Trade war looms over EU's airline tax

A trade war is looming over the European Union's move to impose charges on airlines based on the greenhouse gases emitted during a flight into and out of European airports.

Beyond a certain level of free allowances, the airlines have to buy emission permits depending on the emissions produced by their flights. As the free allowances will be reduced in future years, the charge to be paid will rise, thus increasingly raising the price of passenger tickets and the cost of transporting goods, and affecting the profitability and viability of airlines.

The China Air Transport Association has estimated that Chinese airlines will have to pay 800 million yuan ($127 million) for 2012, the first year of the EU scheme, and that this will treble by 2020.

According to Reuter Thomsom Carbon Point, the total cost to all airlines in 2012 is estimated at 505 million euros ($664 million), at the carbon price of 5.84 euro per tonne last week. Last September, when the carbon price was 12 euro per tonne, Carbon Point estimated the cost would be 1.1 billion euros in 2012, rising to 10.4 billion euros in 2020.

Many countries whose airlines are affected, including China, India, Malaysia, Nigeria, South Africa, Egypt, Brazil and the United States, consider this to be unfair or illegal or both.

The countries are particularly angry that the EU is imposing a charge on emissions produced during the entire flight of an aircraft and not just on the portion of the flight that is in European airspace.

The US has launched a case against the EU scheme in a European court that is still proceeding and China has banned its airlines from taking part in the EU scheme unless the government grants permission. And since their protests have not yielded any results, officials of 26 countries will meet in Moscow on Tuesday and Wednesday to discuss retaliatory action, such as imposing levies on European airlines and reviewing access and landing rights agreements with European countries.

There are many reasons why the concerns of these countries are justified.

Since each country has sovereignty over the airspace above its territory, reaffirmed by the Chicago Convention, the EU tax, which also includes the portions of flights that are not in European airspace, infringes the principle of sovereignty.

The UN Climate Convention's Kyoto Protocol also states that Annex I parties (developed countries) should pursue actions on emissions arising from aviation through the International Civil Aviation Organization (ICAO).

Consistent with the principle of common but differentiated responsibilities, only Annex I countries are mandated to have legally binding targets. This UN Framework Convention on Climate Change principle is violated by the EU requirement, which applies to airlines from both developed and developing countries.

What happens in this aviation case is significant because there are many other unilateral measures linked to climate change being lined up by developed countries. These include the EU plan to impose charges on emissions from maritime bunker fuel, a US Congress bill that requires charges on energy-intensive imports from developing countries that do not have similar levels of emissions controls as the US, and several schemes involving labels and standards linked to emissions.

The EU's aviation emissions tax is thus an important test case, and this explains the furious and coordinated response by the developing countries, which form the majority of the protesting 26 nations meeting in Moscow this week.

It is the first full-blown international battle over whether countries can or should take unilateral trade measures on the grounds of addressing climate change.

Developing countries in particular are concerned over the growing signs that developed countries are preparing to take protectionist measures to tax or block the entry of their goods and services on the grounds that greenhouse gases above an acceptable level are emitted in producing the goods or providing the service.

Besides the EU flight charge, several other measures are being planned by the EU or by the United States that will affect the cost of developing countries' exports. In fact, trade measures linked to climate change may become the main sources of protectionism.

If these unilateral measures are implemented then developing countries will really feel they are being victimized for a problem that has historically been caused largely by developed countries. This will lead to a growing crisis in both the climate change regime and the multilateral trade regime.

The author is executive director of South Centre, a think tank of developing countries, based in Geneva.