Table 4 shows that 36 percent of operators operate in the short distance segment (average distance below 1,000 km). Assuming that the defining line between mid and long distance is 4,000 km, a proportion of 48% is below 4,000 km and 16 percent above 4,000 km. The definition of short mid and long distance seems to be critical for operators operating in all business models. However, since the number of these operators in the German section of the List of Administering Member States is small, their influence is negligible. 14 Table 4: Classification according to average flight distance per aircraft operator receiving free allocation Average Flight Distance Number of Operators Percentage < 1,000 km 46 36% 1,000-4,000 km 62 48% > 4,000 km 21 16% Total 129 100% 14 This applies to no more than three aircraft operators. The total average flight distance was calculated between 1,000 km and 4,000 km. Because of the classification of operators, no conclusions can be drawn on the proportion of short, mid and long distance flights. 14 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

2.2.4 Size Size can be determined by various indicators (e.g. size of fleet). As this report focuses on activity in relation to emissions trading, the number of flights subject to emissions trading will be used as a size indicator. This does not necessarily reflect the true size of the company because operators carrying out many daily flights in their country/region of origin, but operating just a small number of flights to Europe will thus be classified as small aircraft operators. The difference between the operator with the lowest (three flights) and the operator with the highest (624,787 flights) number of flights figures as range (navy) in Figure 8. As the range of flights per aircraft operator is 624,784, logarithmic scaling is required in Figure 8. The quartile distance (median 50 percent) lies between 101 (lower quartile, light blue) and 3,180 flights (upper quartile, red). Not only is the range very wide, but the majority of flight data covers a low number of flights. The logarithmic scaling does not sufficiently highlight that the distribution is skewed to the right, but it becomes clear that the median is in the left side of the box. It can be concluded that the majority of aircraft operators were responsible for only a small fraction of the flights by the operator with the maximum flights. Range Median Lower Quartile Upper Quartile Datenreihen5 Datenreihen6 Datenreihen7 Datenreihen8 1 10 100 1000 10000 100000 Number of flights per aircraft operator in the reporting year 2010 Figure 8: Box-Whisker-Plot showing the number of flights per aircraft operator receiving free allocation in 2010 (logarithmic scaling) When distinguishing between commercial and non-commercial operators receiving free allocation in the reporting year 2010, it turns out that the flights carried out by non-commercial operators make up no more than 1.2 percent. This is reflected in Table 5 where only 12 percent of the noncommercial aircraft operators carry out more than 500 flights per year. Conversely, all commercial operators must have carried out more than 243 flights per year because otherwise they would be exempt from emissions trading according to the regulations (less than 243 flights in three subsequent four-month periods). Assuming that flight activities were seasonally balanced, even operators carrying out up to 726 flights would not be subject to emissions trading. Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 15

Table 5: Commercial and non-commercial Operators, sorted according to Number of Flights carried out Type of Operator Size in Number of Flights Number of Operators Operator Type Percentage Percentage of Total commercial 500-1,000 Flights p.a. 3 5.5% 2.3% 1,000-5,000 Flights p.a. 25 45.5% 19.4% 5,000-10,000 Flights p.a. 11 20.0% 8.5% 10,000-100,000 Flights p.a. 14 25.5% 10.9% more than 100,000 Flights p.a. 2 3.6% 1.6% Total commercial 55 100,0% 42.6% non-commercial < 10 Flights p.a. 4 5.4% 3.1% 10-50 Flights p.a. 17 23.0% 13.2% 50-150 Flights p.a. 23 31.1% 17.8% 150-500 Flights p.a. 21 28.4% 16.3% 500-1,000 Flights p.a. 6 8.1% 4.7% 1,000-5,000 Flights p.a. 3 4.1% 2.3% Total non-commercial 74 100% 57.4% 3 ALLOCATION 3.1 BASIS OF ALLOCATION 3.1.1 Entitlement to the free allocation of allowances According to the Greenhouse Gas Emissions Act TEHG, Article 11 Section 1 and 3, all aircraft operators having carried out flights subject to emissions trading in 2010 had the right to apply for the allocation of free emission allowances for trading periods 2012 and 2013-2020. In order to apply, a one-off verified report on the transport volume in 2010 (tonne-kilometre report) had to be submitted together with the 2010 emissions report by 31/03/2011. According to TEHG, Article 11 Section 5, the DEHSt was required to check the tonne-kilometre data in the applications and transfer the applications to the European Commission by 30/06/2011, where an average benchmark was calculated. The numerator contained the average annual total of emissions from all flights by aircraft operators subject to emissions trading between 2004 and 2006 (historic emissions). From this estimated value were subtracted the mitigation target, auction volume and special reserve (2013-2020). The nominator for the average benchmark comprises the total transport volume of aircraft operators applying for an allocation for the reporting year 2010. The resulting benchmark is applied consistently throughout Europe and does not distort competition between operators because it is based on the transport volume achieved. 3.1.2 Allocation Benchmarks In its Decision 2011/638/EU, the European Commission published the benchmarks for the calculation of the free allocation of emission allowances for aircraft operators on 26/09/2011. They are set at approximately 0.68 emission allowances per 1,000 tonne-kilometres 15 for 2012 and approximately 0.64 emission allowances per 1,000 tonne-kilometres 16 for 2013-2020. The number of aviation allowances (each covering the emission of one tonne of carbon dioxide) issued to operators was based on the product of the benchmark and the transport volume (in tonnekilometres) in the baseline year. Compared to other allocation methods (such as allocation based on historic emissions), the benchmark-based allocation of free emission allowances, is more likely to create an incentive for fuel economy and thus climate protection in aviation. 15 0.000679695907431681 emission allowances per tkm (basis for calculation) 16 0.000642186914222035 emission allowances per tkm (basis for calculation) 16 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

