A flight to carbon trade safety

Once rhetoric surrounding a brewing 'carbon trade war' has cooled, non-EU countries are likely to accept charges against carbon emissions on their flights arriving in and departing from the European Union.

Opposed countries including the United States, China and India are meeting in Moscow this week, disgruntled over the perceived injustices of the EU scheme which applies a charge on the entire carbon emissions of flights including those parts outside EU airspace.

At most they will likely warn the EU, and demand that the UN body, the International Civil Aviation Organization (ICAO), resolves the problem.

The plea to ICAO will be in vain: it would be difficult to make a binding sanction stick against the EU, which would only accept an ICAO compromise launching a global scheme to curb emissions from aviation – something it has failed to do in 15 years.

Aviation was uniquely (alongside shipping) excluded from CO2 targets under the 1997 Kyoto Protocol on condition that countries instead agreed to "pursue limitation or reduction of emissions of greenhouse gases ... working through ICAO".

The European Commission justifies its unilateral action from ICAO's failure to deliver significant action in the meantime. The European Court of Justice (ECJ) last year upheld that view.

ICAO member states will have a hard time proving that the EU is breaking any rules under the Chicago Convention on International Civil Aviation, given that ECJ support.

More substantively, and in time, countries including China will probably agree bilateral deals, taking their own action to curb emissions.

The economic impact of the EU scheme is not trivial, with a total cost to airlines of about €10.4 billion ($A12.91 billion) through 2020, according to industry news and consultancy firm ThomsonReuters Point Carbon.

But carriers will pass some or all of the extra cost to passengers, adding about 1.5 euros to the cost of a London-New York flight, according to the European Commission. Australian and US airlines have already announced plans to hike fares.

The airlines case is the first where a country or region has imposed a carbon change on imports: until now that was a theoretical tool for governments to protect their domestic industry, and so stop companies relocating to more lax regimes to avoid emissions targets at home.

France has long supported EU carbon duties on imports of energy-intensive products such as steel and cement.

The EU has preferred to protect such heavy industry by giving them free permits, under its emissions trading scheme, rather than impose import duties.

It's easy to see how steel duties could escalate into a trade war given the metal's strategic importance and a long history of conflicts.

In the case of steel duties, countries can apply tit-for-tat tariffs, but on EU flights that would likely inflict more self-harm than good, impacting tourism and business.

That problem is reflected in rather weak opposition so far.

While China has banned its airlines from taking part in the EU scheme, that was unless they received government approval.

China's opposition is somewhat weakened by the gains it has reaped under the EU emissions trading scheme, which allows European polluters to meet carbon caps by buying offsets from developing countries, making emissions cuts there instead.

China is the biggest winner under that scheme, selling 60 per cent of all offsets so far, worth more than €5 billion assuming an average price of €10, according to Point Carbon.

China will this year sell carbon offsets worth €1.5 billion compared with costs from complying with the EU aviation charges of €70 million, according to UBS analyst Per Lekander.

Meanwhile, the US Senate earlier this month passed a bill which included a statement opposing the EU law, but stepped back from a House version which would have blocked carriers from complying.

EU rules give carriers until April 2013 to buy permits against this year's emissions, leaving plenty of time for negotiation.

The most likely compromise will be in bilateral deals, as the EU scheme exempts countries which take "equivalent measures" to curb CO2.

For example, China has set a target for airlines to cut their carbon intensity (the amount of a company's CO2 emissions per dollar of revenue) by 22 per cent by 2020 compared with 2005 levels.

That compares with the EU's plans to nearly halve emissions by 2020, compared to the expected level without action.

Those are two very different metrics, but nevertheless could be the basis for a Beijing exemption.

EU international aviation emissions have doubled since 1990.

This story was originally published by Reuters. Reproduced with permission.