Trade War Looms Over Airlines' Refusal to Comply with EU Cap-And-Trade Law

In June, I wrote about whether the US was right to seek an exemption from the European Union's Emissions Trading Scheme (EU ETS) for US airlines. The cap-and-trade scheme, designed to curb CO2 emissions, is being vigorously opposed by the American Air Transport Association, and a month on, it seems things are no less fractious, with the rhetoric from Capital Hill going up a notch.

Business Green reported that the Republican chairman of the House Transportation and Infrastructure committee stated this week, "This appropriately named EU 'scheme' is an arbitrary and unjust violation of international law that disadvantages US air carriers and kills US aviation jobs" adding "..the United States will not participate in this ill-advised and illegal EU program."

Unsurprisingly, China isn't pleased with EU ETS plans either. The country has threatened to retaliate, possibly by punishing European Airlines or even taking action against French aircraft manufacturer, Airbus.

Back in June, the EU Climate Action Commissioner, Connie Hedegaard, was reported here as having stated "Now is not the time to get nervous over legislation that has already been agreed. This was agreed by all 27 EU member states, by the European Parliament and by the European commission."

With all sides digging in, it's looking like this can't end well, and could even tip things into a trade-war. But it's worth taking a closer look at what is actually at stake here. Firstly though, an explanation.

How the EU-ETS Works

PWC has a great overview of how the plan will operate for the aviation industry. Here are the main points.

• The EU CO2 cap is to be set initially at 97% of 2005 emissions levels and at 95% from 2013 onwards


• From 2012, operators will have to surrender one allowance per tonne of CO2 emitted


• It is applicable for flights to, from and within the EU (but does not include overflying the EU)


• It is applicable for passenger, cargo, commercial and non-commercial flights with a take-off weight 5,700kgs or more, and applies irrespective of where an operator is based


• Operators are to account for annual emissions and reconcile them with the required number of allowances each year


• Allocation of free allowances is awarded to operators based on transported persons or cargo, using their 2010 data as the base year. Allocations are assessed on the basis of "tonne kilometers" transported


• Operators emitting more than their allowed amount of CO2 must either reduce emissions or procure extra allowances.


• Emissions will be calculated as the product of fuel consumption and an emission factor for each flight and each fuel type.


• Non compliance will result in a penalty of 100 Euros per missing allowance plus an obligation to procure and surrender missing allowances

So, at the risk of sounding glib, going forward, more efficient planes = less cost.

Why is the scheme contentious?

The president of the American Air Transportation Association (ATA), Nicholas Calio, has stated it is "illegal under international law because it is extraterritorial application of EU policy on US carriers. The only way anyone can impose this jurisdiction overseas is with the approval of the International Civil Aviation Organization and they don't have that."

The matter is currently working through the European Court of Justice in Luxembourg. So its legality is still unresolved. But clearly, at its core, this is a protest against adding any cost of doing business with Europe.

Further Analysis

Assuming the European Court finds against the ATA and the program is implemented as planned, it is important to note that this does not disadvantage US carriers. Or if you prefer, it disadvantages all carriers, while singling out none. Or, put yet another way, it provides an opportunity for all carriers to operate more efficient aircraft!

In fact, Deutsche Welle (see second article via this link) reported that the environment manager for the Association of European Airlines estimates that while ETS will affect 100% of activity for all European based airlines, it likely affects, for example, only 16% of Air China's activity or 12% of American Airlines' activity. So sure, it will affect American carriers, but this is not a discriminatory act favoring EU carriers. Indeed, Europe's airlines and manufacturers are themselves not overjoyed about the law either - both Virgin Atlantic and Airbus have registered concern with the EU Climate Action Commissioner, while British Airways' holding company has stated the timing couldn't be worse under current economic conditions.

Which raises the important question; what cost will this impose on customers? A piece in the New York Times this week, details an estimate by the International Air Transport Association (IATA) figuring the average fare would probably rise by between $21 to $45. Is this good value? If it achieves carbon abatement, then it's not a staggering amount to pay. And as the NYT piece mentions, the "European scheme is no more intrusive on foreign sovereignty than, say, the tax the United States levies on travelers who enter or leave the country." Good point!

But saving the best bit for last, it's worth noting that all this outrage and contention could have possibly been moot. The European Union has a provision under ETS which provides a waiver for carriers from countries with so called "equivalent measures." This provision - while unfortunately written a little vaguely, in terms of what qualifies - nonetheless states that in order to avoid double accounting, the possibility exists to exclude flights from third countries that have developed emissions reduction provisions of their own. In fact, China has an outside shot at qualifying for this.

But for the U.S? Just imagine if Congress had pressed on with a cap-and-trade program of its own, which at one point looked likely. Such a plan might just have meshed with Europe's plan, qualifying US airlines for a waiver. Then, carbon emissions would have been managed on either side of the Atlantic - and members of Congress would possibly have side-stepped what could turn out to be a damaging trade war for both sides - which I would venture to say, is likely a lot less affordable than compliance with ETS.