The lower the emissions caused by the transport carried out by the operator, the higher the proportion of free allowances allocated, reducing the need to purchase allowances. The benchmark approach thus conforms to the environmental objective of rewarding efficient operators as they are put in a better position in comparison to inefficient operators and is therefore encouraging investment in emission reduction. The opportunity to realize emission reduction potential by encouraging investment in more efficient equipment or better use of capacities is increasedwith the variance in the efficiency of the aircraft or strategies used in the existing market. The benchmark approach varies in its implications for different business models. Non-commercial (especially business aviation) operators receive a relatively small allocation due to their low transport volume. Consequently, they must shoulder the higher proportion of external cost (high carbon dioxide emissions per passenger) of their business model. Conversely, commercial aircraft operators with their high transport volume (larger aircraft and often high use of capacities and lower carbon dioxide emissions per passenger) receive significantly more free allowances. In Part 5 of this report allocations and carbon dioxide emissions will be compared and analysed. Analysing existing convergence between allocation and emissions can be a first clue as to where emission reduction potential may be realised. At the beginning of emissions trading for aviation, no empirical evidence can be provided yet as to whether the incentives, including benchmark-based allocation, will be effective and initiate emission reduction measures. This will be the object of future evaluations. Furthermore, the establishment of an average benchmark ensures that the cap (the absolute top limit for emissions, set at 97 percent for 2012 and 95 percent of the average 2004-2006 emissions for 2013-2020) will be adhered to in the allocation process and all aircraft operators will receive the same number of emission allowances per tonne-kilometre unit. 3.1.3 Allocation Procedure Member States were given three months for the formal allocation of free emission allowances to individual aircraft operators. The list containing the names of all aircraft operators and their respective allocations were published on the DEHSt website (www.dehst.de) on 23/12/2011. The list of free allocations issued to aircraft operators administered by Germany is also found in Appendix 7.1. An overview of the relevant allocation decisions by other EU Member States is found on the website of the European Commission http://ec.europa.eu/clima/policies/transport/aviation/allowances/links_en.htm. According to TEHG Article 14 Section 3 Sentence 1, the DEHSt as the competent authority will issue the total volume of aviation emission allowances for a trading period in equal annual instalments to be issued by the 28/02/ of the relevant year. Figure 9: Timeline - Dates relating to emissions trading in aviation Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 17

