Pleas for ETS postponement after European court rejects US airline objections

A preliminary opinion issued by the advocate general in the European Court of Justice rejected contentions by the Air Transport Association (ATA) that the European Union (EU) is violating the Chicago Convention by unilaterally imposing its Emissions Trading Scheme (EU ETS) which threatens to drive up airline costs when they can least afford it and when they need it to replace ageing fleets.

ATA, who brought the suit to which the Advocate General Juliane Kokott responded, estimates inclusion in the EU ETS would cost US airlines more than USD3 billion through 2020. Estimates provided by the Association of European Airlines have projected emissions charges to be paid by European carriers at over EUR17 billion between now and the end of the decade.

Despite the preliminary opinion and the fact that it is likely to be sustained by the full court, opposition within Europe is growing with the Netherlands Aviation Secretary urging changes or postponement citing the competitive impacts it will have on European hubs.

The failure to build a new runway at Heathrow, its slot restrictions, tax policies and the growth of Middle Eastern carriers who are forging global connections over their Middle Eastern hubs have already put European airlines at a competitive disadvantage. The imposition of the ETS would likely exacerbate this situation.

"The inclusion of international aviation in the EU emissions trading scheme is compatible with the provisions and principles of international law invoked," Ms Kokott said in her opinion.

The EU says the ETS is necessary, citing the fact that the US has blocked progress before the International Civil Aviation Organisation (ICAO) numerous times. They also argue this is no different than US-imposed new security regulations for US-bound flights in the wake of 9/11.

ATA gains support from around the world

ATA filed suit in 2009, asking the court to reject the EU's planned ETS, which takes effect on 01-Jan-2012, in favour of a global sectoral approach agreed to during the 2010 ICAO assembly. Filed on behalf of its members, including United Continental, Delta and American, the suit received its first blow this week with the opinion of the Advocate General.

ATA pointed to the Oct-2010 ICAO resolution, saying progress on the global level is demonstrated by the agreement as industry and governments coalesce around a common platform for addressing emissions. The organisation said the Advocate General’s opinion was a non-binding, preliminary opinion and does not mark the end of the case. ATA and a growing number of the world’s airlines now await a decision by the full European Court of Justice, expected later this year or in early 2012.

"The Air Transport Association is disappointed that Advocate General Kokott does not believe that the European Union is bound by the Chicago Convention, the treaty governing aviation, and that the unilateral application of the EU ETS to international aviation otherwise does not violate law,” said the organisation. “ATA's view that the extension of this unilateral, regional scheme to aviation violates international law is supported by more than 20 countries, (including Brazil, Russia, India, China, Japan, the United States and many others), which recently reconfirmed their opposition to the EU.”

The opposition list also includes Korea, South Africa, Saudia Arabia, Qatar, Philippines and Paraguay who signalled they would sign the US-India coalition now being prepared. The opposition coalition includes 27 EU countries in addition to Norway, Iceland and Switzerland, the British CAA and US and European environmental groups including Earthjustice, World Wildlife Fund-UK and the Environmental Defence fund. British Airways and Air France also oppose the ETS. In addition, the US, China and India have threatened retaliatory action against the EU.

Funds needed for fleet modernisation

The opinion prompted a firestorm of protests from within and outside of Europe. Airlines object to the premature imposition of the ETS, saying it not only contravenes international law but siphons funds away at the very time they are moving to re-equip their fleets with more fuel efficient and environmentally friendly aircraft. The world’s airlines have shown an interest in sustainable alternative fuels, pouring millions into research and development and even inaugurating the first commercial flights this year using alternative fuels.

The International Air Transport Association (IATA) noted at least six airlines have used biofuels in commercial service, adding biofuels have the potential to reduce the industry carbon footprint by 80%.

“Biofuels could be a game changer,” said IATA Director General Tony Tyler. “But despite the quick progress to date, some major hurdles still remain, such as bringing big oil on board and getting the policy framework of fiscal and legal incentives to encourage their commercialisation. We need positive economic measures that result from strategic government decisions to support the growth of green economies – including aviation.”

Even so, the growing controversy prompted State Secretary for Infrastructure and the Environment Joop Atsma, who meets with European Union colleagues in Luxembourg next week, to urge a change to the more controversial provisions of the ETS or postpone implementation altogether. Failing that he suggested imposing the ETS only on intra-European flights.

Speaking before the annual Schiphol Dinner, the man responsible for Netherlands aviation cited the fact that the European ETS is not now the “global operating system” promised when it originally agreed to the scheme. He added the ETS should be reconsidered in light of the growing global opposition. He wants to avoid this being a unilateral system introduced solely in Europe.

Emphasising the need for change or postponement, he said, “The effect must not be that new hubs emerge outside Europe, meaning simply more will be flown and therefore CO2 emitted.”

He noted that Netherlands already has allies in Europe who also want postponement until other regions develop their own ETS. However, the rest of the world is waiting for ICAO, which will report in 2013 on a worldwide scheme, followed by a draft proposal for member states to consider.

The Netherlands news service quoted KLM Director Camiel Eurlings favouring Atsma’s position. "In theory, it is a good system,” he said of the ETS. “But only if the whole world participates will there be no question of distortion of competition.”

