COLUMN-EU court case nudges world towards carbon tariffs-Gerard Wynn

Thu Oct 6, 2011 10:05am EDT

(Gerard Wynn is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON Oct 6 (Reuters) - The European Union took a step closer on Thursday to limiting world airline carbon emissions, which may point towards wider border measures against high-carbon industries and countries given a void in international climate action.

The EU is the first jurisdiction to try and limit carbon emissions beyond its own borders, acting to shield the competitiveness of domestic airlines from participation in its own emissions trading scheme from next year.

Such schemes force polluters to buy permits called allowances above a certain quota or emissions cap.

The EU concern is that its unilateral action to limit aviation emissions will hand an advantage to international rival airlines.

Under the EU plan, from January 1, 2012 all airlines will have to buy permits accounting for their full carbon emissions, in European air space and beyond, for flights landing in and exiting the European Union.

A senior judge on Thursday found the EU scheme to be justified, in a non-binding "opinion" to the European Court of Justice (ECJ), in a case where U.S. airlines and associations have sought an exemption.

The ECJ is expected to rule early next year.

The United States and China joined a group of 26 countries last month declaring the EU scheme to be illegal.

DISPUTE

It's early days to draw a link between the EU plan and a wider escalation of border measures against high-carbon goods in other countries and sectors.

However, the prospect for new EU-style cap and trade schemes in Australia and South Korea, both slated for 2015, raises the possibility that such measures may become the international tool of last resort for curbing carbon emissions in a period of multilateral indifference.

The United Nations has failed to rally countries into united global effort, despite repeated deadlines, following bitter acrimony between emerging and industrialised countries over who does what, and more so after the financial crisis.

Broadly, border measures may encourage wider action to fight climate change as long as U.N. climate talks are stalled. They may encourage countries to curb industrial emissions, knowing they can protect businesses with balancing border measures, and then motivate more countries to join in, to avoid the border charges or a messy legal dispute.

A sceptical view is that industry lobbies will assert overly aggressive action and retaliation, given they routinely exaggerate the costs of regulation, in tit-for-tat reprisals endangering trade.

Draft U.S. climate bills two years ago included an option for border measures to protect steel, cement and aluminium industries, under a proposed U.S. cap and trade scheme which ultimately failed in the Senate and is unlikely to be revived for years.

The idea was to force importers to buy equivalent emissions allowances, in a "border carbon adjustment", as if they were manufacturing under a local emissions trading scheme (ETS).

So far the EU has chosen to shield its steel and cement sectors, which are already included in its ETS, by giving them as many free allowances as they need or more, rather than using any import adjustment.

An important distinction between aviation and energy-intensive products like steel and cement is that trade in aviation services is not covered by the World Trade Organisation (WTO), while the latter are, meaning a whole different set of rules would be argued over.

A joint WTO-UNEP (United Nations Environment Programme) "Trade and Climate Change" report hinted that border carbon measures may be legal, although it carries no legal weight.

SPARED

As far as aviation emissions are concerned, these have been spared regulation by the 1997 Kyoto Protocol which directed countries to pursue action through the International Civil Aviation Organisation (ICAO).

That was partly because of a 1944 Chicago Convention which established ICAO and restricted taxes on jet fuel.

ICAO has since agreed various measures, but not binding, Kyoto-style CO2 caps, and airlines argue that countries must continue to wait for a global agreement.

Thursday's legal opinion stated that: "The EU institutions could not reasonably be required to give the ICAO bodies unlimited time in which to develop a multilateral solution."

The opinion added that the EU emissions trading scheme, which forces polluters to buy allowances whose price will vary, and only above a certain cap, did not count as a tax, potentially by-passing Chicago Convention restrictions. (Editing by James Jukwey)

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