In 2012, 85 percent of aviation emission allowances will be issued free of charge. The remaining 15 percent will be auctioned. Between 2013 and 2020, only 82 percent of aviation emission allowances will be allocated free of charge because every year, three percent of the total quantity will be added to the special reserve for new entrants and fast-growing aircraft operators. The special reserve will be allocated according to a different set of application and allocation rules (see TEHG Articles 12 and 13). Between 2013 and 2020 the remaining 15 percent will be auctioned as well. 3.2 ANALYSIS 3.2.1 Type of Transport Volume To complement Figure 6, Figure 10 shows on what basis the transport volume was calculated. While with non-commercial operators, 96 percent are passenger transport (including luggage), commercial operators have a transport volume consisting of 66 percent passenger transport (including luggage) and cargo/mail. Commercial operators transporting passengers (including luggage) only are almost as rare (10 percent) as commercial operators transporting cargo/mail only (9 percent). Please note that the category Passengers (incl. luggage) and cargo/mail does not necessarily mean that these are transported in the same aircraft, but rather denotes the fact that passengers and their luggage as well as cargo/mail have been transported in the reporting year 2010. commercial operator non-commercial operator 3 4% 10 18% 9 16% 36 66% 71 96% Passengers (incl. luggage) Cargo/mail Passengers (incl. luggage) and cargo/mail Figure 10: Payload transported by commercial and non-commercial operators receiving free allocation 3.2.2 Allocation to operators, sorted into different categories Figure 11 shows the allocation volumes of emission allowances per aircraft operator across all categories (commercial and non-commercial). Again, the differences are significant, ranging from a minimum of nine to a maximum of 107,521,784 aviation emission allowances for the trading period 2012 and 2013-2012. The range is a figure near the highest allocation. Note that the median, however, lies at 743 allowances and the median 50 percent are between 172 (light blue) and 1,138,851 (red). For a more differentiated representation, non-commercial (lower average allocation in absolute figures) and commercial operators (higher average allocation in absolute figures) will be shown separately. The total allocation volume for non-commercial operators is 0.014 percent only. 18 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

Range Median Lower quartile Upper quartile Datenreihen5 Datenreihen6 Datenreihen7 Datenreihen8 1 10 100 1000 10000 100000 1000000 10000000 100000000 1E+09 Allocation 2012-2020 [Aviation emission allowances] Figure 11: Box-Whisker-Plot showing allocation volumes per aircraft operator for the 2012-2020 period (logarithmic scaling) Table 6: Total Allocation 2012-2020 for commercial and non-commercial Aircraft Operators Type of Operator Number of Operators Allocation 2012 [EAs/a] Allocation 2013-2020 [EAs/a] Allocation 2012-2020 Percentage Allocation 2012-2020 commercial 55 42,830,532 40,466,928 366,565,956 99.986% non-commercial 74 6,118 5,775 52,318 0.014% Total 129 42,836,650 40,472,703 366,618,274 100% 3.2.3 Allocation for non-commercial aircraft operators Figure 12 shows a histogram of the 2012-2020 allocations. The category with allocations between 1 and 200 aviation emission allowances comprises 36 operators. With 48.7 percent, they represent the largest percentage of non-commercial aircraft operators. Combined with the 200-400 aviation emission allowances category, they make up 78.4 percent. Thus, three quarters of all non-commercial aircraft operators receive 1 to 400 aviation emission allowances, which is only 19 percent of all allocations to non-commercial operators. Figure 11 shows that the two largest operators receive 55 percent of the allocation, the largest of which does not operate in a business aviation segment. Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 19

Frequency 1 50 45 100% 90% 40 80% 35 70% 30 60% 25 50% 20 40% 15 30% 10 5 Frequency Proportion of non-commercial operators % Non-commercial allocation % 20% 10% 0 200 600 1,000 1,400 1,800 2,200 2,600 3,000 3,400 3,800 4,200 4,600 5,000 5,400 5,800 6,200 6,600 7,000 7,400 7,800 8,200 8,600 9,000 9,400 9,800 10,200 10,600 11,000 11,400 11,800 12,200 12,600 13,000 13,400 13,800 14,200 14,600 15,000 15,400 15,800 16,200 16,600 17,000 17,400 17,800 18,200 18,600 19,000 19,400 19,800 und größer 0% Allocation 2012-2020 [Aviation emission allowances] Figure 12: Distribution frequency of allocation volumes for non-commercial operators receiving free allocation 3.2.4 Allocation for commercial aircraft operators Figure 13 shows a histogram of the 2012-2020 allocations. When aggregating categories up to 1,000,000 und 1,000,000 to 2,000,000 aviation emission allowances, the resulting proportion is 50.9 percent. More than half of commercial operators receive between one and 2,000,000 allowances. This is no more than 6.5 percent of the total allocation of allowances to commercial aircraft operators. Frequency 25 100% 90% 20 80% 70% 15 60% 50% 10 40% 30% 5 Frequency Proportion of commercial operators % Commercial allocation % 20% 10% 0 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103 105 107 109 3 5 7 9 0% Allocation 2012-2020 [Aviation emission allowances] Figure 13: Distribution frequency of allocation volumes for commercial operators receiving free allocation 20 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

