Carbon Tax: Rest of the World vs EU

By Jitender Bhargava

Even as most Indian carriers are grappling for survival due intense competition in the domestic skies forcing them to keep fares at uneconomic levels, a new controversy in the global arena has begun to rage with the potential of resulting in enhanced air fares on international routes. With European Union determined to extend Emission Trading Scheme (ETS) to international aviation effective 2012 and non-EU countries equally determined to oppose what they call "Europe's unilateral and extra-territorial decision", the stage is set for an EU vs the rest of the world battle.

Countries, including India, the United States, Russia and China, are up in arms seeking abrogation of EU's law requiring airlines flying to Europe to pay for greenhouse gas emissions under the E.U. ETS. Representatives of more than 30 countries, in fact, met in Moscow last month and decided on a series of retaliatory measures that countries will be compelled to take against EU if it refuses to pay heed to their suggestion for abrogating the law. The potential measures finalized by these countries include: filing of court suits against the E.U., barring their respective national airlines from participating in the ETS, suspending talks with European carriers on new routes, reviewing bilateral service and open skies agreements with European countries, and imposing retaliatory levies on E.U. airlines. In the meantime, the Indian government, has directed Air India, Jet Airways and Kingfisher flying to Europe to desist from participating in ETS.

To digress, all global Airlines are collectively reckoned to be currently accounting for two per cent (650 million tonnes) of manmade carbon emissions while carrying 2.8 billion passengers and 46 million tonnes of cargo annually. Air transport industry, being fully conscious of the need to address the environmental concerns, had in fact set in motion a plan to reduce carbon emissions more than a couple of years ago. Airlines, airports, air navigation service providers and aircraft/engine manufacturers have made global commitments to:improve fuel efficiency by 1.5 per cent annually by 2020; to cap net emissions from 2020, and cut the emission by half by 2050 (compared to 2005 level).

This is to be achieved through a four pronged strategy of:investment in new technology, creating more efficient infrastructure, making operations more effective, and introducing positive economic measures.

The target: by 2050, global airlines should account for only 320 million tonnes of manmade carbon emissions, as against the existing level of 650 million tonnes, while carrying 16 billion passengers and 400 million tonnes of cargo.

The hard stance adopted by non-EU countries has been prompted by EU's stubbornness in rejecting arguments put forth by non-EU countries and IATA, the representative body of airlines, that the issue of climate change should be allowed to be handled by the International Civil Aviation Organization (ICAO), which, incidentally, has always been the conventional forum where countries have found global solutions for various aviation issues ranging from safety in flight operations to noise pollution.

Even the legal challenge presented by the Airlines of America, IATA and the National Council of Canada on the issue of ETS in the Court of Justice of the European Union has yielded no relief. The argument put forth by the petitioners that EU ETS contravened the Chicago Convention which prohibited such taxation of international aviation was rejected by the CJEU on the plea that the Chicago Convention did not bind the EU which was not a signatory and also because the ETS does not violate any other aspect of international law.

What is baffling to most countries is to see EU display its lack of faith in ICAO's ability to address the issue even though only a decade ago, ICAO had achieved a globally accepted balanced approach to noise pollution that had helped avert a conflict over Europe's unilateral plans? ICAO can thus be expected to do the same with climate change. The 2010 Assembly of ICAO had, in fact, agreed to 15 principles for economic measures besides committing itself to developing a framework for a global trading or compensation scheme by 2013.

Interestingly, airlines flying to Europe are already burdened with payments of Euro 4 billion as departure tax in three EU countries - UK, Germany and Austria. These levies were all stated to be part of environmental measures. What is even more perplexing is the fact that at current market price for UN issued certified emissions reductions Euro 4 billion is good enough to offset all the world's aviation CO2 emissions, one and a half times over. Why is ETS then being introduced? If the concern of EU is essentially carbon emissions, the revenues currently being generated through departure tax can be restructured so that the objective of reducing carbon emissions can be attained without burdening the airlines.

What are the cost implications on airlines? Under the EU ETS 85 percent of the airlines' carbon permits in 2012 will be handed out for free, while 15 percent will be sold to airlines at auctions. Certificates for one tonne of emissions would cost Euro 14; the fine for ignoring the rule - Euro 100 per tonne and the companies that refuse to pay would be banned from crossing the E.U. borders. The cost of buying carbon permits by airlines operating to and fro Europe in 2012 is estimated at a staggering $ 1.2 billion.

Aviation analysts have, however, opined that these estimated rates are pegged to a baseline year.so the growth after that would distort the figure. Moreover, there is no guarantee that rates would stay at that level. Experience in other industries has shown that rates rise rather quickly in subsequent years. The Euro 14/tonne is only a current market estimation and the actual rate will depend on when the permits are actually purchased. They are also emphatic that if carriers are refusing to pay the ETS, it would be difficult to see them willing to pay the fines.

Considering the difficult phase through which the global aviation is passing through on account of high fuel costs, a trade war triggered by ETS and resulting in higher fares for passengers will only spell doom for the airline industry.

(The author is a former Executive Director on the board of Air India and renowned expert on aviation.)

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