The Price of Blue Skies – Is the EU Emissions Scheme Inviting a Trade War?

On January 1, the EU extended its ETS (Emissions Trading Scheme) to the aviation sector. It requires all airlines transiting or operating from or to a European airport to buy pollution permits in accordance to their actual level of pollution. The ETS is a crucial tool for the EU to reach its 20% reduction target of CO2 emissions. While aviation only contributes to about 3% of global CO2 emissions, it is expected to grow considerably over the next decade (International Business Times).

The measure is heavily contested by 26 of the 36 members of the ICAO (International Civil Aviation Organization), including the US, Russia and China. After a lawsuit at the ECJ (European Court of Justice), which judged the measure legal, The US House of Representative adopted a draft law forbidding American airlines to actually pay the tax. A few months later, the Chinese government announced it too was forbidding any of its national companies to abide the European legislation. The Guardian reported that the CATA (China Air Transport Association), which represents the four major Chinese airlines fly millions of passengers to the EU each year, estimated that the cost of complying would neighbor 800 million yuan (US $127 million) in year one and would triple by 2020.

Watch the trade war

As the EU is not planning on backing down, the companies that do not respect the new law would be charged a 100-euro fine per pollution allowance excess (while a permit price is 8 euro) or could be banned from EU airports. Airbus CEO Enders has expressed his worries in the French paper Le Monde that the events could escalate into a trade war and that the consequences could be dramatic for the aircraft industry (Le Monde). China and other nations indeed claim the measure is anticompetitive and is a disguised trade barrier that does not conform to the Convention on International Civil Aviation (1944), which guarantees the freedom of the air. If they have to, non-EU countries could therefore impose restrictions on EU imports in response. Such tit-for-tat retaliation would threaten international trade and economic growths.

Nevertheless if Europe is to implement such a policy on aviation, it is unlikely that it will refrain on charging non-EU airlines too. Beyond the purposefulness of involving as many polluters as one could, it also prevents carbon leakage and carbon competitiveness. ‘Carbon leakage arises when a carbon price causes domestic businesses to relocate to countries not pricing carbon’, while carbon competitiveness diverts consumption away from domestically produced goods to cheaper imports from countries not pricing carbon (Meltzer, 2012). Thus if unjustified from an international law point of view, as the opponents affirm it is, the measure would stand as a protective measure.

To save trade

The issue could be resolved through the WTO and its provisions against so-said disguised trade barriers. However, the EU could play on the WTO exceptions for measures related to the conservation of natural resources that are necessary to protect human or animal or plant life and health (WTO). But against this point, many argue that to actually address climate change, measures to be implemented by the EU on non-EU and EU airlines alike, should be the result of a, preferably, global consensus.

The international community says the best way to resolve this would be through the ICAO although until now it is seen as unlikely that the parties would be able to come up with any solution before April 2013, when the taxes (and fines) are set to begin being levied on airlines. Spring 2013 nevertheless leaves more than a year for a solution to be found between the EU, China, the US and other contesters who will meet in Moscow later this month. The EU and the US are likely to favor a compromise rather than to put their struggling economies at further risk as should China, who would otherwise be undermining its relations with its two main trading partners and thus its growth by the very nature of the fact that it has been dominated by exports.

• Charles Van Tuyckom- CPG Marketing Intern