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May 18, 2012

Are airline carbon levy wars a sign of things to come?

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The European Union (EU) has unilaterally declared that it wants all planes entering or leaving the EU territory to pay an emissions tax. The bloc has long had an emissions trading scheme (ETS) that is applicable to large emitters like power stations, smelters and refineries, but aviation is something new.

The principle of making polluters pay is a sound one. There is good theory and evidence to demonstrate how externalities are borne by third parties and that which is not paid for, in the end, amounts to a subsidy to industry. For instance, the US Environmental Protection Agency has declared carbon dioxide (CO2) a pollutant and is pushing through regulations under the Clean Air Act for all new coal-fired power plants to have a cap on their greenhouse-gas (GHG) emissions.

The EU aviation ETS is the only mandatory scheme in the world at present. GHGs from the aviation industry are expected to grow by between 3%/y and 4%/y, which could account for 15% to 20% of global CO2 emissions by 2050. Eventually, these will have to be dealt with.

If the EU aviation ETS is not blocked, which is a possibility, given the row that followed its announcement, it will set the tone for carbon border tax adjustments in the future in sectors beyond aviation. To illustrate the point, only recently, Ireland put out a note that it wants to impose a levy on South African wine bottles because of their carbon footprint. No doubt, this will affect our wine exports.

The mere announcement of the imposition of an aviation carbon levy has already set in motion a trade war of sorts. A grouping of US airlines took the EU to court but subsequently dropped their private lawsuit. They have requested the US government to take over the matter.

All indications point to concerted efforts to dismantle a potential international agreement that is being proposed to be mediated through the International Civil Aviation Council (ICAO).

The EU aviation ETS is expected to kick in by January next year. By then, any airline entering the EU airspace will have to calculate its carbon footprint.

Airlines seeking to comply have to buy permits under the EU ETS. The total revenue the EU will earn by the end of 2020 is expected to be about $12-billion.

Airlines opposing the EU ETS have argued that the EU is violating international law. The governments of the US, China and India (as well as those of some developing countries that do not have a significant number of planes entering EU airspace) have also issued threats of countervailing actions.

China recently refused to conclude an Airbus deal for new jets worth $12-billion, and this was largely seen as a form of retaliation against the EU aviation levy.

Airplane manufacturers have a different view about a global deal, compared with passenger operators: they would prefer a global deal to a trade war. They are right – their biggest future buyers will be in emerging economies and China’s threat not to buy their planes should be taken seriously.

South Africa has also raised its objections but Tourism Minister Martinus van Schalkwyk took a more reconciliatory stance when he recently opened an International Air Transport Association summit in Geneva.

To be fair, the EU scheme was legislated by the bloc in 2009 and governments that would have been affected did not really react to this move. The EU also works within the context of the ICAO, which failed to get an international agreement on aviation GHGs. However, the ICAO gave countries the go-ahead to set up their own national systems in 2004.

The EU ETS only applies to airlines that have more than 200 flights in and out of Europe each year, which exempts 98% of the countries of the world but affects the 14 most dominant global econo- mies and their trade in Europe and outside Europe.

Countries that can demonstrate they have equivalent measures within their own countries will be exempt from the EU ETS. In other words, they will pay a double tax. And, given that the tax starts off a small base, costs will initially be incremental. Some even argue that it is so incremental that it will not have the desired impact of bringing GHG emissions down to the levels they need to be at.

So, how will this problem be solved? At the heart of the issue is the question of national sovereignty and protection from unilateral impositions. The extension of the EU aviation ETS beyond the bloc’s borders is the main cause of the anger.

For now, given the nature of the dispute, we will have to go back to the drawing board. It means the matter has to be dealt within the framework of the ICAO. It is in the interests of everybody that an amicable outcome be agreed and postponement of the imposition of EU ETS for another year or two would be the most rational thing to do.

The idea of a global deal is still vague. But it should at least address sensitivities about sovereignty, the EU should have a fair approach to how it will deal with revenues from its scheme, and proponents of the EU aviation ETS (who argue it is long overdue) want a system that has no ‘net incidence’, which means that such a scheme must be implemented in a way that does not harm participating countries’ trade and economies.

Edited by: Martin Zhuwakinyu
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