European Airlines Add Voice to Fears Over Europe's Cap and Trade Program

The controversial European Emissions Trading Scheme (ETS) - a European wide cap and trade program - has sparked an ongoing dispute between the US and Europe regarding mandatory inclusion of non-European based airlines into the program.

In August, the potential for a trade war seemed possible due to mounting opposition both in the USA as well as other nations - notably China - over Europe's insistence that no airlines would be exempt from participating in the scheme.

ETS requires that any airline taking off or landing in Europe, regardless of country of domicile, must produce a carbon allowance accounting for every tonne of CO2 emitted.

Prior reports have mainly focused on US Congressional outrage over what they consider Europe's illegal "extraterritorial action," but European airlines are now becoming increasingly concerned that should the EU concede to outside pressure, any exemptions granted will put Europe's carriers at a competitive disadvantage.

Popularity is wearing thin on either side of the Atlantic, and it's all about the cost burden that a globally fragile airline industry will likely be forced to bear.

A couple of developments have taken place since TriplePundit last reported on this.

Firstly, while the American Air Transport Association has already taken the issue to the European Court of Justice in Luxembourg, on September 9th, the House Transportation and Infrastructure Committee approved the "European Union Emissions Trading Scheme Prohibition Act of 2011", which was drawn up in July of this year. A key passage in the Act states:

"The Secretary of Transportation shall prohibit an operator of a civil aircraft of the United States from participating in any emissions trading scheme unilaterally established by the European Union."

This is an unambiguous position that will be bound to create friction if it becomes law. Subsequently, on September 26th, the European Commission announced rules for the allocation of free emissions allowances under ETS:

• From Jan 1 2012 to Dec 31 2012, 85% of aviation allowances will be allocated free


• From Jan 1 2013 to Dec 31 2020, 82% of aviation allowances will be allocated free

The European commission details that 15% of remaining allowances will be auctioned, while in the 2013 - 2020 period, 3% will be set aside in a special reserve for new entrants and fast growing airlines.

In the Press release, Europe's Climate Action commissioner Connie Hedegaard was quoted as saying,

"At current market prices these free allowances represent more than €20 billion over the decade. With these potential revenues, airlines could invest in modernising their fleets, improving fuel efficiency and using non-fossil aviation fuel. As much as the EU prefers global action, we can't defend that the aviation sector is exempted from contributing because they can't agree internationally."

Reacting to the situation, British Airways' holding company - International Airlines Group, and Virgin Atlantic, sounded the alarm over the potential fall-out should the EU cave in to outside pressure. In writing to Vince Cable, the UK's Business Secretary, Business Green reports the two airlines have jointly written:

"What is particularly worrying is that the [European] commissioner makes no reference to the ongoing legal and political challenges by third-country airlines and their governments against the EU ETS, which are turning ETS into a trade and fiscal problem, rather than an environmental solution,"

they go on to add,

"We are relying on you and your colleagues to ensure that British and European carriers are not put at a competitive disadvantage against our international competitors as a result of the commissioner's failure to understand the economic realities of air travel."

The two British carriers also take issue with the characterization that the free carbon allowances represent more than €20 billion to invest in modernizing their fleets; stating,

"We reject the commissioner's suggestion that airlines are being gifted €20bn to invest in modern, fuel-efficient aircraft. ETS is a cost to airlines, not a revenue stream, and to think the allowances strengthen airlines' investment potential shows little understanding of the harsh financial reality of our industry."

Indeed, this is a fair argument; the estimated €20bn to be saved on allowances was never a cost to the airlines. But despite finding fault in the logic of the ETS, in the case of Virgin Atlantic at least, it's not about avoiding environmental responsibility. Virgin's environment policy supports the objectives of ETS - but asserts that it's something that should be a global (not a unilaterally European) resolution.

This is in fact the position of the International Air Transport Association (IATA) too, which feels the EU should abandon the inclusion of airlines into ETS altogether; instead urging they work towards a solution within the International Civil Aviation Organization.

With US legal action in progress in Europe, a Congressional Act prohibiting American based airlines from participating, and European Airlines vigorously questioning the process - the January 1st deadline inevitably means things will come to a head over the next quarter. Stay tuned!

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