Isra-Mart srl: The EU's clean-air turbulence

www.isramart.com

Passengers flying to and from Europe face higher fares from next year, and anyone flying to Japan or Asia will pay sharply more than those staying within Europe or going to the Middle East, thanks to new rules from the European Union in pursuit of an oxymoron, making air travel environmentally friendly.

Unless there is an unlikely change of heart by "Eurocrats" and their political bosses, or a legal hitch or a last-minute political deal, the EU will begin imposing its complex new charges on carbon-dioxide emissions from January. Plans for the tax were boosted this month when the European Court of Justice's advocate general advised that the plan does not infringe the sovereignty of third countries and complies with aviation agreements. The court follows such advice in 90 percent of cases.

The U.S. Air Transport Association and the two major U.S. airlines, United Continental Holdings and American Airlines, are challenging the EU plan in the court. The airlines' trade body, the International Air Transport Association, is unhappy, and China has joined the outcry. The scheme may add $30 to the price of a ticket, and even more for passengers traveling to or from Japan in long-haul flights. Estimated costs of the scheme to airlines start at ?2.5 billion next year and rising to ?20 billion by 2020, more than enough to wipe out all the profits of all the world's airlines. No doubt the tax will be passed on to passengers in ticket prices.

But in Japan — where air tickets are already virtually the highest in the world and where the cost of the scheme will hit hardest — the EU's plans seem to have gone unnoticed. E-mail requests to Japan's two big airlines went unanswered, and a search of the Internet for Japanese reaction to the potential new tax turned up nothing.

John Slosar, chief executive of Cathay Pacific Airways, laments that the EU Emissions Trading Scheme (ETS) "has the right intentions but is taking the wrong approach. Aviation is by its very nature a global industry, so for this reason we believe a global approach, not a regional one, is needed for any emissions scheme." China also reacted angrily against the measure, citing "common but differentiate responsibility" under the United Nations Framework Convention on Climate Change, stating that developed counties have a duty to take action first. Beijing threatened that it might resort to a trade war, including not buying aircraft from European manufacturer Airbus.

Hong Kong Airlines was expected to announce the purchase of 10 A380 super-jumbo aircraft at the Paris Air Show, but no such deal was struck, reportedly because of China's opposition to the ETS.

Europe is prepared to call China's bluff. EU climate chief Connie Hedegaard told The Guardian newspaper that she was "standing firm" on the plans. "This is our legislation, adopted unanimously. This is the first time China has mentioned a trade war and retaliation. If Europe immediately backtracks what would that look like? If someone says boo, we do not change our laws."

To emphasize the point, a statement from the EU delegation in Beijing stated that the ETS is an essential part of Europe's climate change goals: "It is an important part of the EU's action to reduce emissions of greenhouse gases associated with Europe and to limit climate change to 2 degrees Celsius." As a non sequitur, the statement added that, "flights to and from China would account for less than 3 percent of total aviation emissions covered by the EU system."

Environmentalists and green lobbying groups mostly applaud the EU for daring to cut through the fog of hot air spouted by airlines while they take a free ride on the damage they are causing to the environment with their greenhouse-gas emissions. The EU gave several years notice that it would bring aviation and airlines into its ETS and the legislation was passed two years ago. The world's airlines have continued to produce lots more hot air but little action.

But the European scheme is deeply flawed, inequitable, expensive to operate, and possibly even dangerous to the environment. Mark Watson, head of environmental affairs at Cathay Pacific, points out that, "Essentially, ETS was mapped onto aviation based on what works for fixed-base emitters such as power companies, with little regard for the special issues of aviation and the fact that we are mobile emitters."

Flaws and inequities of the scheme include:

• Great complexity and costs of administering, not least in terms of monitoring reporting and verification;

• Unequal treatment because the tax will be levied on the whole flight, not just for the parts of it that go through European airspace; this will mean that an airline flying to Japan via an intermediate point outside Europe will have a competitive advantage over the Japanese airlines' nonstop flights.

• Danger to the environment because the revenues will go to governments for their general account, not into a fund for the environment or to mitigate environmental damage; Britain notoriously started charging an air-passenger duty of up to 170 pounds sterling on long-haul flights, citing protection of the environment, but the money goes to general revenues and there has been no suggestion that the tax will be dropped when the EU scheme bites.

The scheme gives too much power to the Eurocrats because they will be able to decide if a country has its own environmental scheme that should be counted toward exemption from the EU scheme; this could open the door to potential nightmare of bureaucratic appeal and litigation.

Slosar and Watson of Cathay are correct that a global scheme would be preferable to a series of piecemeal regional ones that the EU seems destined to trigger. Watson says that the Aviation Global Deal group that Cathay helped established proposed that airlines would "pay based on the amount of fuel uplifted, with a predefined cap on emissions and that carbon trading permits would be administered under the U.N. International Civil Aviation Organization. If properly administered an ETS can be a very effective climate policy tool as it creates a market price for carbon and incentivizes industry to innovate and invest in environmental technology."

The good news is that the impending EU scheme has concentrated minds. There is growing consensus that airlines need to do more for the environment and that the immense improvements in aircraft fuel efficiency are not sufficient. Modern jet aircraft are 70 percent more fuel efficient than those of 40 years ago, and the Boeing 787 Dreamliner will deliver a further 25 percent improvement. But all in all, the relative 1.5 percent a year reduction in emissions has been offset by the absolute growth of aviation, averaging 3 to 5 percent a year.

The problem is that there is a dialogue of the deaf: The EU scheme is a partial and distorted effort, to which court action or trade wars are no answer.