Push-back grows against Europe's emissions tax scheme

David Jessop, THIS WEEK IN EUROPE

Watch closely what is happening in Europe regarding its proposed environmental tax on aviation.

In recent weeks, China has added its voice to that of other nations to make clear that it will not accept the extension by the European Union of its emissions trading scheme - the EU ETS - to aviation.

This is an important development. Its implications go far beyond the Caribbean's concerns about this scheme's impact on tourism. It suggests that attempts by Europe to impose unilaterally environmental taxation that is extra-territorial in effect are likely to be subject to an ever-increasing range of legal and other challenges, and may also come to be seen as a restraint on trade.

In outline, the EU has had in place since 2005 an emissions trading scheme which seeks to limit the amount of carbon dioxide that industries in Europe emit.

It has done so by establishing a cap, and then progressively reducing the amount of carbon that named industries can discharge before they have to buy or trade licences to enable emissions at levels above the cap.

Up to now, the industries covered have all been physically located in Europe, but this will change with the inclusion of aviation, and eventually, maritime transport, within its scope if, as the European Commission (EC) argues, the International Maritime Organisation cannot come up with a global approach by the end of this year.

Under the EU directive, emissions from aviation will be capped at 97 per cent of the average airline emissions between 2004 and 2006, and 95 per cent as from 2013.

To begin with, 82 per cent of the airlines' allowances will be handed out free, while 15 per cent will be sold at auction, and three per cent will be put into a reserve for fast-growing airlines and new entrants. The amounts that will be free in subsequent years will fall, increasing the costs to airlines, or in theory, forcing them to reduce the number of flights by increasing efficiency or load factors.

The sums raised from the licensing scheme will be retained by individual EU member states, and controversially, in the United Kingdom, will be levied on top of existing aviation taxes such as Air Passenger Duty (APD).

additional costs

The EU scheme will result in all airlines flying into and out of Europe facing additional costs of around US$1.5 billion - some suggest much more - when the new regulations come into force, but it is far from clear how the cost of the licences will be passed on to the consumer.

This is because the airline, whether scheduled, charter, private or freight, will have to take a commercial decision as to apply the cost to specific flights and routes.

Up to now, this is the only way this issue has been debated in public, but there is now a growing international reaction to the extra-territorial implications of a tax on carriers from non-EU nations.

Four US airlines are in the process of bringing a case relating to the legal enforceability of the EU ETS. They argue that the unilateral inclusion of airlines from outside Europe infringes key articles in the Chicago Convention, the treaty that regulates international civil aviation.

The case will be heard before the European Court of Justice in July of this year, but is unlikely to result in a ruling until sometime after the EU ETS scheme has embraced aviation.

China's airlines are now threatening also to bring a case, and the Chinese government is making clear that it might consider retaliatory trade measures.

The Chinese position is different to that of the US airlines and is of particular significance to the Caribbean.

Chinese aviation authorities argue that under the Kyoto Protocol, they are exempted from international legally binding obligations to reduce carbon emissions as China is classified as a developing nation, and as such, should be excluded from Europe's scheme.

For its part, the Chinese government has made clear, following inconclusive talks with the European Commission that it reserves the right to take countermeasures.

Although these have not been specified, it is clear from the nervous reaction of EU governments to the concerns about retaliation expressed by the French plane maker Airbus and by European airlines that they are fearful that China may invoke legal and trade measures if no agreement can be reached.

competitive neutrality

A first consequence is that Germany and France have both complained to the EC and may challenge the EU legislation involved, warning that foreign airlines should only be subject to the EU ETS if it causes no harm to European airlines and ensures so- called competitive neutrality.

For its part, the European Commission has responded by taking a hard line on the basis that if it backs down, it will lose influence in international fora. However, the EC also appears to be considering whether measures being introduced by China to reduce its own aviation carbon emissions might be considered to be equivalent and thus not require it to be subject to the EU ETS.

As this is being written, the Caribbean is in the process of submitting its response to the UK government's consultation paper on the reform of the APD, the tax which is levied on the basis of arbitrarily chosen distance.

The document in part is expected to point to Principle 12 of the Rio Declaration on the Environment and Development of 1992.

This accepts that all states should cooperate to promote a supportive and open international economic system ... to better address the problems of environmental degradation.

It quotes the following language in the declaration: "Trade policy measures for environmental purposes should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade."

"Unilateral actions to deal with environmental challenges outside the jurisdiction of the importing country should be avoided. Environmental measures addressing transboundary or global environmental problems should, as far as possible, be based on an international consensus."

The Chinese response to the EU ETS has important implications for the Caribbean and all developing nations. While the region has so far forgone the idea of legal retaliation against Europe in relation to the damage that the unilateral taxation of aviation emissions is having on its principle export industry, tourism, a moment may come soon when the injury caused by the EU ETS and the APD will have to be taken much more seriously by Europe.

David Jessop is director of the Caribbean Council. Send feedback to david.jessop@caribbean-council.org.