From 2012, Chinese airlines flying to the European Union will either have to make major emission cuts or purchase carbon permits thanks to a decision to include all carriers in the EU’s Emission Trading Scheme (ETS). If the number of flights by Chinese airlines remains steady, it is estimated that those emission permits will cost in the region of 100 million euros (US$137 million) for 2012.
If implemented, this will be the EU’s first border carbon adjustment. China’s aviation industry has long been aware of the looming changes, but has failed to put together a systematic or effective response. This article is based on consultations with both European and Chinese bodies and analyses the motives for the policy, its status in international law, and suggests possible resolutions.
The case from Europe
In January 2009, a European directive formally made the aviation industry, including non-EU airlines flying into or out of the trading bloc, part of the EU-ETS. The policy document made clear that the move intended to reduce the climate impact of aviation activities as, although the European Union’s overall emissions for 2006 were 3% lower than in 1990, aviation industry emissions doubled over the same period. Improvements in aviation technology and efficiency, though significant, have not been sufficient to cancel out the increase in emissions brought about by rapid expansion. In 2012, the aviation industry is expected to account for 23 million tonnes of carbon emissions, rising to 122 million tonnes in 2020.
But this is not just a climate-change policy: it is a political decision. The European Union is attempting to use the international nature of aviation to give its regional solution global reach, thus demonstrating its leadership on climate-change issues and strengthening its use of market mechanisms in the climate-change arena. This experiment with the aviation sector may pave the way for similar efforts in other global industries such as steel or power.
Equally important is that the EU’s market-based emission-reduction mechanisms will bring new business to the region, for example in monitoring carbon emissions, carbon trading and carbon finance. In the future, these firms will have a head start in carbon markets worldwide. Including international aviation in the EU-ETS will consolidate and strengthen the Europe’s leading position in global carbon markets. This is the second driver.
The third is a desire to resolve competition issues for European airlines. If only EU airlines are required to pay for their emissions, then their costs will be higher than those of competitors based elsewhere. The aviation sector is already fiercely competitive, and the extra costs of carbon emissions would place EU airlines at a disadvantage.
The EU decision was controversial from the start. In December 2009, the US Air Transport Association (ATA) and three American airlines brought a case against the EU-ETS in London. The UK court, holding that the case affected European interests as a whole, referred it on to the European Court of Justice.
The ATA view is that the inclusion of non-EU carriers in the trading scheme breaches the 1944 Chicago Convention, the Kyoto Protocol and the Open Skies Agreement between the European Union and the United States.
The US action cited the Chicago Convention’s Article 1 on sovereignty, Article 11 on control of airspace and discrimination according to nationality and Articles 15 and 24 on charges and dues. The United States holds that non-EU airlines have no obligation to abide by carbon quotas for flights in non-EU or international airspace.
The United Kingdom’s legal position is stronger, however. First, the lawyers argue that the European Union as a whole is not a signatory to the Chicago Convention and as such is not restricted by it. If the ECJ agrees on that point, then all arguments based on the Chicago Convention can be ignored.
Next, even if the Chicago Convention is applicable, requiring airlines to provide allowances for their flights over non-EU airspace is not an infringement of sovereignty, as the third country remains free to impose its own emissions measures and control the entry of aircraft.
Third, there is no question of discrimination, and so no breach of Article 11.
Fourth, on charges and dues, the United Kingdom holds that the EU-ETS does not constitute a charge, but that it is an administrative scheme requiring airlines to monitor and report their emissions and giving them the choice to operate within their given quota, or purchase permits for over-quota use. Even if those purchases are made, this does not constitute a charge in the sense of Article 15, for the right of transit over or entry or exit to a territory.
And fifth, Article 24 of the convention bans customs duties on fuel. But as the fuel remains on board the aircraft and does not pass through customs, the costs of the ETS cannot be counted as customs duties.
Even so, the Open Skies Agreement may offer American airlines a way out. Article 11 of the bilateral agreement mandates that no tax can be imposed on fuel consumption. The US airlines claim that, by requiring the purchase of emissions permits, this is precisely what the EU is doing. In a 1999 case, the ECJ ruled that a Swedish tax on emissions calculated on the basis of fuel consumption amounted to a tax on fuel – and as such would be banned by the agreement.
Also, the United States argues that Europe’s unilateral carbon-trading system violates the 1997 Kyoto Protocol, which rules that aviation emissions should be reduced “through international aviation associations”. In response, the United Kingdom maintains that states are not required to work only through those associations. The irony of the Americans citing the Kyoto Protocol, when as everyone knows they have not themselves ratified it, has not been lost on observers. This line of argument should be ignored.
Progress of the row to date suggests that the claims based on the Chicago Convention are likely to fail, while those referring to the EU-US Open Skies Agreement may succeed. That would mean that, although it is legal for non-EU airlines to be included in the EU-ETS, American airlines would be excluded and would not have to buy emission permits.
This would be the worst case scenario for China: the United States, with the world’s largest fleet of aircraft, would not have to purchase EU-ETS permits, while China’s airlines would.
Cheng Shuaihua runs the Strategic Analysis Department at the International Centre for Trade and Sustainable Development (ICTSD).
This article was originally published on the ICTSD’s Chinese website and is reproduced here with permission. Some information has been updated following consultation with the author. The views expressed in this article are the author’s own and do not represent those of, and should not be attributed to, his organization.
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