BRUSSELS — When the European Union’s highest court hears arguments Tuesday that Europe should not charge U.S. airlines for their carbon emissions, it will be a showdown at the crossroads of environmental protection and cold cash.
Starting Jan. 1, the Union intends to expand its Emissions Trading System to cover emissions from most flights that touch down at, or take off from, European airports. That means airlines will have to buy some of their carbon permits from traders and E.U. governments.
Promoters of the change say the rules, which were approved by the 27-nation bloc in 2008, should compel airline operators to speed up adoption of greener technologies at a time when air traffic, which contributes about 3 percent of global carbon dioxide emissions, is growing much faster than efficiency gains are cutting those emissions. Many European governments say they will use the extra income to help offset spending on climate protection.
But the plan has generated fierce opposition from airlines, many of them non-European. They say that Europe has no right to charge for emissions on some routes that are mostly outside European airspace.
Air China, China Eastern and China Southern have threatened to file a lawsuit against the system, and the China Air Transport Association has suggested that Chinese airlines might buy fewer aircraft from European manufacturers. In response, Airbus and the Association of European Airlines have raised concerns about a trade conflict with China that could affect their businesses.
On Tuesday, the Air Transport Association of America, an industry group, and three major U.S. airlines — United Airlines and Continental Airlines, which merged last year, and American Airlines — will make their case at the European Court of Justice in Luxembourg against the way the system will be applied by Britain.
As home to London Heathrow and other busy airports, Britain has the highest carbon dioxide emissions from aviation in the Union, making it a cornerstone of the E.U. system to regulate the sector.
A decision by the court supporting the U.S. airlines would badly damage the initiative because E.U. regulators and European airlines say that involvement of non-E.U. carriers is critical to its success. An advisory opinion could come within months, with a final judgment possible before the system takes effect in 2012.
Lawyers for the U.S. carriers are expected to argue Tuesday that the E.U. system conflicts with the Chicago Convention, an international accord that gives countries sovereignty over their airspace, and with the Kyoto Protocol, a climate treaty.
The airlines also are expected to attack the cost of the system and the lack of guarantees that revenues will be used for climate protection.
Seeking to defuse the dispute, E.U. officials have emphasized that they will exempt incoming flights if other countries take “serious measures” to reduce emissions that would be considered equivalent by the Union. E.U. officials also have begun discussions with national governments on introducing rules requiring them to use the revenues from permits to tackle climate change.
But they say delays are out of the question.
“We are not thinking at all about the possibility of changing our legislation,” José Manuel Barroso, president of the European Commission, said last month. “All the world should unite in some kind of directive like this one.”
What is clear is that by charging airlines for their carbon emissions, the European Union would do more than protect the climate. The system could be a source of revenue for countries, like Britain, with busy airports and ballooning budget deficits.
Britain already generates about £500 million, or $800 million, annually from auctioning permits to polluting industries under the Emissions Trading System, according to the Office for Budget Responsibility, a government-funded body that operates independently.
It could generate a further £80 million next year from airlines, while nations across the Union could net about €480 million, or $695 million, according to estimates by bankers and analysts.
Airlines complain that some of the money they will spend on carbon permits will end up subsidizing debt-laden governments.
“Countries like Britain have reserved the right to use the money how they see fit,” said Nancy Young, a vice president at the Air Transport Association of America. “Helping Europeans out of their fiscal hole is not the aviation industry’s job.”
Last month, officials from the administration of President Barack Obama demanded that U.S. airlines be exempted. They also have asked E.U. officials how they planned to track the money they collected from airlines.
One factor sharpening the debate is that the amount governments stand to gain is unclear, as is the eventual cost to the airlines.
For now, the sums governments could raise from airlines are minuscule by comparison with national budgets. But the airlines are looking at the thin end of a big wedge, as those sums could grow very substantially over coming years, if governments decide to auction a larger proportion of permits, and if demand for the permits and their value rises.
In an emissions trading system, the authorities set a cap on greenhouse gases and then allow companies to trade permits corresponding to their emissions.
In the European system, the national authorities hold periodic auctions to distribute new batches of permits. Banks, traders and energy companies then can buy and sell the permits, creating a worldwide market that was worth about $120 billion last year. Most of that trade was concentrated in Europe.
Airlines will have to buy a greater proportion of their permits than other industries did when the system was established six years ago, partly because the E.U. authorities wanted to ensure that permit prices did not collapse, as happened in the past when governments handed out too many for free.
Obliging airlines to buy 15 percent of their permits to begin with should mean that “bringing aviation into the system will surely result in substantial government revenues, just as a tax would,” said Robert Stavins, the director of the Harvard Environmental Economics Program.
Britain, for example, should be able to generate £2.2 billion annually from the system by the middle of the decade, mostly by auctioning permits to electricity utilities but also by auctioning to other sectors, including airlines, according to the Office for Budget Responsibility.
Kevin Johnston, a spokesman for United Continental Holdings, the company that operates two of the U.S. airlines that will be in court Tuesday, declined to estimate how much United Continental would have to pay to comply with the system, but he said the costs would be “significant.”
The International Air Transport Association said the costs to airlines in the first year of the system would be about $1.5 billion. Anthony Concil, a spokesman for the association, said airlines could spend more than half of that sum on permits to cover growth in their emissions in recent years.
Those estimates were probably too high, according to Trevor Sikorski, an analyst at Barclays Capital. Mr. Sikorski forecasted that airlines would need to pay between €400 million and €600 million for permits during the first year of the system.
Many airlines probably will face little pain to begin with — and some may even profit. That is because airlines are likely to pass on to ticket-buying passengers the entire cost of the carbon dioxide allowances that they purchase, as well as the allowances received for free, which still represent the vast majority.
The rating agency Standard & Poor’s has forecast that airline fares will increase, and that by 2020 airlines will have added €4.60 to the price of a seat on an internal European flight and €39.60 to the price of a seat on a long-distance flight. Those increases assume that the price of a permit to offset a ton of carbon dioxide rises to €30 from current levels of about €13.
The money paid for some permits can be used by governments to support efforts to address climate change, and in some cases money for permits can go toward offsetting emissions in other parts of the world. But a criticism of the system is that, at current prices, permits still cost too little to compel polluters to reduce their own greenhouse gas emissions by significant amounts.
“There are likely to be large windfall profits for airlines at first,” said Annela Anger, a researcher at the Cambridge Center for Climate Change Mitigation Research in England. “But airlines will need to be seen investing that money in becoming greener or be forced to buy all their permits sooner than they would like.”
Link http://www.nytimes.com/2011/07/04/business/global/04emissions.html?_r=1
Annela Anger, Cambridge, featured in the New York Times
Sunday, July 10, 2011 - 09:27
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