Europe’s Doomed Flight of Decarbonizing Fancy

Green taxes are soaring. To be precise, to 30,000 feet as the EU’s new carbon tax on airlines for all flights to or from Europe kicked in on January 1. While the levies involved will push profit margins to the limit for some, with ETS carbon permits trading at pathetically low levels and expected to stay that way through 2012, the pain in the first year for airlines may not be as much as the €1.1 billion initially projected. Even so, letting the plane take the carbon strain represents seriously poor long-term strategic planning for Europe given the looming global trade war it is about to ignite.

One can only wonder what the Brussels-based mandarins were thinking. The global war on CO2 is going nowhere. By the end of 2011 global emissions had hit an all-time high. China, India and others are fast-industrializing opening new coal-fired power stations more quickly than the EU can shut down the old ones. The Kyoto alliance is crumbling as Russia backs Canada’s pull-out. Renewables subsidies and investments are being devastated by shale extraction investments – ironically, with natural gas from shale impacting CO2 levels far more than the global carbon war has. To cap it all, the EU carbon price is currently languishing between €6 and €9 per tonne; nowhere near the levels needed to secure industrial action and raise the revenues required to keep renewables on subsidized life support. As well as alienating the airlines and air travellers, the EU is mired in its Eurozone mess. It has chosen this moment to fire the first shot in a global trade war; as Dirty Harry would say: “Outstanding”.

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As the 2012 New Year hove into view, a Chinese industry insider told the London FT that his government was seriously considering retaliatory measures. The state-owned news agency was blunt calling the carbon tax a “trade barrier in the name of environmental protection”. He adding, “It will be difficult to avoid a trade war focused on a ‘carbon tax’ for airlines.” In fact, China has already made a pre-emptive strike. In July 2011 Beijing blocked a multi-billion euro order from Hong Kong Airlines for 10 European Airbus. Neither is it the only deal in jeopardy. A glum Airbus executive recently told the London Financial Times, “These are not the only orders taken hostage by the Chinese. The A380s are just the first”. The Chinese Government also intends to file a complaint in a German court early in the New Year. If the EU Commission wants to cripple its flagship Airbus industry, it’s going the right way about it. The Chinese hardline response not only reflects general international opposition, it shows the economic clout that could have the EU reeling in an escalating trade war. Just before Christmas the Indian Government told its national airlines to refrain from submitting carbon emissions data, advising that any EU correspondence on the matter be referred to them. Indian carriers estimate the new EU regulations will cost them four billion rupees per year (around $75 million). The EU-imposed penalty for non-compliance has been fixed at €100 per tonne. Something gotta give. Speaking to Aviation Week, Prashant Sukul, joint secretary for India’s Ministry of Civil Aviation, had a pithy response, “If they don’t call it off, we will retaliate” adding, “If Russia doubles the over-flight charges, European airlines will be out of business. They could no longer fly east of Europe.” India has already introduced a proposal to the International Civil Aviation Organization opposing the EU move. It will carry a great deal of weight. Of its 36 members, 21 are already signatories to India’s declaration. On December 28 a bid by American and Canadian airlines to block the regulations was finally rejected by the European Union’s highest court. While the American airlines confirmed they would abide by EU law “under protest”, they also said they would be pursuing “legal options”. With strong government support for their national airlines generally, the gloves are now formally off. The decision to include the airlines – responsible for just 3 percent of global CO2 emissions – in the EU cap-and-trade scheme came in the wake of the failure to agree a global agreement. While airlines will only pay for 15 percent of their emission allowances in 2012, around €256 at current market prices, from 2013 they will have to pay 18 percent. The airline industry estimates the cost over the first 8 years will be in the region of €17 billion ($23.8 billion). Although the carbon pollution bill kicked-in on January 1, 2012, invoices will not be sent to airlines until 2013; which is why non-EU governments are considering their next moves carefully. At the heart of the “legal options” for the airline lawyers is the international agreement regulating air commerce known as the Chicago Accords. More prosaically known as the Chicago Convention on International Civil Aviation, its opening section specifically states, “The contracting states recognize that every state has complete and exclusive sovereignty over the airspace above its territory.” The new EU carbon regulations clearly violate the terms of this agreement by seeking to regulate air flight above nations outside Europe. But beyond violating international agreements, the serious fallout comes from the alliance of international competitors only too ready to wield the trade war weapon against Europe. Which begs the question: why did the EU embark on this doomed flight of decarbonising fancy and risk a trade war it is plainly in no economic shape to win? In a word: arrogance. The unilateral move is thoroughly in-keeping with the European Commission’s delusion that it is a carrier (forgive the pun) of serious international clout. Its latest green tax scheme may have taken to the skies, but it is set for a bumpy ride and a quick forced landing. The EU’s capacity for shooting its own political foot continues to perplex.