Isra-Mart srl: Airline emissions trading will spark trade wars, industry warns EU

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Airlines have threatened the EU that "illegal" plans to bring the sector into its $120bn emissions trading scheme (EU ETS) will face a succession of challenges in the courts and could start a trade war with the US, China and Russia.

The annual general meeting of the International Air Transport Association (IATA) in Singapore this week saw industry representatives reiterate concerns over the EU's plans to set an annual emissions cap for airlines from January next year, pulling them into the bloc's cap-and-trade scheme.

Under the proposals, carriers must purchase additional carbon credits if their emissions output exceeds their official cap. Advocates of the scheme claim that it will provide airlines with a financial incentive to curb emissions by improving the efficiency of their operations and investing in cleaner aircraft.

The move is an attempt to get to grips with an industry that currently accounts for around two per cent of global emissions, but without action is likely to increase its share significantly as other sectors decarbonise.

However, the proposals remain immensely unpopular in the aviation industry, which has long favoured a global rather than regional solution to rising greenhouse gas emission levels.

IATA said this week that the EU plan will cost the industry €1.1bn a year and lead to average fare increases of €40 a ticket, hitting an already faltering industry hard. The trade body also cut its 2011 worldwide industry profit forecast today by 54 per cent to $4bn, down from an earlier forecast of $8.6bn.

Addressing the conference, British Airways chief Willie Walsh echoed airlines' fears that charging all carriers for flights in and out of the EU as planned could result in tit-for-tat legislation or trade barriers springing up across the world.

"It is clear that the countries are going to retaliate, whether in the form of imposing additional taxes on European airlines or restricting access to markets," he said, adding that initially integrating only European and domestic flights into the ETS would present an effective compromise.

"It is unacceptable that airlines face the prospect of retaliation because of the actions of the EU," he said. "Plan B for me would be to restrict the scheme to intra-Europe."

The US and China have argued that the plans discriminate against carriers furthest away from Europe, and are taking the matter to the courts.

American carriers will put their case on 5 July at the European Court of Justice in Luxembourg, and Wei Zhenzhong, secretary general of the China Air Transport Association (CATA), told news agency Reuters today that Air China was preparing to launch a separate legal challenge.

CATA, which includes the country's three biggest airlines, said that it would give the legal action its full support as moving its carriers into the EU ETS would cost Chinese airlines ¥800m ($123m) in the first year, and over three times that by 2020.

Speaking in Singapore, Chai Haibo, vice president of CATA, called the idea "unreasonable and illegal", and said "our group totally opposes it".

The European Commission has said that exemptions will be granted if governments take "equivalent measures" to tackle aviation emissions, but has yet to outline what kind of measures it considers acceptable.

However, Wei told Reuters that applying for an exemption was not a solution, and called for the EU to reopen negotiations. Failure to agree a way forward could lead to a trade war, he said.

European airlines wrote to the EU last month warning of a "trade conflict with the world's most powerful economic and political players", adding that the ETS measures are widely seen as an additional tax.

Giovanni Bisignani, director general of IATA, called on the EU to listen to a "growing chorus of countries strongly opposing an illegal extraterritorial scheme", but climate commissioner Connie Hedegaard said on Sunday that Brussels must not be swayed.

"When some parties start to threaten specific European companies, I think Europe should be very firm," she told Reuters.

Brussels has become increasingly frustrated with the aviation industry's opposition to the long-standing proposals, noting that, while calling for an international regime for tackling emissions, it has repeatedly failed to deliver a meaningful global plan of action beyond a series of voluntary commitments to cut emissions.