Trade war looms over EU tax

Global Trends By MARTIN KHOR

This week, 26 countries will meet to organise retaliation against the EU over its move to tax airlines for their emissions. This may be the first salvo in dangerous trade wars fought over climate change. 

A TRADE war is looming over the European Union’s move to impose charges on airlines on the basis of the greenhouse gases they emit during the planes’ entire flights into and out of European airports.

Many countries whose airlines are affected – including China, India, Malaysia, Nigeria, South Africa, Egypt, Brazil and the United States – consider this to be unfair or illegal or both.

Since their protests have not yielded results, officials of 26 countries are meeting in Moscow this week to discuss retaliatory action against the EU.

The EU’s move, which took effect on Jan 1, and the tit-for-tat actions by the offended countries, is the first full-blown international battle over whether countries can or should take unilateral trade measures on the ground of addressing climate change.



Developing countries in particular have been concerned over increasing signs that the developed countries are preparing to take protectionist measures to tax or block the entry of their goods and services on the ground that greenhouse gases above an acceptable level are emitted in producing the goods or undertaking the service.

Besides the airlines case, several other measures are being planned by the EU or by the United States that will affect the cost of developing countries’ exports.

In fact, trade measures linked to climate change may become the main new sources of protectionism.

The EU’s aviation emissions tax is thus an important test case, and this could explain the furious and coordinated response by the developing countries, which form the majority of the protesting 26 nations meeting in Moscow.

The countries are particularly angry that the EU is imposing a charge or tax on emissions from the entire flight of an airline, and not just on the portion of the flights that are in European airspace.

The EU action takes effect by including the aviation sector (and airlines of all countries) in the European Emissions Trading Scheme.

Beyond a certain level of free allowances, the airlines have to buy emission permits depending on the quantity emitted during the flights.

As the free allowances are reduced in future years, the cost to be paid will also jump, thus increasingly raising the price of passenger tickets and the cost of transporting goods, and affecting the profitability or viability of the airlines.

The China Air Transport Association has estimated that Chinese airlines would have to pay 800 million yuan (RM387mil) for 2012, the first year of the EU scheme, and that the cost will treble by 2020.
The total cost to all airlines in 2012 is estimated at 505mil (RM2bil), at the carbon price of 5.84 (RM23.30) per tonne last week, according to Reuter Thomsom Carbon Point.

Last September, when the carbon price was 12 (RM48) per tonne, Carbon Point had estimated the cost to be 1.1bil (RM4.4bil) in 2012, rising to 10.4bil (RM41.6bil) in 2020.

While this may generate a lot of resources for Europe, airlines in developing countries will in turn have to pay a lot.

There are many reasons why the concerns of the affected countries are justified, as shown by Indian trade law expert R.V. Anuradha, in her paper on Unilateral Measures and Climate Change.

Since each country has sovereignty over the airspace above its territory (reaffirmed by the Chicago Convention), the EU tax based on flight portions that are not on European airspace infringes the principle of sovereignty.

The UN Climate Convention’s Kyoto Protocol states that Annex I parties (developed countries) shall pursue actions on emissions arising from aviation through the International Civil Aviation Organisation (ICAO).

Consistent with the principle of common but differentiated responsibilities, only Annex I countries are mandated to have legally binding targets. This UNFCCC principle is violated by the EU requirement affecting airlines from both developed and developing countries.

ICAO members have been discussing, but have yet to reach agreement on, actions to curb aviation emissions. Last October, 25 countries issued a paper in ICAO protesting against the EU measure.

While the United States has challenged the EU action in a European court, China has ordered its airlines not to comply with the EU scheme unless the government gives them permission.

In addition, retaliation measures such as imposing levies on European airlines and reviewing the access and landing rights agreements with European countries are being considered by the 26 countries.

What happens in this aviation case is significant because there are many other unilateral measures linked to climate change being lined up by developed countries.

These include the EU plan to impose charges on emissions from maritime bunker fuel, a US Congress bill that requires charges on energy-intensive imports from developing countries that do not have similar levels of emissions controls as the US, and several schemes involving labels and standards linked to emissions.

If these unilateral measures are implemented, then developing countries will really feel they are being victimised for a problem – climate change – that historically has been largely caused by the developed countries.

Moreover, this will lead to a growing crisis of both the climate change regime and the multilateral trade regime.