UPDATE 3-China airlines won't pay EU carbon tax-association
* China will not cooperate with EU on ETS - CATA
* Will consider legal action vs EU, but no rush on this
* ETS could cost Chinese carriers $123 mln in first year
* Cathay may raise prices, SIA to be more fuel-efficient
By Alison Leung and Harry Suhartono
HONG KONG/SINGAPORE, Jan 4 (Reuters) - China's airlines will refuse to pay any carbon costs under the European Union's Emissions Trading Scheme, while other Asia Pacific carriers, already battling a weak travel market, are likely to pass on the extra cost to passengers.
The EU's scheme (ETS) was launched in 2005 as one of the pillars of the bloc's efforts to combat climate change. From Jan. 1, all airlines using EU airports are included in it.
"China will not cooperate with the European Union on the ETS, so Chinese airlines will not impose surcharges on customers relating to the emissions tax," Cai Haibo, deputy secretary-general of the China Air Transport Association (CATA), told Reuters by telephone on Wednesday.
CATA represents the country's four major airlines: flag-carrier Air China Ltd , China Southern Airlines , China Eastern Airlines and Hainan Airlines.
EU law makes a provision to enforce fines of 100 euros for each tonne of carbon dioxide emitted for which airlines have not surrendered carbon allowances. In the event airlines persistently flout the EU law, the Commission has the option of banning an aircraft operator.
But the law also allows some flexibility, giving countries the option of seeking alternative ways to offset airline emissions.
"Our law gives all countries the choice to reduce aviation's carbon pollution differently. If they take equivalent measures, all incoming flights from these countries can be exempt," Isaac Valero-Ladron, EU spokesman for climate action, said.
"Instead, some countries are basically saying: 'We don't like your approach, but we aren't going to do anything to reduce emissions.' Hopefully, these countries will quickly shift their attention to the need to take bold action at home."
TRADE WAR THREAT
Immediately after a December ruling from Europe's highest court that inclusion of airlines in the ETS was valid, China's state-run Xinhua news agency warned of a trade war, although the foreign ministry later stated its opposition less stridently and called on the EU to talk to other governments.
The United States has also warned of possible retaliation, while a draft law in the U.S. Congress proposes to make it illegal to comply with the EU legislation.
Chinese airlines will consider legal action against the EU in response to its charges for carbon emissions, Cai said.
But they will not rush into this, he added, mindful that U.S. airlines in December lost their legal challenge against the ETS and given that collection of the carbon cost from airlines will not be until March 2013.
Australia's Qantas Airways has said it was also considering legal action against the scheme.
"We are now walking on two legs -- first, we would not rule out the chance of taking legal action and, second, to resort to the government for retaliatory measures. Several departments have been looking into this," Cai said.
CATA estimates the scheme will cost Chinese airlines 800 million yuan ($123 million) in the first year and more than triple that by 2020.
The European Commission has assessed the impact on air fares at 2 to 12 euros per passenger. For airlines, the cost is gradual as 85 percent of carbon allowances are handed out for free this year and bills will be due only next year after emissions are calculated.
Germany's Lufthansa, the world's second-largest long-haul carrier after Dubai's Emirates, warned passengers on Monday to brace for higher ticket prices as it decided to pass on costs to the travelling public.
The EU says its ETS, which already applies to other industries, is the fairest way to tackle aviation's contribution to global warming in the absence of a global scheme, which more than a decade of debate at the U.N.'s International Civil Aviation Organization (ICAO) has failed to deliver.
Hong Kong-based Cathay Pacific Airways Ltd and some other Asian airlines, facing a sluggish economy and weak cargo demand, said they might impose surcharges or increase airfares to counter the ETS impact.
"It's inevitable that increased costs will be passed on to passengers. We will share the details at the appropriate time," said Carolyn Leung, a spokeswoman for Cathay Pacific, whose CEO has said the ETS would add about HK$50 ($6.44) to a ticket between Hong Kong and Europe.
Singapore Airlines Ltd (SIA), the world's second-most valuable airline, said it would try to offset the impact of the ETS by improving fuel efficiency and reducing its carbon emissions, which would lower the carbon charges.
"However, we're not yet ruling out any options for recovering the additional cost," SIA spokesman Nicholas Ionides said in an emailed response.
Tony Tyler, director general of the International Air Transport Association (IATA), has said the ETS would cost airlines 1.2 billion euros ($1.6 billion) this year, and he warned that airlines could struggle to pass this on to passengers in a weak travel market.
IATA, whose 230 members carry more than 93 percent of scheduled international air traffic, forecast a 29 percent drop in the industry's profit this year to $4.9 billion, dented by the weak global economy and high fuel prices.
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