Starting Jan. 1, the EU will require all international air carriers flying in and out of the airports of member states to participate in its carbon trading regime governing greenhouse gas emissions. Last week, the European Court of Justice in Luxembourg rejected a petition by a group of U.S. airlines that argued the plan to impose the scheme on non-European airlines contravened international law and impinged on the sovereignty of other nations.
What's at Stake
The move, which is expected to raise airfare and introduce a new level of economic risk for airlines due to fluctuating carbon prices, comes at a time when the airline industry is struggling to address higher fuel costs and a decreased demand for air travel. The industry forecasts significantly lower earnings in 2012 and possible losses of up to $8 billion if the eurozone's economic woes erupt into a full-blown banking crisis. Analysts at Bloomberg Government say it could cost U.S. airlines alone anywhere from $2 billion to $4 billion through 2020 to comply with the EU scheme.
More than twenty governments, including the United States, China, India, and Russia, have issued protests, and in some cases threatened retaliation. The International Air Transport Association and some analysts warn the aviation issue could erupt into a trade war. The U.S. House of Representatives has passed a bill forbidding U.S. airlines from participating in the EU's carbon market. Australian trade expert Alan Oxley said at a special seminar during December's UN climate conference that the potential demise of the Kyoto Protocol would lead to more attempts like the EU's plan to erect trade barriers in order to combat climate change.
Whether the EU's plan constitutes a tax that violates international trade and aviation law is hotly contested, as is the financial impact on the airline industry. "This is a trade barrier in the name of environmental protection," says an editorial by China's Xinhua news agency. Market analysis compiled by Fitch Ratings notes that "retaliation may be largely rhetorical in the early stages, but an absence of progress next year may trigger protectionist responses, especially from emerging market governments."
Environmentalists, meanwhile, argue that non-EU airlines and their respective governments are blowing the issue out of proportion. "The financial impact will amount to, at most, some $16 for a transatlantic flight," writes environmental lawyer Vera Pardee, who notes that by participating in the carbon market some airlines might even make money. While the EU will issue 85 percent of emissions allowance free, airlines could realize $27 billion in additional revenue over the next decade if they choose to charge customers anyway, according to the European Commission.
The EU has said it would exempt airlines complying with equivalent emissions-reduction policies based in their own countries. But opponents argue the EU mandate disrupts a plan by the International Civil Aviation Organization, the industry's governing body, to create a market-based emissions regime for international air travel, which could be initiated as early as 2013. Some experts say there is still time to broker a deal for governing emissions under the ICAO.
Jeff Gazzard, who works for a London-based environmental group, notes that the EU's market is an adequate global model for controlling aviation emissions and that all the world's airlines have already begun to take measures to comply (Economist), including applying for free allowances.
Read the rest at CFR.org.