BRUSSELS/LONDON Nov 1 Twenty-six nations,
including the United States, are expected to lodge a formal
protest on Wednesday against a European Union law to make all
airlines travelling to and from Europe pay for their carbon
The protest at the International Civil Aviation Organization
(ICAO) meeting in Montreal, Canada, is likely to escalate
transatlantic tension, which has triggered an anti-EU bill in
the U.S. Congress.
It declared illegal the EU plan to make all flights buy
carbon permits under the EU Emissions Trading Scheme (EU-ETS)
from Jan. 1 to offset their emissions.
The proposed U.S. legislation could mark the beginning of a
trade war, analysts and lawyers said. The following looks at
some of the issues.
HOW LONG HAS THE DEBATE RAGED?
In 1997, the Kyoto Protocol on tackling climate change asked
developed countries to work with the ICAO to reduce aviation
greenhouse gas emissions.
Aviation accounts for about 3 percent of total EU greenhouse
gas emissions but this is forecast to keep rising.
ICAO considered regulating carbon emissions on the basis of
international airspace and decided this was impractical.
Problems included regulation of emissions while planes were
flying over the high seas, which would be "orphan pollution" --
i.e the responsibility of no one.
Frustrated by the lack of progress, the EU -- which has
taken a leading role in tackling climate change -- in 2005
concluded that bringing aviation into the EU ETS would be the
most cost-efficient and environmentally effective option for
controlling aviation emissions.
In protest at the EU law, the Air Transport Association of
America, American Airlines and United Continental
took their case to the High Court in London, which
referred it to the European Court of Justice (ECJ) last year.
In October, the advocate general in a preliminary opinion
said the EU was acting within the law. Her opinion is not
binding, but is a good gauge of the ECJ's final ruling expected
early next year.
WHAT DIFFERENCE WOULD A FORMAL PROTEST AT ICAO MAKE?
EU lawyers have said any decision by the ICAO council would
not be legally binding, but could be a step towards a formal
dispute procedure, in which the president of ICAO would mediate.
Lawyers specialised in the airline industry said ICAO was an
appropriate forum, although they questioned whether that would
change the EU's position.
"It's doubtful an ICAO challenge will dissuade the EU from
its current plans," said Gabriel Sanchez, adjunct professor of
law at the International Aviation Law Institute, Chicago.
ICAO, he said, "does not have a good track record with
respect to issuing final rulings in aviation disputes."
HAVE THE AIRLINES CHANGED THEIR STANCE?
Lobby groups said the airlines have radically shifted
In a paper in 2007, seen by Reuters, trade group, the
International Air Transport Association (IATA) assessed the
"financial impact of extending the EU ETS to airlines."
In sum, it said the impact on revenues would be minimal.
Even if prices for EU Allowances (EUAs) rose to 100 euros
per tonne of CO2 emitted (compared to around 10 euros now) and
passenger numbers shrank by 37 million, "the impact on airline
profits would be minimal."
This week, IATA said it had always been consistent.
"Our views have not changed. The 2007 paper analysed a
different scheme design to what the EU delivered," IATA Chief
Economist Brian Pearce told Reuters.
"IATA supports emissions trading in principle, but only if
it does not distort competition or be imposed
extra-territorially. The design of the current EU ETS does both
"Airlines in practice will not be able to raise fares to
reflect ETS costs, because of unequal competitive impacts
between EU and other airlines. So the ETS will adversely impact
A report last week said the scheme could cost airlines
around 2 billion euros ($2.8 billion) by 2020.
WHAT IS HAPPENING IN CONGRESS?
Last week, the U.S. House of Representatives approved
legislation to make it illegal for U.S. passenger and cargo
airlines to comply with the EU law.
There has not yet been companion legislation in the U.S.
Senate, but Washington and EU sources said a proposal was
expected in the coming weeks.
WHAT HAPPENS IF PROPOSED U.S. LEGISLATION IS SIGNED INTO
Lawyers said that if the U.S. draft legislation became law,
airlines could find themselves unable to fly into Europe for
fear of breaking either U.S. law or the EU law.
A way out of the impasse could lie with a 1996 blocking
regulation passed by the EU, which made it illegal for EU
entities to comply with the Helms-Burton Act that strengthened
the U.S. embargo against Cuba.
Effectively, it would mean staving off one piece of blocking
law with its own blocking legislation.
"If the U.S. adopts a law prohibiting compliance with the
ETS (and any taxes or fines due under it) for U.S. companies,
that law will likely apply also to EU subsidiaries," said Lucas
Bergkamp, a partner at Hunton & Williams in Brussels.
"In response, the EU could add the U.S. law to the annex of
the blocking regulation agreed in response to the Helms-Burton
Act on Cuba.
"EU member states could then enforce the ETS against the EU
subsidiaries of U.S. airlines," he said.
COULD THERE BE EXEMPTIONS?
The EU Commission has repeatedly said it will not back down.
However, it told the China Air Transport Association in June
there were provisions in ETS rules to exempt airlines of
countries taking equivalent steps to cut emissions from
"I would not be too surprised to see some exemptions," said
Matteo Mazzoni, carbon analyst at Nomisma Energia.
"Eventually, they are always the most accepted compromise in
this kind of deal."
WHAT WILL BE THE IMPACT ON THE MARKET?
Opinion is divided on the impact of the row on the carbon
Exempting U.S., Chinese and Indian airlines from the ETS
would reduce the aviation sector's total demand for carbon
permits by nearly 12 percent next year, according to researchers
Under current rules airlines will need to buy an estimated
47 million carbon units next year but this could shrink to 41.5
million if the EU Commission exempts airlines from the three
main countries opposed to the targets.
Low demand could heap pressure on EU Allowances (EUAs),
which hit a two-and-a-half year low this summer.
"We are increasingly concerned by the continuing level of
opposition to inclusion in the EU ETS (..) and by the risk this
opposition poses to our forecasts for net EUA demand from the
aviation sector over 2012-20," said Deutsche Bank last month.
Others say airline demand was not forecast to be high at
first anyway as airlines are only required to pay for 15 percent
of the carbon they emit in 2012 and will be given permits for
free to cover the other 85 percent.
"According to our model, if everything proceeds as it
should, aviation will start to become a factor no earlier than
2015. Till then, EUA demand from air carriers is likely to
remain pretty much limited," Mazzoni added.