Asia Tells Europe to Back Down on ETS or Face Consequences

 - February 14, 2012, 6:15 AM
China Airlines Airbus A330-300

Asian air transport industry leaders yesterday signaled European Commission vice president Siim Kallas that they will step up their war against the European Union’s emissions trading scheme (ETS). But Kallas held firm, telling the Singapore Airshow’s Aviation Leadership Summit that while the EU is willing to negotiate over how ETS applies to airlines outside Europe, it will only do so only on its own terms and is in no hurry to give ground.

Kallas addressed the conference barely a week after the Chinese government banned its airlines from complying with ETS. Legislation currently moving through the U.S. Congress would have the same effect.

What isn’t clear is how the EU would respond to a widespread refusal to comply with ETS. Its regulations call for punitive fines against operators who fail to account for their carbon emissions and pay for them with credits. China and the U.S., which have been leading the charge against ETS, have both threatened Europe with serious consequences if it doesn’t back down–raising the specter of an aerospace trade war.

“This issue must be solved and tackled by ICAO…we would prefer multilateral solutions,” Kallas admitted. “We are not trying to dominate the world…transport is a dynamic part of our economy and is the only sector in Europe that has increased emissions of carbon dioxide. [Therefore] it is quite natural for certain measures to be implemented.”

Europe “Ready To Negotiate”

Kallas indicated that the EU is “ready to negotiate within our own framework…I don’t think this is economically a big problem. It is mostly a matter of principle. That is why it has been raised to a political level.” He suggested that steps should be taken to avoid a trade conflict in future. “We are serious in negotiating a solution.” However, he added: “If [non-EU members] say nothing will happen until you suspend the ETS and [only] then start negotiations, that is unacceptable.”

Voices against the EU ETS were loud and clear here in Singapore. “This tax is morally unacceptable even though it is economically tedious. It has no sense of balance,” said Martin Craig, CEO of the Pacific Asia Travel Association (PATA), speaking on behalf of his Asian counterparts.

However, Kallas seems to be in no hurry: “The conditions are not right yet for EU ETS to be suspended because we have time until 2013,” he asserted. During the 2012-2013 trading period, 85 percent of the total available allowances will be allocated to airlines free of charge while the remaining 15 percent will be auctioned by the EU. But the potential costs are troubling airlines, not to mention the extraterritorial nature of the scheme.

Singapore Airlines (SIA) is one airline that has taken a clear stand on ETS, preferring to coordinate through the International Air Transport Association, said Goh Choon Phong, SIA’s CEO. But as an industry association with clear vested interests, the EU is highly unlikely to accept it as an honest broker in settling the increasingly bitter dispute.

Airline Bottom Lines

Meanwhile, aircraft manufacturers such as Airbus, whose business is currently driven by the growth in the Asia Pacific, voiced concerns over ETS, fearing the issue could hurt airline bottom lines. Airbus CEO, Tom Enders stated: “[We] hope it is avoidable. What started as a solution for the environment has become a potential trade conflict.” As Europe’s top airframer it clearly has the most to lose from any trade war over ETS.

A major issue remains over legalities, an influential delegate told AIN. “In the EU court of law [European Court of Justice], ETS cannot be challenged on grounds of the Chicago Convention, as the EU is not a signatory [to the Convention], but individual states are. Therefore, in effect, talks [on ETS] should be held with each country, as many countries have not as yet ratified EU horizontal [cooperation] agreements. The world needs to challenge the legality of this issue.”

IATA director general Tony Tyler questioned the very logic of the ETS. “Departure taxes in the UK, Germany and Austria–introduced as environmental measures–amount to well over €4 billion. At current market prices for UN-issued Certified Emissions Reduction [credits], that would offset the world’s CO2 emissions about one-and-a-half times. And ETS is being added on top of that!”