3.2.5 Shares of the allocation per aircraft operator receiving free allocation Figure 14 provides the cumulative frequency distribution of the entire allocation between 2012-2020. In contrast to Chapters 3.2.3 and 3.2.4, no distinction is made between commercial and non-commercial operators. This permitted an evaluation of what number of aircraft operators would receive what proportion of the total 2012-2020 allocation. For a given allocation value on the horizontal axis the relative share of the total allocation can be observed. Proportion of aircraft operators receiving no more than x emission allowances 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 52 % 48 % 0% 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 100,000,000 110,000,000 Allocation 2012-2020 [Aviation emission allowances] Figure 14: Cumulative frequency distribution of the 2012-2020 allocation Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 21

3.2.6 Geographical distribution of the allocation volume Figure 15 shows allocation volumes sorted according the aircraft operators country of origin. The next highest volume after German operators goes to operators from the United States. However, this does not allow any conclusions as to international traffic concentration, as all flights subject to emissions trading carried out by an operator will be assigned to the operator s country of origin, irrespective of their destination. 2012-2020 Allocation (in Million Aviation Emission Allowances) 180 160 140 120 100 80 60 40 20 0.0000% 0.0001% 0.0001% 0.0002% 0.0002% 0.0192% 0.0335% 0.0515% 0.1224% 0.1270% 0.1535% 0.1551% 0.3077% 0.4170% 3.0170% 4.3721% 4.7226% 5.9520% 6.6295% 21.6540% 52.2654% 60.0000% 50.0000% 40.0000% 30.0000% 20.0000% 10.0000% 0 0.0000% Figure 15: Absolute and relative share of the total 2012-2020 allocation, sorted according to the aircraft operators country of origin 3.2.7 Transport volume per flight Figure16 shows the differences in transport performance (volume of transport carried out and thus allocation-relevant) between commerical and non-commercial aircraft operators. The transport performance of commercial operators per flight is higher by a factor of 133 (in relation to the respective median, see also Figure 15). The result is hardly surprising in view of the diverging business models of business aviation and scheduled aviation (these are the main representatives of each group) as far as transport performance per flight is concerned. It is self-evident that air taxi service providers operate on demand on a decentralised basis. The type of aircraft used and the task in hand restrict transport performance. At the other end of the spectrum, traditional airlines, charter and low-cost airline services aim for an optimum use of capacity and high transport performance. Payloads are highest in dedicated cargo aircraft, which is why cargo companies have been separately marked in Figure 16. The diagram shows a progression from low to high transport performance and the operator categories non-commercial, commercial and dedicated cargo aircraft operators. 22 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

Average transport performance per flight [tkm] 500000 50000 5000 Non-commercial operators Commercial Operators Cargo operators Median non-commercial operators Median commercial operators Factor 133 500 50 0 20 40 60 80 100 120 Ranking of aircraft operators with increasing average transport performance Figure 16: Average transport performance of non-commercial and commercial aircraft operators receiving free allocation (logarithmic scaling) 4 EMISSIONS 4.1 LEGAL BASIS 4.1.1 Obligations for Reporting and Surrendering of Allowances TEHG Article 5 commits aircraft operators to determine their emissions generated during a calendar year and to report them to the DEHSt as the competent authority by 31/03/ of the subsequent year (reporting obligation). The data in the emissions report must have been verified by a verifying body. Following the submission of the report, according to TEHG Article 7 Section 1 Sentence 1, operators must surrender the number of emission allowances to cover emissions caused in the previous year by 30/04 of every year, starting from 2013 (obligation to surrender allowances). 4.1.2 Possible Sanctions If an operator does not comply with the reporting and surrendering obligations, comprehensive sanctions ensue. According to TEHG Article 29 Sentence 1, the competent authority has the right to block an account in the Emissions Trading Registry in order to enforce the reporting obligation. In order to enforce the obligation to surrender emission allowances, TEHG Article 30 Section 1 states that the DEHSt has the right to impose a fee of 100 Euros for each tonne of carbon dioxide that has been emitted, but not covered by an emission allowance. The fee does not exempt the operator from the obligation to surrender the allowances required. For that purpose, the DEHSt has the right to determine the volume of emissions generated on estimates. TEHG Article 32 lists a comprehensive catalogue of offenses. Offenses, such as incorrect specifications in violation of the reporting obligations can be sanctioned with a fine of up to 500,000 Euros (TEHG Article 32). As a last resort, as specified in TEHG Article 31, operations of the offending operator may be suspended Europe-wide. Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 23

