Bridges Weekly Trade News DigestVolume 16Number 5 • 8th February 2012

Tensions over EU Emissions Levy Reach New Heights as China Tells Airlines Not to Comply

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The Chinese government has barred the country’s airlines from participating in Brussels’ controversial plan to place a levy on foreign airlines for the emissions they use on incoming and outgoing flights. With China also set to meet with other opponents of the aviation emissions levy - including India, Russia, and the US - later this month to discuss a plan of action, tensions over the EU scheme are expected to escalate much further.

In banning its airlines from complying with the EU’s Emissions Trading System (EU ETS), the Civil Aviation Administration of China underscored that “China objects to the EU’s decision to impose the scheme on non-EU airlines, and has expressed its concerns over the scheme through various channels.”

According to Xinhua, the country’s official news agency, airlines cannot join the ETS or use it as a justification for raising ticket prices without government approval.

The 6 February announcement also argues that the inclusion of aviation under the bloc’s Emissions Trading System is in breach of UN Framework Convention on Climate Change (UNFCCC) and International Civil Aviation Organization (ICAO) principles.

The European Court of Justice, Europe’s top court, ruled in December that the inclusion of aviation under the ETS is fully compatible with international law. Shortly thereafter, China’s four biggest airlines said they would not comply (see Bridges Weekly, 11 January 2012). This latest move by Beijing, however, raises the level of discourse to the capitals.

China has the world’s fastest growing aviation industry, with many direct connections with European cities.

Trade war could be on the horizon, some fear

Some officials have suggested that the aviation policy could result in a “trade war,” with Chinese state media calling it a “trade barrier in the name of environmental protection.” The day after announcing the ban, China also indicated that it would consider taking additional steps to defend itself from the scheme.

“China will consider taking necessary steps in accordance with the way things develop to protect the rights of our nationals and our companies,” Foreign Ministry spokesman Liu Weimin told reporters on Tuesday 6 February.

The European Commission has said that airlines that do not comply with the ETS will be fined and could be banned from EU airports. However, a spokesman for Connie Hedegaard, the EU climate commissioner, told the Financial Times that the bloc was “confident that the Chinese airlines will comply with our legislation.”

Still, the spokesman stressed, the EU would not be “backing down.”

The China Air Transport Association - which includes the country’s biggest state-owned airlines Air China Ltd, China Southern Airlines, China Eastern Airlines, and Hainan Airlines - has long been pressuring Beijing to oppose the levy. The association - which had already threatened in January not to pay ETS-related charges — says the scheme could cost Chinese airlines as much as US$127 million in 2012.

Other sources, however, place the cost as far lower, making the actual impact of the scheme on these airlines unclear.

“I believe all sides will negotiate again and find a solution,” said Chai Haibo, the group’s vice president. “I can’t imagine that the worst case, such as the EU grounding Chinese flights, could happen.”

The group has also been working on a legal challenge in Germany, according to Bloomberg. However, their pursuit of the case will depend on Brussels’ reaction to the China ban, the news wire reports.

Beijing’s announcement comes just days before Chinese and European leaders are scheduled to meet for a summit in Beijing. The Chinese Foreign Ministry said yesterday that it hopes these discussions could help resolve the emissions row.

Aviation levy opponents want “global” solution

China - along with Russia India, the US, and others - say Europe’s unilateral approach will be less effective than a global solution. The Montreal-based ICAO, the UN body responsible for civil aviation, has said that it plans to form a global emissions system.

China, India, Russia, and the US, along with various other countries that oppose including aviation in the scheme, are set to meet in Moscow on 21 February to discuss a plan of action in response to the EU scheme, Reuters confirmed on Monday, citing unnamed EU and Indian sources. Nearly 30 countries are expected to attend, according to the news wire.

The US House of Representatives in October 2011 passed a similar bill that would make it illegal for US airlines to comply with the scheme (see Bridges Weekly, 2 November 2011). However, the bill still requires Senate and presidential approval before it can become law.

ICTSD reporting; “World powers ‘plan anti-carbon tax talks’,” AGENCE FRANCE PRESSE, 5 February 2012; “China Bans Airlines From Joining EU Carbon Levies System,” BLOOMBERG, 6 February 2012; “China bars airlines from EU tax plan,” FINANCIAL TIMES, 6 February 2012; “Europe holds China to carbon tax payments,” FINANCIAL TIMES, 6 February 2012; “China Bans Airlines From Joining EU Emissions Scheme,” REUTERS, 6 February 2012; “China says hopes EU talks can solve airline fee dispute,” 7 February 2012; “Opponents of EU airline CO2 scheme to meet in Moscow,” REUTERS, 6 February 2012; “UPDATE 2- China says to defend against EU emissions plan,” REUTERS, 7 February 2012.

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