The next global trade battle

BRUSSELS, Belgium — Prepare for extreme turbulence between the European Union and the rest of the world.

Not usually accused of being unilateralist and unwilling to negotiate, the EU has sparked what is shaping up to be the next big international trade dispute.

On Jan. 1, the EU will require airlines operating out of all airports in its 27 member states to financially offset their flights’ carbon dioxide emissions. The move brings aviation into the EU’s existing “Emissions Trading Scheme” (ETS) that has been applied to many other industries since it was first implemented in 2005.

EU Environment Commissioner Connie Hedegaard says it’s high time "the polluter-pays principle" applies in the skies too.

“How can we ever hope to make ordinary citizens of the world play their part in tackling climate change,” she writes on her website (in English and Chinese), “if the financier from Hong Kong or London or the business man from Guandong [sic] or Frankfurt is not asked for any contribution whatsoever in respect of the significant emissions that he incurs on an intercontinental flight?”

Other governments have blasted the EU’s go-it-alone approach. Airlines have consistently resisted being included in the ETS as the system has evolved. Now that it’s due for implementation, many non-EU governments have rejected the plan, most vocally the United States, China, India and Russia.

Their main complaints: the EU is asserting the right to assess these fees in the absence of a global agreement, or any reciprocal measures by other governments, to do so; it will be charging for the entire length of a flight, not just the portion in European airspace; and the earnings from the carbon dioxide charge will go directly into the coffers of EU governments, with no requirement that the money be spent to combat global warming, on research and development, new aviation technology or any other tool to protect the environment.

Environmental groups, however, have hailed the plan.

U.S. airlines have already mounted a legal challenge to the ETS, contesting the EU’s right to charge airlines for anything outside EU airspace. Initially launched in Britain by American, Continental and United Airlines and the industry’s umbrella organization, the Air Transport Association, the case was then referred to the European Court of Justice in Luxembourg. The initial hearing was July 5 and a preliminary opinion by an independent advocate general is expected in October. That opinion will then go back to the British court for the final ruling, as the emission fees on these airlines must be administered by the United Kingdom.

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But with only a few months to go before the scheme starts, Brussels hasn’t blinked.

“The ETS is valid, and [the Americans] will come under it like everyone else,” Transportation Commissioner Siim Kallas said last fall.

But U.S. lawmakers are now so incensed, they aren’t even waiting for the European court's opinion before they attempt to sheild U.S. airlines from the program.

The House Transportation Committee’s aviation subcommittee has drafted Bill 2594 that would ban U.S. airlines from taking part in the EU’s ETS. It urges U.S. officials to take whatever actions necessary to make sure no penalties from Brussels are incurred as a result of ETS non-compliance, accusing the plan both of violating U.S. sovereignty and of undermining efforts to come up with a global consensus on emissions measures in the United Nations’ International Civilian Aviation Organization.

At a subcommittee hearing last month to discuss the stand-off, two things stood out: the bipartisan unity and the fury directed at the EU.

“We’ve done everything possible to have a positive and productive exchange with our EU counterparts” in meetings both in Washington and Brussels, lamented Transportation Committee Chairman Rep. John Mica (R-Fl.). He concluded that the ETS is “just a cash grab” by the bloc. One of the panelists at the hearing, Capt. Lee Moak of the Airline Pilots Association International, warned of dire consequences.

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“This is an arbitrary voodoo tax scheme, that’s what it is,” he told committee members. “It will be another ticket expense that a passenger has to pay, less people will fly, airlines will shrink, Americans will lose their jobs, communities will lose services. This is a bad idea, period.”

Susan Kurland, U.S. assistant secretary of transportation for aviation and international affairs, said that while the Obama administration strongly supports reductions in greenhouse gas emissions, “this is the wrong way to pursue the right objective.”

EU airlines expect the measure to cost them 3 billion euros ($4.3 billion) annually, said Association of European Airlines Secretary General Ulrich Schulte-Strathaus. If non-EU airlines don’t pay, it would cause a “serious distortion of competition,” he said.

“Europeans have accused the U.S. of imperialism in the area of security, for example,” Schulte-Strathaus said, “and our view is that they’ve now replaced the U.S. imperialism with EU imperialism in the area of the environment. The Europeans are now taking a unilateral approach and saying ‘we’ll go ahead and hopefully the others will follow.’ They won’t.”

Marlene Holzner, the European Commission’s spokeswoman on energy issues, is more optimistic. She said it’s “not possible” that ETS implementation might be delayed in order to work on a global compromise and that she doesn’t presume the Capitol Hill bellowing will actually result in a boycott.

“The U.S. has not said it will not accept our rules,” Holzner clarified. “They have said they will ‘comply in protest.’” Holzner reported that American airlines have thus far completed all the necessary steps for the ETS, including reporting airlines’ emissions for 2010 and applying for their share of the free allowances for next year. So notwithstanding the congressional rush to make the ETS illegal, Holzner said, “we have every indication they’re going to participate.”

But Ulrich Schulte-Strathaus says he has every indication “we’re really headed toward a trade conflict of serious dimensions."

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Editor's note: This story was updated to correct the name of an organization.