China Bans its Airlines from Participating in the EU's Emissions Trading Scheme

The controversy over the European Union's Emissions Trading Scheme (ETS), and the inclusion of airlines into the program from the beginning of this year, continues to escalate, with the announcement that China has banned its airlines from participating.

Under the European scheme, all carriers, regardless of nationality,  must account for every metric ton of carbon emitted for any flight originating, or landing, in the EU. Carriers must then purchase allowances for 15 percent of their total emissions in Europe's carbon markets.

China's ban makes it illegal for their carriers to pay for these carbon allowances, as well as disallowing them from hiking ticket prices to account for them. Though China's reaction is the strongest so far, they are not alone in opposing the ETS.
The United States has voiced strong opposition to the ETS law too, with Congress likely to pass a bill in the coming weeks expressing its formal opposition. However, China stands alone in imposing a national law placing an outright ban on participation.

Already, the legality of the European ETS law has been challenged on the basis that it infringes on the sovereignty of non-EU countries. However, Europe's highest court ruled in December 2011, that the EU plan falls within international law.

But that ruling has not put the matter to rest and Reuters reported this week that many airlines are calling on governments to seek a swift resolution to the dispute on the basis that the deadlock will cause competitive distortions. If non-European airlines are exempted, Europe's carriers say they will be at a distinct disadvantage. And though the whole point is that all carries must comply equally if they want access to the European market, the disquiet really stems from the worry that no airline can afford any cost increases, whether they're on a level playing field or not.

The BBC reported this week that China claims the ETS scheme will impose 95 million Euros in extra annual costs on their airlines. But an analysis by Thomson Reuters Point Carbon, also released this week, suggests the costs would actually be much lower.

The Point Carbon analysis notes that Europe's carbon prices have plunged from around 12 Euros per tonne in September last year, to only 8.56 Euros earlier this week. This is due to the region's continued debt crisis and reduced industrial output. On the strength of this, Point Carbon says China's top 5 airlines affected by the European law, would face 8.5 million Euros in additional cost during 2012. A big difference from China's estimate of 95 million Euros!

Apparently then, there's not much agreement over what the expected costs are actually going to be. But despite various governments being up in arms over all this, the Economist's Gulliver blog reported this week that airlines should perhaps be less resistant to Europe's law and could actually profit from the program.

The blog notes that Irish carrier, Ryanair, already charges an ETS supplement of 25 Euro-cents per passenger per flight. Knowing this, Aviation Advocacy crunched some numbers and found that since the carrier flies some 76 million customers a year, in the current carbon market, Ryanair could stand to make 19.1 million Euros after covering the 15 percent of carbon allowances it must purchase under the law. Perhaps this shouldn't be surprising. This is a marketplace and smart companies find opportunities in marketplaces!

But still, the dispute between the EU and non-EU governments will likely to drag on for a while. Fortunately, the matter is not critical for the time being since the EU law does not require airlines to reconcile their carbon allowances until 2013 - after their total emissions for the current year are determined.

The BBC quotes an analyst as saying the matter could yet end up on the desk of the World Trade Organization. Ironic in a way, since the reason the EU is acting unilaterally is because the International Civil Aviation Organization was too slow getting a global agreement together in the first place.

In terms of the next steps, on February 21st, 26 countries including the USA, Russia, India and China will meet in Moscow to discuss a plan of action over the matter. And though China is digging in over this, a spokesman for the China Air Transport Association nevertheless believes all sides will negotiate again and find a solution.

Image by bifishadow