4.2 ANALYSIS 4.2.1 Classification according to type of operator and size of company Table 7 breaks down the 129 operators that were allocated free emission allowances by 23/12/2011 into commercial and non-commercial operators and different size categories (in relation to their emissions). Table 7: Type of Operator Commercial Emissions 2007-2008 and 2010 Operator Status and Size Mass- Emissions 10,000 to 50,000 50,000 to 500,000 Number of Operators Emissions 2007 [t of CO 2 ] (EURO- CONTROL Estimate) Emissions 2008 [t of CO 2 ] (EURO- CONTROL Estimate) Emissions 2010 [t CO 2 /a] Percentage of Emissions in 2010 10 584469 314579 298,183 0.58% 25 3378093 3630019 5,234,918 10.11% > 500,000 20 40224842 42058783 46,153,223 89.13% Subtotal 55 44187404 46003381 51.686.324 99,82% Noncommercial < 1,000 57 21428 22444 25,437 0.05% 1,000 to 10,000 10,000 to 50,000 15 31374 34478 37,201 0.07% 2 24403 22984 32,795 0.06% Subtotal 74 77205 79906 95,433 0.18% Total 129 44264609 46083287 51,781,757 100% It emerges that apart from two exceptions, emissions of non-commercial aircraft operators remain below 10,000 tonnes of carbondioxide p.a. Average emissions of commercial operators, by contrast, are significantly higher. The 20 commercial aircraft operators in the size category above 500,000 tonnes of carbon dioxide p.a. are responsible for approximately 90 percent (2010 89.13 percent) of all emissions across the sector. 4.2.2 Reported Emissions and Emissions Budget When looking at the cap, we must allow for the fact that it is based on historic aviation emissions, i.e. the median of 2004-2006. Compared to reductions mentioned in the Emissions Directive (total volume of 97 percent (2012) and 95 percent (2013-2020), the objective becomes increasingly ambitious with the expansion of the aviation sector. The annual growth rate of world aviation between 1999 and 2009 was 3.7 percent 17. At an estimated annual growth of emissions by two percent (between 2004 and 2012), an aircraft operator with average efficiency will thus receive no more than 70 percent of the required allowances for free, and just under 65 percent in2013. This explains why emissions of aircraft operators have already been exceeding the total cap for 2012 and 2013-2020 for several years (see Figure 17). It seems therefore likely that the sector will be a buyer on the emission allowances market in the coming years. 17 International Civil Aviation Organization (ICAO) Environment Report 2010, p. 19 24 Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020

Tonnes of carbon dioxide 60,000,000 50,000,000 Emissions Allocation volume 2012 Allocation volume 2013-2020 40,000,000 30,000,000 20,000,000 10,000,000 0 2007* 2008* 2009** 2010 Figure 17: Allocation volume and reported emissions (*non-verified estimate by EUROCONTROL, **no data available, ***verified emissions reports) 4.2.3 Efficiency of aircraft operators, based on transport performance Emissions in relation to transport performance (tonne-kilometres) can be used to measure the efficiency of aircraft operators. The lower the emissions, the more efficient the operator, which will be reflected in the issuance of a higher number of free emission allowances for that operator. Figure 18 shows a large discrepancy between the 129 aircraft operators who applied for free allocations of emission allowances. Emissions range from 0.0004 to 0.07 tonnes of carbon dioxide per tonne-kilometre, differing from each other by a factor of 14. The arithmetic mean is 0.01 tonnes of carbon dioxide per tonne-kilometre. Emissions per tonne-kilometre (t/tkm) 0,080 0,070 0,060 0,050 Emissions per tonne-kilometre Arithmetic mean of emission values Weighted (transport performance) arithmetic mean of individual emission values 0,040 0,030 0,020 0,010 0,000 0 20 40 60 80 100 120 140 Rank ordering of aviation operators from lowest to highest emissions per tonne-kilometre Figure 18: Emissions per tonne-kilometre all operators Allocation of Emission Allowances to Aircraft Operators for Trading Periods 2012 and 2013-2020 25