The Commission plans to bring forward legislative proposals by the end of 2006. It is clear that it is all but impossible to deliver the UK's aim of bringing aviation into the ETS by 2008, the start of the second phase of trading. But it suggests that aviation could be included before the start of the third phase in 2013, provided the European institutions approve the legislation quickly.
Environment Commissioner Stavros Dimas told journalists that "we are three to four years away from the inclusion of aviation in the ETS." Previously, he has downplayed the prospect for extending the ETS to aviation before 2013.
One key question is the impact on the wider carbon market of introducing a potentially significant net buyer of allowances mid-way through a trading period. Several industries have already expressed concerns over the impact on the carbon price.
The Commission proposes that airlines be responsible for emissions under the ETS, rather than alternatives such as airports and fuel suppliers. It wants to include the full climate impact of aviation "to the extent possible". This could be achieved by applying a multiplier to aircraft CO2 emissions, or by including only CO2 emissions in the ETS and using "flanking measures" such as differentiated airport charges for NOxemissions.
The Commission's preferred option is to cover all flights leaving EU airports. The alternative of covering only flights between EU destinations would capture only 40% of the sector's emissions. The Commission argues that this approach is legally acceptable - if politically controversial - and should not entail competitive distortions between EU and overseas carriers.
The Commission stops short of recommending a centralised allocation methodology, but says that a "harmonised" approach is needed to avoid competitive distortions in the EU air transport market. Auctioning is understood to be a serious contender as free allocation to state-owned airlines could fall foul of state aid rules.
However, talks on the level of the overall cap - and aviation's impact on the carbon price - have not yet started. They are not likely to begin in full until the legislative proposal is on the table.
Critical design issues and potential impacts on competitiveness will be addressed by a working group under the European climate change programme. This will report by the end of April and feed into the Commission's wider review of the ETS due by June 2006.
The proposals face a rough ride from the US administration and the aviation industry.
Giovanni Bisignani, director general of the International Air Transport Association, claimed that "a European solution is no solution at all" - and will "distract" from international action on aviation under the International Civil Aviation Organisation. So far, progress at ICAO has been very slow (ENDS Report 357, p 41 ).
"There are no announced plans for inclusion of other forms of transport - road and rail - or sectors like households in the ETS," complained Mr Bisignani. "What is the policy rationale for singling out air transport with its relatively small contribution to total emissions, particularly as we are in the process of developing a global solution through ICAO?"
British Airways backs the move towards emissions trading - but argues that only intra-EU flights should be brought under the ETS. "We do not want the EU scheme sidelined by international disputes or for EU airlines' competitiveness to be jeopardised," said Andrew Sentance, the company's chief economist.
However, much of BA's business is in the long-haul market. Low-cost competitors such as Easyjet and Ryanair are more reliant on intra-EU flights - and are understood to be backing the Commission's position.
The Commission downplays the economic impact of the ETS on the aviation sector. Its modelling suggests that the price of a return ticket would increase by just €0.2 to €9 for allowance prices in the range €10-30/tCO2.
Likewise, the Commission says, "aviation demand would grow at a slightly slower rate than otherwise". It is assuming that air travel will increase by 4% per year, rising to perhaps 6.2% for freight. Modelling suggests that carbon prices €10-30/tCO2 would shave just 0.1-2.1% off predicted growth of 17% between 2008-12.