Explainer: From Moscow talks to a carbon trade war?

A group of nations opposed to an EU law forcing all airlines to pay for their emissions meets in Moscow this week to debate possible retaliation, raising the risk of a trade war.

From January 1, all airlines using EU airports are obliged to acquire carbon allowances under the EU Emissions Trading Scheme. The law has triggered international protest from nations including the United States, China and India.

The following looks at what the meeting on Tuesday and Wednesday could decide and what might happen next.

The agenda

The Moscow agenda is expected to debate a range of possible counter-measures, ranging from a formal dispute at the UN's International Civil Aviation Organization (ICAO) to blocking legislation banning airlines from participating in the EU's ETS to retaliatory fees for EU flights.

Other measures mooted in a draft discussion paper seen by Reuters include halting international aviation talks or other trade discussions between EU and non-EU states and denying EU states any requested new routes.

The agenda will also discuss a letter that each nation attending the Moscow meeting could send to the EU and its member states.

The draft letter says the EU scheme "totally negates the principle of international cooperation."

It also says nations will refuse to take part in it, which could "impact other areas of cooperation with the EU."

How far will the meeting go?

EU and Russian sources, as well as analysts have said no-one wants a trade war involving the EU, the world's largest single market, and there is still time for negotiation, although they do not entirely rule out agreement on some of the counter-measures.

The host of this week's meeting, Russia, has repeatedly said the best outcome would be for a decision to be taken at ICAO, rather than at the Moscow talks.

"Our position was stated after meeting in Brussels. We said that a decision should be taken at the level of ICAO and our position has not changed," a Transport Ministry spokesman said on Monday. He was referring to talks between Russia and the EU earlier this year.

Taking the issue to ICAO could mean a formal dispute, but analysts and sources again thought the Moscow meeting would hold back from that extremely lengthy procedure.

"In the end, no country is really looking for a trade row in current insecure economic times. So, in that sense, everyone expects harsh language from the coalition of the unwilling, but no real trade threats," said Dutch Green member of the European Parliament Bas Eickhout, who has followed the dossier closely.

Who's involved?

The Moscow talks bring together 26 nations opposed to the EU scheme and dubbed "the coalition of the unwilling".

They are Argentina, Brazil, Burkina Faso, Cameroon, Chile, China, Colombia, Cuba, Egypt, India, Japan, South Korea, Malaysia, Mexico, Nigeria, Paraguay, Peru, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Swaziland, Uganda, the United States and the United Arab Emirates.

The 26 have held previous meetings and in New Delhi last year issued a joint declaration opposing the EU's plan.

A meeting of ICAO in Canada in November adopted a working paper from the 26 objectors urging the EU not to include non-EU carriers in its plan.

Can ICAO find a solution?

All parties have said the best solution would be if ICAO produced its own scheme to curb airline emissions.

The escalation of tension has accelerated efforts, which so far have dragged for well over a decade.

Is there room to manoevre?

The EU said it only opted to include all airlines in its scheme because of ICAO's failure to deliver.

Its law could be modified should ICAO find a solution, but the bloc cannot simply tear up law approved by all 27 of its member states and endorsed in its highest court in December last year.

It has some flexibility over implementation, however. It has always said it would consider exempting nations provided they have "equivalent measures" in place to reduce airline carbon emissions. It has never specified what these might be.

Under the EU's scheme, 85 per cent of allowances will initially be handed out for free and in any case, no airline will face a bill until next year, leaving time for negotiation.

"The question to the Moscow meeting is will these countries instead of telling us what we should not do come up with a constructive and concrete alternative?" Isaac Valero-Ladron, EU spokesman for climate action, said on Monday.

"Will these countries propose a work plan and timeline? When, how and what are they going to deliver?"

The impact on the carbon market

The European Union's ETS in December dived to record lows below €7 under the pressure of oversupply and economic recession. It has recovered to around €9, but is still far below the levels needed to spur low-carbon investment.

Airlines buying emissions could help boost the scheme.

The sector's net demand for carbon permits could reach up to 700 million by 2020, analysts at Thomson Reuters Point Carbon have said, making it the second biggest buyer of carbon units behind the electricity sector.

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