From: Issue 38

Will the EU airline carbon tax fly?

7 March, 2012

Written by Peter Gorrie

The European Union has dragged the world’s airlines kicking and screaming into its carbon emissions trading system (ETS). Now, the carriers and their governments are battling to scuttle the scheme, which as of January 1 began imposing pollution quotas on all flights that land or take off at EU airports.

China’s aviation overseer vows its airlines won’t co-operate. Legislation before the U.S. Congress would make it illegal for American carriers to comply. Along with India and several other countries, they threaten lawsuits or trade retaliation. Canada has expressed disappointment.

The EU, though, is hanging tough on a plan it estimates will eliminate 70 million tonnes of annual emissions by 2020. “We will not back down from our legislation, and we will not modify it,” says Isaac Valero-Ladron, spokesperson for EU climate action commissioner Connie Hedegaard.

All this over a measure that environment groups describe as a modest first step, and one that will boost ticket prices by far less than airlines’ fuel surcharges or baggage fees.

The groups accuse the industry of hypocrisy: “Negotiations at ICAO have dragged on without result for 14 years … the airlines have tried at every turn to make sure nothing happens,” says Bill Hemmings, program manager at Brussels-based Transport & Environment, which campaigns for sustainable transportation. “The ETS will add no more than 15 euros (about $20) to long-haul flights. That’s less than the daily variations in price. No one worries about them, but along comes an environmental measure and we have an international case.”

The ETS has its origins in the 1997 Kyoto Protocol, which instructed the industry to develop a strategy for reducing emissions – now just three per cent of the global total but rising fast – via the United Nations’ International Civil Aviation Organization, or ICAO.

Seven years later, seeing no progress, the EU decided to add aviation to its emissions trading system, which already covers about 12,000 factories and power plants.

The scheme caps total annual emissions from all flights. This year, the ceiling is 97 per cent of the 2004-2006 average, or about 215 million tonnes. For 2013 to 2020, it drops to 95 per cent. From this pot, credits, each worth one tonne, are allocated among the 900 airlines that must participate – in effect, setting an upper limit on the emissions they’re allowed.

This year, the ETS gives each carrier 85 per cent of its credits; they must purchase the rest. From 2013, the free portion drops only slightly to 82 per cent. Those that emit less than their limit can sell unneeded credits; those over must buy enough to cover their excess.

The credits’ value is set through trading on Europe’s carbon market. In theory, since air traffic is certain to increase while credits stay constant, demand will increasingly exceed supply, raising their value and prompting polluters to reduce emissions.

How that works in practice remains uncertain given the depressed carbon market, where credits fetched about eight euros, or roughly $10.50, at the end of January – close to half the level a year ago.

Even so, the airlines estimate that by 2020 they’ll have bought 700 million credits. That expense, they complain, will force fare hikes, which will make them less competitive and further threaten an industry hurting from overcapacity. The money would be better spent on more efficient aircraft, alternative fuels (see “Green Shades of Jet Fuel”) and other measures that cut emissions, they say.

A study by researchers at the Massachusetts Institute of Technology and Germany’s Muenster University recently generated headlines by concluding U.S. airlines could actually reap windfall profits of up to $2.6 billion from the ETS over the next nine years.

That would occur only if they charge their customers for all the emission credits they require, ignoring the fact they’ll get most of them for free – as some European electricity generators and oil refiners did when they were brought into the ETS.

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