A Leas-Chathaoirligh and Deputies and Senators, thank you for the invitation to appear before the joint committee. We welcome the opportunity to contribute to the committee's deliberations on two matters of significant importance for Irish and European climate policy. Phillip Lee LLP is a leading Irish law firm with offices in Dublin, Cork, London and New York and our international climate projects practice advises clients across the full spectrum of emissions trading regulation and carbon markets. Our team works at the intersection of EU and international climate law to advise governments, airlines, climate charities, project developers and financial institutions. With four partners and five senior supporting lawyers, ours is the largest private practice team of its kind globally.
Ireland assumed the Presidency of the Council of the European Union on 1 July at a significant inflection point for international climate policy. The European Commission is mandated to propose amendments to the EU emissions trading system directive, including as applied to aviation and the integration of carbon dioxide removals, with the draft proposal due on 17 July. Ireland will chair negotiations on this file and the decisions taken will shape global aviation emissions governance, and the investment thesis for carbon dioxide removal activities, for a generation.
Aviation was first brought within the scope of the ETS through Directive 2008/101/EC which originally envisaged coverage of all flights arriving at or departing from EU airports, including those operated by carriers from third countries. Coverage commenced from 2012, with airlines legally required to surrender emissions allowances to cover carbon dioxide generated by covered flights. This year is the first year European airlines will carry the full cost burden of the ETS for flights within the European Economic Area, EEA, as free allocation of emissions allowances for intra-EEA aviation has been completely phased out. The extraterritorial application of the ETS to flights beyond the EEA provoked immediate and sustained international opposition from the United States, China, India and others, including explicit and credible threats of trade retaliation. In response, the EU adopted a "stop the clock" decision in 2012, which suspended the application of the ETS to extra-EEA flights. This suspension was subsequently extended several times through to the end of this year to allow for the development of a global mechanism and the current review is the culmination of that process.
In 2016, the International Civil Aviation Organisation, ICAO, adopted the carbon offsetting and reduction scheme for international aviation, CORSIA, to address any annual increase in international aviation carbon emissions above a baseline set at 85% of 2019 emissions. CORSIA operates in three phases, namely the pilot phase that ran from 2021 to 2023, the first phase from 2024 to 2026, in which participation by states is voluntary, and a second mandatory phase that will commence in January. We are in the final year of the voluntary first phase. The deadline for operators to have purchased and cancelled CORSIA eligible emissions units, CEEUs, equal to their final obligations for the first phase is 31 January 2028.
There is a linkage between CEEUs and Article 6 of the Paris Agreement that goes directly to availability of supply. Article 6 of the Paris Agreement governs the use of internationally transferred mitigation outcomes, ITMOs. An ITMO is a formally authorised carbon credit that represents a tonne of CO2 reduced or removed by an underlying project activity. Once authorised, the country that hosts the project is required to apply corresponding adjustments to the emissions balance within its national greenhouse gas inventory. This is to prevent the double counting of emission reductions or removals between the host country and whoever uses the ITMO. Considering both past experience and the current geopolitical moment, developing countries are acutely aware that affordable climate finance is in extremely short supply. This is why many such countries have placed great emphasis on ITMO-related revenue generation through the Article 6 mechanism within their most recent nationally determined contributions, NDCs, submitted to the UNFCCC's secretariat at or about last year’s UN Climate Change Conference, COP, in Belém. However, the detailed rules for Article 6, at UNFCCC level, were finalised at COP29 in Baku less than two years ago. As a result, most countries are still finalising domestic implementation of those rules and are increasingly aware of CORSIA as a critical demand node for their ITMOs. Derailing the unconditional application of CORSIA on international routes by the EU at this time would have the effect of derailing the ITMO export-related revenue expectations of many developing economies.
There are other risks associated with unilateral EU action on this matter. As noted in our written submission, the threats of trade retaliation that led to the stop-the-clock decision have not dissipated. In the current geopolitical climate, those threats are considerably more severe. Industry opposition is significant. The International Air Transport Association has publicly stated the opposition of its airline members to any extension of the emissions trading system, ETS, to international routes on the basis that it would distort competition between EU and non-EU carriers. Jet fuel prices and other increased costs are undoubtedly contributing to this sentiment. Over recent weeks, Airlines for Europe, the president of the ICAO Council and the ICAO secretary general, have written to President von der Leyen warning that extending the ETS to international routes would undermine CORSIA and impose duplicative carbon charges on the same emissions.
CORSIA has the potential to function well if all contracting states comply. The EU should use its diplomatic influence to apply pressure on key contracting states in order to ensure that the scheme is transposed into law and imposed on all airlines on and from the commencement of the mandatory phase next year. A failed CORSIA means a failed attempt to cap emissions. A failed attempt to cap emissions, eradicates hope for net zero in aviation.
The scientific case for carbon dioxide removal, CDR, is set out comprehensively in the European Scientific Advisory Board on Climate Change's February 2025 report Scaling up carbon dioxide removals - Recommendations for navigating opportunities and risks in the EU. The advisory board is the independent scientific advisory body established under the European Climate Law of 2021, mandated to serve as a point of reference for the EU on scientific knowledge relating to climate change. The advisory board has concluded that the EU must rapidly accelerate CDR deployment alongside deep emissions cuts if it is to achieve its legally binding climate neutrality obligations. Removals are already recognised in Ireland's climate Act and in the EU’s most recent nationally determined contribution.
The EU's carbon removals and carbon farming, CRCF, regulation is the first legislative framework of its kind. It has been established to certify carbon removals, including in respect of engineered and nature-based projects. In February, the European Commission adopted the first set of methodologies for permanent carbon removals through delegated acts, covering bioenergy, carbon capture and storage, BECCS, direct air carbon capture and storage, DACCS, and biochar. The Commission is expected to adopt certification methodologies for carbon farming activities, including agroforestry and peatland restoration, this summer. At present, however, there are no clear demand signals for CRCF-certified removals in EU climate legislation.
The integration of certified permanent removals into the ETS was expressly referred to in the European Climate Law, which, as recently amended, sets a binding 2040 target of a 90% reduction in net greenhouse gas emissions and explicitly foresees domestic permanent removals under the ETS contributing to that target. The advisory board has recommended a progressive integration of permanent removals into the ETS, subject to strict conditions to prevent mitigation deterrence and address environmental risks.
The economics of CDR integration into the ETS depend critically on the amendments to the linear reduction factor, LRF, that are due as part of a 17 July review. A reduced LRF would suppress ETS allowance prices, posing economic challenges to CDR projects. If the ETS price falls below the cost of delivering permanent removals, a private investment case for these technologies will become challenging.
Carbon contracts for difference, CCDs, constitute a mechanism by means of which governments guarantee a strike price to CDR project developers. The lower the ETS price, the greater the difference between the strike price and the market price, and the greater the resulting cost to EU taxpayers. These contracts are similar in structure to the contracts for difference that have been successfully deployed across the EU to support the roll out of renewable energy.
Outside the ETS, Ireland has a significant and immediate opportunity. The CRCF creates the possibility for demand signals for non-permanent CDR pathways, including nature-based solutions such as carbon farming. Ireland can take a leadership role in creating such demand drivers domestically, thereby assisting with its obligations under the effort sharing regulation and the land use, land use change and forestry, LULUCF, regulation. Acting now would help Ireland to meet its climate targets, avoid fines and create carbon farming jobs.
I again thank the Leas-Chathaoirleach. I am happy to take any questions from members.
