Aviation's soaring contribution to global warming has emerged as perhaps the most serious obstacle to the sector's ambitions for continued rapid growth.
The industry has pointed to emissions trading as the way of squaring the circle. However, the International Civil Aviation Organization has struggled to develop plans to bring international flights under the Kyoto Protocol, largely because it is dominated by US airlines. Moreover, many observers believe the industry is overly optimistic that it will be able to gain access to a vast pool of cheap emission credits from other sectors.
In light of the slow progress at ICAO, EU Environment Ministers have asked the European Commission to develop proposals to reduce greenhouse gas emissions from aviation in the EU.
Until now, the front runner has been a system of in-flight emission charges covering the whole European airspace. A report for the Commission by CE Delft suggests that these charges could raise €1.1-8.6 billion per year, reducing CO2 and NOx emissions by up to 14% below business as usual.
However, pressure is growing for aviation to be included in the second phase of the EU emissions trading scheme, which starts in 2008. BAA's proposals, drawn up in consultation with stakeholders and an independent steering group, are the most comprehensive yet to have been put on the table. They are informed by an analysis by consultants Oxera, part-funded by the Department for Transport.
Bringing aviation into any trading scheme poses several serious difficulties. First, emissions from international flights are not allocated to any countries under the Kyoto Protocol. Second, the global warming impact of aircraft is caused by emissions of CO2, NOx and water vapour - but the latter two pollutants are not regulated under the Protocol, and their effects are still subject to considerable uncertainty. Indeed, actions to reduce emissions of one pollutant tend to increase others - so partial coverage in a trading scheme could create perverse effects.
BAA argues that CO2 and NOx emissions from intra-EU flights should be partially integrated into the EU scheme from 2008. The impact of contrails and cirrus cloud formation could be as great again. However, BAA says another decade of research is needed to quantify this, and should be funded by a 'moderate' EU emissions charge.
Under the company's proposal, airlines would be set legally binding emission reduction targets for CO2 and NOx. They could meet these in-house or by buying emission allowances from the EU emissions trading scheme. This would also give them indirect access to the Kyoto Protocol's 'flexible mechanisms' through the proposed 'linking' Directive.
Crucially, airlines would not be able to sell allowances into the EU carbon market, using a 'gateway' mechanism similar to that in the UK emissions trading scheme. This would limit the extent to which aviation's non-CO2 impacts become entangled with the EU's commitments under the Kyoto Protocol.
Oxera's analysis suggests that a pure trading system with grandfathered allowances would be much cheaper for the industry - by a factor of as much as 40 - than applying a tax to all or part of the climate damage costs. The full impact depends on the how strict the target is, the price of EU allowances and whether the allocation process includes an element of auctioning.
Importantly for other industry sectors, the inclusion of aviation under any meaningful emissions cap would bring a major new source of demand into the EU carbon market - pushing up prices substantially.
In the longer term, BAA says that aviation should be fully included in an open international emissions trading scheme. Initially, it says that this is likely to begin with CO2 alone on 'pragmatic' grounds.
Chief executive Mike Clasper denied that the company is 'ducking the debate' on demand management. 'We recognise that the consequence of a regime of smart, well-targeted instruments will be higher costs and reduced demand,' he said. 'But we need the smart instruments first, not the blunderbuss of crude taxes designed to make travel unaffordable.'
Ms Wallström gave a cautious welcome to the proposals, and said the idea of including aviation will be considered next year in the first review of the trading scheme. This is a significant shift from her sceptical line just a few months ago. However, she stressed several pre-conditions - most notably that aviation's full climate impact, about 2-4 times higher than for CO2 alone, must be taken into account.
'Discussions about emissions trading should not further delay action into the future,' Ms Wallström said. 'In fact, if taxes or en route charging are in place, it may be easier for aviation to take part at some later point in time in emissions trading as a way of being released from the taxes or en route charge.'
For BAA, Mr Clasper pointedly said that 'we cannot afford to be seduced by those in our industry who say there is no need for action' on climate change. Indeed, a Commission official told ENDS that 'BAA's engagement is very impressive - but we'd take the idea of trading more seriously if the companies which actually own and fly airplanes showed as much enthusiasm.'
Andrew Sentance, chief economist and head of environmental affairs at British Airways, supported the idea of bringing intra-EU flights into the EU trading scheme 'as soon as possible.' However, he argued that action should be on the basis of CO2 emissions only, and stressed the need for more research into the impact of other emissions.