BEIJING China on Monday barred its airlines from joining an EU scheme that could charge for carbon emissions from flights in and out of Europe, escalating a global trade row over the taxing of foreign carriers.
The hardening of the dispute, which comes a week before Chinese and EU leaders hold a summit, could eventually subject Chinese airlines to fines or prohibitions on use of EU airports.
It also comes as euro zone countries look to China, with its huge foreign exchange reserves, to help ease a severe debt crisis.
Chinese airlines were prohibited from participating in the EU Emissions Trading Scheme (ETS) without government approval, the central government's State Council, or cabinet, said on its website (www.gov.cn).
Beijing further prohibited all carriers from using it as a reason to raise fares or fees in connection to the program that began on January 1, which it had already denounced as a trade barrier.
Under the scheme, airlines are required to reduce emissions or buy additional allowances for emissions beyond a set level, or else face fines.
The EU plan is intended to curb rising greenhouse gas pollution from aviation and fight climate change. Globally, emissions from aviation comprise about two percent of mankind's greenhouse gas pollution and this share is expected to grow.
"China hopes Europe will act in the light of the broader issues of responding to global climate change, the sustainable development of international aviation and Sino-European ties, strengthening communication and coordination to find an appropriate solution acceptable to both sides," an unnamed official from China's civil aviation authority said, according to the announcement.
"As well, the Chinese side will also consider taking necessary measures to protect the interest of the Chinese public and businesses based on developments," the official said.
Foreign airlines object to the scheme because the carbon cost is calculated over the length of the entire journey, not just within European air space. This has led to accusations by the United States, China, India and others that the European Commission has over-stepped its legal jurisdiction.
Any airlines that do not comply face fines of 100 euros ($130) for each tonne of carbon dioxide emitted for which they have not surrendered allowances. In the case of persistent offenders, the EU has the right to ban airlines from its airports. Fines would kick in from next year.
EU Climate Commissioner Connie Hedegaard has repeatedly said she is open to talks with other nations and that the EU law provides for "equivalent measures."
But what these measures are has not been fully explained, said Andrew Herdman, director-general of the Association of Asia-Pacific Airlines, which represents 15 regional airlines, including Cathay Pacific and China Airlines.
He was unaware of any governments seriously considering equivalent measures, which could be a matching scheme in other countries that impose carbon costs on incoming and outgoing flights.
"We're now at the stage that it's absolutely clear that a whole host of foreign governments are not going to allow the EU to do this," Herdman told Reuters, but added the Chinese government ruling was problematic.
"It does put the Chinese airlines in a difficult position where you've got to comply with the legislation and yet your government is telling you not to comply," Herdman said, but added there would be no immediate financial impact.
On Monday, the EU's Ambassador to China, Markus Ederer, said at current jet fuel prices, the per-ticket cost increase from the scheme on a one-way Beijing-Brussels trip would amount to about 17 yuan ($2.70).
Qantas said last week it was raising fares because of higher fuel prices and the EU carbon charge.
A spokeswoman for Cathay Pacific said the Hong Kong-based airline had fully complied with the EU program but under strong protest.
"Europe is a green leader in the world and we try to live up to our aspirations," Ederer told reporters at a news conference in Beijing. "Airplanes are an important source of emissions. They should be regulated."
For airlines, cost increases are gradual, as 85 percent of carbon allowances are handed out for free this year and payment for the remaining 15 percent in 2012 would be due in 2013 after emissions are calculated.
"COALITION OF THE UNWILLING"
India and the United States are among those leading a group of 26 countries opposed to the law, a group one Indian official dubbed the "coalition of the unwilling."
Late last year, the European Court of Justice ruled against a challenge by a group of U.S. airlines.
In December, the China Air Transport Association (CATA) urged China's airlines to refuse to take part.
CATA says the scheme would cost 800 million yuan ($123 million) in the first year and more than triple that by 2020.
CATA represents the country's four major airlines: flag-carrier Air China Ltd, China Southern Airlines, China Eastern Airlines and Hainan Airlines.
Chin Leng Lim, a law professor at the University of Hong Kong, said the World Trade Organization was not the right venue for resolving the dispute but said countries would find ways to hit back if it came to that.
"They think their sovereignty has been violated, they argue international law has therefore also been violated, and they definitely think a rule that says the further you are from Europe, the larger your carbon footprint, is unfair ... and downright protectionist to boot," he said in an email.
Indian officials say retaliatory action against European firms could be considered if the European Commission doesn't relent, including charges for overflying Indian airspace or reducing the numbers of European flights coming to India.
(Reporting by Chris Buckley; Additional reporting by Michael Martina and Lucy Hornby in Beijing, David Fogarty in Singapore, Alison Leung in Hong Kong and Krittivas Mukherjee in New Delhi; Editing by David Fogarty and Ken Wills)