Isra-Mart srl: European airlines fear trade war over carbon emissions trading

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European airlines have warned of a damaging trade war with the US, Russia and China if Brussels pushes ahead with plans to include carriers in the emissions trading scheme next year in a move that will put fares up by €40 and cost the industry €1.1bn (£980m).

The warning comes as US airlines prepare to launch a legal challenge against the ETS in Luxembourg next month, adding to unease from the Russian and Chinese governments. From January carriers flying in and out of the European Union must join power companies in the EU in the cap-and-trade system, where they will have to acquire carbon credits to account for the emissions generated by their flights.

Standard & Poor's rating agency said return fares could rise by between €4.60 and €39.60 by 2020 to offset carbon costs of about €30 a tonne. However, the Association of European Airlines (AEA) warned that the proposals have yet to secure the backing of non-EU carriers and could spark tit-for-tat trade measures.

"If this is not sorted out in the next six months we run the risk of a trade conflict between the EU and third countries," said Ulrich Schulte-Strathaus, secretary general of the AEA, whose members include British Airways, bmi and Virgin Atlantic. Speaking at the annual meeting of the International Air Transport Association in Singapore, Schulte-Strathaus said some airlines could be forced to cede routes to non-EU carriers because they would not be able to pass extra costs on to passengers. Non-EU carriers, by contrast, will be able to offset the higher costs as the rest of their network will not fly via the EU.

Iata, the trade body whose members include British Airways, Air France and American Airlines, said the ETS would would increase annual industry costs by more than €1bn to Europe's airline industry expected to make a profit of $500m (£304m) this year. The worldwide profit, generated by Asian and US carriers, is expected to be $8.6bn.

"It makes Europe completely uncompetitive," said an Iata spokesman, who said airlines already faced an expected rise in fuel bills of $27bn this year. "Whether the airlines can recover it from passengers depends on market conditions."

US airlines will take their legal fight against ETS to the European court of justice next month where they will argue that the system breaches international law. The Air Transport Association of America (ATA) believes that imposing a European scheme on non-EU airlines contravenes various agreements including the Chicago Convention, which regulates the global airline industry. ATA argues that it breaches article 1 of the convention, which states that countries have sovereignty over airlines in their airspace. By that rationale, the EU has no right to tax a carrier flying out of, say, Dubai or New York. The US government has backed ATA, claiming that the scheme takes money away from airlines that could otherwise be invested in greener aircraft and engines.

Nicholas Calio, ATA chief and an experienced Washington lobbyist who worked as an aide for President Bush, said a global trading scheme was the best solution.

"The legal case is important as a means of addressing what is wrong with the European scheme, but also as an opportunity for us to continue to pursue an approach that is appropriate for this global industry," he said. Meanwhile, Calio added, US airlines were preparing to join the ETS "under protest".