When the European Union’s highest court in December ruled the EU could force all airlines to pay for carbon emissions from flights to and from airports in its 27 member nations, the reaction was fierce and swift. The move enraged the EU’s three major trading partners, including the U.S., China and India — also the world’s three largest carbon emitters — because it cleared the way for the EU to charge a carbon levy on the entire journey, not just the European stretch of the flight.
Now the EU is scrambling to head off a potential global trade war over an extension of a cap-and-trade system, known as the Emissions Trading Scheme, that the EU’s trade partners say violates their sovereignty.
Still, there’s time for Brussels to cook up a compromise. Although the law took effect on Jan. 1, airlines won’t get a bill until next January after their emissions have been calculated.
For airlines, any new cost is bad news. The industry already is struggling with stagnant trade, overcapacity, falling rates, staggering fuel costs and shippers who are willing to sacrifice speed in delivery or are sourcing products closer to their home markets.
The good news for carriers is that the initial costs will be minimal, because airlines will have to pay for only 15 percent of the carbon they emit, and receive free allowances to cover the remaining 85 percent. But payments will increase sharply thereafter, reaching an estimated $12 billion by the end of 2020.
A compromise is looking increasingly likely as the EU comes under mounting pressure from its own aviation sector and foreign governments to modify, or suspend, the levy. China and India have told their carriers to boycott the program. Beijing has frozen an order for 55 Airbus planes worth $14 billion. Russia warns it might ban EU airlines flying over Siberia en route to Asia. India says the carbon levy is a “deal-breaker” for global climate change negotiations.
The global aerospace industry is also irate. Boeing and Airbus are campaigning against the carbon levy, and the EU is facing criticism from its own airlines. “I am extremely concerned about the way the EU decided to implement (the carbon levy) and basically open up for a trade war. That would only have a negative impact on European carriers,” said Rickard Gustafson, CEO of SAS. The Scandinavian carrier is owned by Sweden, Norway and Denmark, Europe’s environmental standard bearers.
Airbus, Air France and French engine maker Safran say the levy will put some 2,000 French jobs at risk.
The warnings have European governments extremely nervous about the potentially damaging fallout from the levy. French Prime Minister Francois Fillon urged the European Commission, the EU’s executive arm, to “deploy every effort necessary to find mutually acceptable solutions with third-party countries.” But he also called on Brussels to respond with “appropriate measures” if European companies become the target of discriminatory actions.
The EU was playing hardball until a few weeks ago. “You can’t threaten a trade war just because you don’t like European legislation,” said Connie Hedegaard, the EU’s climate commissioner. Hedegaard has said in the past the only reason the EU would modify its scheme would be if the U.N.’s International Civil Aviation Organization agrees to a global plan to combat rising carbon emissions from the aviation sector.
Jos Delbeke, Brussels’ top climate change official, said the EU would consider limiting its carbon levy to its own airspace, but only as part of a global deal. That’s highly unlikely in the run-up to November’s U.S. presidential election, because climate change is a politically sensitive issue.
Brussels appears willing to cut deals that threaten to undercut — and eventually undermine — its global approach. EU officials are considering whether a Chinese plan to cut aircraft emissions qualifies as an “equivalent measure” that could exempt its airlines from the EU’s levy. The EU has leeway to steer itself out of a trade conflict because it hasn’t clearly defined “equivalent measures” beyond saying they must lead to reduced emissions.
It’s unlikely the ICAO will agree to — much less ratify — a treaty any time soon. The EU said it went its own way after a decade of inaction by the 191-nation body to tackle rising emissions.
A time-consuming challenge in the World Trade Organization also is unlikely to break the deadlock. While extending the Emissions Trading Scheme to international aviation might violate world trade rules, the EU could argue it’s consistent with WTO-compliant measures necessary “to protect human, animal or plant life or health.”
Contact Bruce Barnard at firstname.lastname@example.org.