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The First Carbon Trade War?

Wednesday, April 18, 2012

Europe vs. the rest of the world.

The European Union—or at least its feisty climate commissioner Connie Hedegaard—seems determined to take on the whole world by demanding that all airlines pay a carbon tribute for the privilege of crossing EU airspace and landing at EU airports. The tax, which will start being collected in 2013, would be levied not just on the miles flown over EU territory but for the entire length of the trip—thus, Indian or Korean airlines that traverse only a few hundred miles over the EU when traveling from Mumbai or Seoul would have to fork over taxes based on the entire trek of several thousand miles. All told, it is estimated that the EU would have taken in $1.2 billion from all airlines in 2012 had the new system been in place, a toll that rises to $3.6 billion by 2020. A sweet deal for EU coffers.

The new EU system is portentous. It is an extension of the continent’s cap and trade system from domestic sources to the international arena. Though other nations protested as the rules were being formulated, the new legislation went into effect on January 1, 2012. The EU took the final decisions unilaterally, including the calculations for carbon pricing; across-the-board levies as opposed to differentials for developing countries; and—crucially—the decision to base the tolls on the total trip miles. Airlines that refuse to comply will be subject to a fine of €100 per ton of carbon dioxide, and possibly banned from operating in the EU. The EU says there is an escape hatch—if the EU determines (again on its own) that a country has taken “equivalent measures” to lessen carbon emissions.

Airlines that refuse to comply will be subject to a fine of €100 per ton of carbon dioxide, and possibly banned from operating in the EU.

The EU’s unilateral action has produced a storm of criticism and threats of retaliation. More than 20 countries, both developed and developing, and including the United States, Brazil, Russia, China, India, South Africa, Nigeria, and Saudi Arabia have met twice to consider common or individual responses. In a joint declaration against the EU tax, they listed potential retaliatory actions, including banning airlines from paying the tax, reopening current open skies agreements with the EU, and counter-levies on EU airlines flying over their airspace. Nations have also taken individual actions: China and India have already forbidden their airlines to pay the tax, and Russia has threatened to cancel air rights for EU airlines flying over Siberia. Increasingly ready to exert market power, China has also upped the ante by delaying and possibly canceling aircraft orders from Airbus worth $12 billion.

On the other hand, the United States has equivocated. It participated in the multinational conferences and signed the protests, and in October the U.S. House of Representatives passed a bill making it illegal for U.S. airlines to comply with the EU scheme. But the State Department has thus far resisted efforts to bring the matter before the international body that sets rules for international airspace, the U.N.’s International Civil Aviation Organization (ICAO), possibly hoping that a compromise can be worked out before the EU tax is in place. That seems very unlikely, particularly after the EU received a blessing from its own European Court of Justice. In a disreputable twist of semantics and logic, the ECJ ruled that because the EU did not exist when international airspace rules were enacted (even though all member states had signed the agreements), the EU was not bound by ICAO obligations. Further, it held that taxing carbon emissions outside EU boundaries was defensible as merely an extension of a legal EU territorial levy that “takes into account” extraterritorial activity. Analyzing this decision, two legal experts labeled it the “triumph of politics” over “legal principle.”

No matter. Armed with this dubious victory, EU officials have been adamant that they will not back down. Commissioner Hedegaard has stated disingenuously that she will not compromise so as to demonstrate that “You can’t threaten a trade war just because you don’t like European legislation.” She is conveniently ignoring the extraterritorial reach of the EU tax. And regarding the worldwide tax, another EU official has loftily stated that he would “leave to your judgment” whether or not this “was too much for saving the Earth.”

The EU’s unilateral action has produced a storm of criticism and threats of retaliation.

What is the likely outcome? Though EU officials keep telling reporters that there is a “lot of bluffing” from the opposition, there are reasons to doubt this. In the first place, developing countries know that the EU decision to tax all airlines at the same rate breaks the Kyoto Protocol rule of “common but differentiated obligations” that places larger costs for climate control on developed countries. China, India, South Africa, and others are likely to dig in their heels, and China certainly has the power and will to force a showdown. Furthermore, the Obama administration can drag its heels only so long before pressure from U.S. airlines and their supporters in Congress (particularly in an election year) become politically dangerous.

The best bet here is that the EU is heading for some kind of humiliation, large or small. It can rather quickly agree to extend the deadline and enter into renewed negotiations in the ICAO, which would be a retreat with some dignity. Or it can test the “bluff” and face a more dramatic smackdown later, after squealing from Airbus and beleaguered European airlines ends in a costly loss of face—in the tradition of the Suez debacle some decades ago.

Claude Barfield is a resident scholar at the American Enterprise Institute.

FURTHER READING: Barfield also writes “Reforming the Patent System: How Did We Do?” “Why the Next IMF Leader Should Not Come from Europe,” and “The White House and Congress Repel Chinese Investment.” Roger Bate discusses “The Environmental and Social Costs of Flying: Who Should Pay?” Kenneth P. Green reveals “The Myth of Green Energy Jobs: The European Experience.” Michael Barone says “Public Cools to Global Warming Alarmism.”

Image by Rob Green / Bergman Group

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