2012 EU Carbon Tax on Airlines: US, China Whine

For some strange reason, the end of the year--especially between Christmas and New Year--is an especially busy one for trade matters. Sometime ago I discussed how Airbus was in danger of losing aircraft orders due to China being wary of impending EU regulations subjecting even foreign airlines to EU carbon limits under the Emissions Trading System (ETS). If you're unfamiliar with it, PriceWaterhouseCoopers has a neat summary as it applies to airlines. At the start of 2012, these emissions laws will come into effect. North American airlines mounted a challenge recently, but were not entertained by the European legal powers-that-be:

The European Court of Justice threw out Wednesday a case brought by north American airlines against a new EU system charging airlines for carbon emissions. European Union law "including aviation activities in the EU's emissions trading scheme is valid," said judges in a ruling which tees up US reprisals threatened by Secretary of State Hillary Clinton.

The EU is to include all airlines in its Emissions Trading System (ETS), used to charge industries such as oil refineries, power stations and steel works for CO2 emissions as part of Europe's efforts against climate change. Furious US, Canadian and other carriers say their inclusion violates international aviation pacts, but the European Commission said following the ruling that the ETS would enter force as scheduled on January 1.

Under the scheme, airlines would have to pay for 15 percent of the polluting rights accorded to them, the figure rising to 18 percent in 2013-2020. "Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue nor the Open Skies Agreement" across the Atlantic [improving access of foreign carriers to European airports], the court decided.

"It is only if the operators of such aircraft choose to operate a commercial air route arriving at or departing from an airport situated in the EU that they are subject to the emissions trading scheme," it added. As a result of this choice, the EU system "infringes neither the principle of territoriality nor the sovereignty of third states, since the scheme is applicable to the operators only when their aircraft are physically in the territory of one of the member states of the EU."

Let's say the EU has rubbed virtually everyone else the wrong way on the matter:

In a letter to EU officials dated December 16, Clinton listed 43 nations from Argentina to Russia to Venezuela also opposed to the EU move. "Halt or, at a minimum, delay or suspend application of this directive," she wrote. "Re-engage with the rest of the world. "The United States stands ready to engage in such an effort. Absent such willingness on the part of the EU, we will be compelled to take appropriate action."

The US House of Representatives passed a bill in October directing the US government to forbid US carriers to take part "in any emissions trading scheme unilaterally established by the European Union."

The (increasingly air travel-happy) Chinese, once more, are particularly aggrieved judging from the reports emanating from our favourite official news agency, which is talking about "trade war"--the aforementioned Airbus incident notwithstanding:

Beijing criticized a decision by Europe's highest court to allow airlines to be charged for carbon emissions on flights to and from the European Union, with state media warning on Thursday it could spark a trade spat and the foreign ministry urging talks.

"This is a trade barrier in the name of environmental protection and will strike a wide blow to passenger benefits and the international airline industry," the state-run Xinhua News Agency said in a commentary. "It will be difficult to avoid a trade war focused on an aviation 'carbon tax'," said Xinhua, whose editorials generally reflect the official government position.

My take is that the law disadvantages non-European airlines proportionately more given that their originating or destination airports are usually farther afield than those which mostly ply their trade in Europe itself.

Also, the EU Court of Justice ruling that US & PRC complaints fail to pass muster since their airlines choose to fly to European destinations and aren't being "forced" to do so is far from unchallengeable. The famous precedent of the tuna-dolphin case comes to mind. Ironically, the US was ruled against by the GATT for "extraterritoriality" or forcing others wishing to sell tuna products in the US to comply with domestic American law protecting dolphins from being caught in tuna nets via the Marine Mammal Protection Act. In the carbon tax matter, the EU takes the role of the US in foisting its carbon tax law on international airlines--particularly those of the bellyaching US and China.

Is it protectionism in disguise as the Chinese suggest? Again, the law applies to all airlines--although international ones will likely have to pony up more per flight on average given that they fly greater distances than those that operate mostly in Europe. However, the tuna-dolphin case sets a precedent which may work in the United States' favour this time around over the application of domestic law internationally via the notion of "extraterritoriality."

Hence, I would not be surprised to see the US and China filing complaints at the WTO next year against the EU. Fancy that; the US and China being on the same side of a trade issue in 2012.