Isra-Mart srl: Taxing the air we breathe: Is the US Right To Seek Airline Exemption From European Carbon Law?

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Business Green reports that US Airlines, American Airlines, Continental and United, along with their trade association, the Air Transport Association (ATA), will file a legal challenge to a European law requiring all airlines flying into and out of the EU to pay a charge per tonne of CO2 emitted.

The US government opposes the law. Reuters quotes an Administration official as saying, “We clearly stated our strong objections to the EU plans on both legal and policy grounds,” during talks last week in Oslo. The news agency also marked this as the strongest public criticism of the EU carbon scheme to date by President Barack Obama’s administration, by taking the view that US airlines should be exempt from the new European law.

Europe’s ruling falls under the EU Emissions Trading Scheme (ETS), a cap and trade system which will require all airlines to buy permits for emitting CO2 over and above a certain limit. European Union president, Jose Manuel Barroso, has said the EU does not intend to withdraw or amend the directive, calling it an established EU law. As such, a potential stand-off is poised to take place over the law which goes into effect on January 1st 2012. But is it reasonable for America’s airlines to be bound to comply?

I imagine the basis of the objection can be simply stated, since its likely the same reason cited as to why the US has failed to put a price on carbon on its own. The law will add to the cost of doing business and damage America’s already shaky airline industry. And beyond that, since it’s a unilateral European emissions law, why should it be imposed by default on an American industry?

Well, for starters, if you want to do business in a region and gain access to the huge number of customers there, then compliance with the law seems to be a prerequisite. And this law is not like a typical trade tariff which favors domestic businesses over foreign ones. Europe’s carriers will have to observe the law – and any costs the law incurs – so logically, anyone else wanting to do business in the EU will have to do the same.

Also, lets consider the existing Open Skies Agreement between the US and Europe which went into effect in 2008. Although it’s introduction was meant to liberalize the transatlantic market, it actually favors US carriers. Prior to 2008, routes used to be assigned to carriers, but Open Skies allows transatlantic carriers to operate to-and-from any airport, opening up routes to greater competition. But even so, as Forbes reported at the time, US carriers were given an advantage since full deregulation did not occur. US airlines were permitted to operate on internal-European (domestic) routes, whereas Europe’s airlines were not offered a similar privilege in return – only US carriers can service US domestic routes. Furthermore, a US law disallowing foreign ownership of American based airlines prevailed, giving US carriers another level of industry protection from foreign competition.

As this back-story suggests, there is likely a somewhat fractious relationship between the US and Europe with regard to the airline industry, so it’s easy to see why Europe is resolute over this matter; America’s airlines are protected by American law, and have access to a bigger market already by protecting its own domestic routes. So why would Europe let them off the hook by exempting them from EU ETS rules?

But aside from all the legal considerations, it would be nice (though probably naive) to think the US and it’s airlines would embrace the ruling. Cap and trade offers a market place in which profit can be made. It provides a market incentive for efficient airlines to operate more efficient aircraft, thereby avoiding the need to buy additional permits, and possibly giving industry leaders an opportunity to sell them at a profit. Why not save the money on the law suits, and step up and run competitive, efficient airlines that in any event, will enhance future success? After all, it seems a stretch to suggest Europe’s new law is unfair on US carriers and it certainly doesn’t single them out.