This is, indeed, the crux of the matter. European carriers say all carriers to/from Europe must also be included if competitive distortion is to be avoided. ATA’s suit centres on the fact that such unilateral regulation contravenes the Chicago Convention since it requires non-EU carriers to obtain permits for European service. But it also requires those permits to include the distance flown from origin, not just the portion flown in European airspace. 

Fitch stated AMR, Delta, United Continental are the most vulnerable to the scheme given the fact that 20% or more of global revenues for the three airlines come from trans-Atlantic routes.

Fitch Ratings issued an opinion on 05-Oct-2011, saying it expects the issue to lead to a wider trade war if the dispute is not resolved in the European Court since both airlines and governments are becoming more vocal on the economic impact

Fitch Ratings predicts the dispute will widen into a trade war, saying the ETS amounts to a tax on the world’s airlines. “It raises operating costs on all European flights at a time when emissions are unlikely to be passed on to customers,” it said.

Passing costs along to the consumer

It is unlikely, given the weak economy, airlines will be able to pass along costs to the consumer. Estimates that the ETS would only increase tickets prices by USD6-10 was rejected by the International Air Transport Association (IATA) which said it would be more like USD45. Other estimates are between EUR2-12. Director General Tony Tyler said it could add about USD1.2 billion in industry costs next year at a time when the worldwide airline industry is only expected to make USD4.9 billion.

IATA has already signalled 2012 will be a lot tougher on the world’s airlines because of the global economic slowdown, high fuel prices and overcapacity, especially in the trans-Atlantic markets. 

ELFAA stands alone

The lone airline voice in favour of the scheme is the European Low Fares Airline Association (ELFAA) which hailed the opinion despite the fact analysis suggests low-fare carriers would be hardest hit.

“Although aviation’s emissions of CO2 are low in relative terms, (1.6% of global emissions of CO2 according to the Stern Review), we acknowledge that this is material and we see ETS as the most environmentally-effective market-based mechanism to take account of it,” said ELFAA Secretary General John Hanlon, adding the Commission concluded that, in contrast to taxation, the inclusion of aviation in EU ETS offers the greatest environmental benefit at the lowest cost to society.

ELFAA also pointed out member fleets are young. Even so, he was quick to add if the low-fare market could sustain a EUR12 increase, it would have been done already. “I don't think that we would be waiting for the introduction of the ETS," concluded Mr Hanlon.

The Association of European Airlines (AEA) came out foursquare against the ETS, saying a statement by Climate Action Commissioner Connie Hedegaard that airlines will profit from EUR20 billion in free carbon permits granted in the first decade was completely misguided. AEA said she called the allowances revenues that airlines could use in fleet modernisation.

“To refer to carbon permits as revenue is totally absurd,” said Secretary General Ulrich Schulte-Strathaus. “This is simply not true. The allocated certificates have to be surrendered; this is not money which airlines can re-invest.”

IATA’s Tony Tyler agreed: “If that were the reality, we wouldn't be complaining! But it’s not,” he said. “The well-known fact is that airlines will be net purchasers of carbon emissions permits for the foreseeable future.”

They were joined by the European Regions Airline Association and the International Air Carrier Association. “Far from profiting from the scheme, an average airline will need to acquire 27% of its permits from the market,” argued ERAA Director General Mike Ambrose. “Contrary to the Commission’s statement, this will hamper industry investment in new technologies and biofuels.”

IACA Director General Sylviane Lust agreed, noting carbon permits are expected to increase in price, hitting around EUR8 by 2020. On this basis, the airline industry will be left footing a EUR17.5 billion between 2012 and 2020. "This would be a tough pill for any industry to swallow, but according to IATA’s latest forecast, European carriers will post a meagre 0.8% margin in 2012.”

Caps set

Emissions are being capped below the 2004-2006 levels, according to AEA. Only last week the European Commission said 85% of of the 221 million tonnes of emissions allowances would be free in 2012 but warned of rising permit-related costs over the next decade as part of an effort to reduce emissions by 5% during the decade.

The EU suggested the formula will reduce CO2 emissions by 72 million tonnes annually by 2020. The ETS was inaugurated in 2005 for non-airline companies.

The price set for the balance of permits is estimated at USD15 per tonne. Bloomberg reported this week that permits for December rose 2% to EUR10.44 or USD13.94 after the court opinion was made public.

EurActiv reported that the top 10 airlines, Air France, Alitalia, American, British Aiwrays, Delta, Iberia, Lufthansa, Ryanair, United and Virgin Atlantic, will likely be hardest hit with a 30 million tonne shortfall in allowances, according to market analyst Point Carbon. This will mean a EUR360 million bill. The top 30 airlines will account for half of CO2 emissions.

Trade war looms

This summer, the US House of Representatives passed legislation prohibiting US airlines to participate in the scheme, putting them between a rock and a hard place on complying with US or European law.

Given the shape of the world’s airlines and declining prospects for 2012, it is likely someone is going to have to blink in this dispute since opposition is mounting and must be addressed. If not, it places Europe at a competitive disadvantage and makes the region an outcast in international aviation circles, especially if the US is successful in building a world-wide opposition block.

If not, the court’s final ruling will be only the beginning of what is likely to be pretty ugly.

"If the airlines go to the mat on this," Gabriel Sanchez, a Senior Research Fellow at the International Aviation Law Institute at De Paul University in Chicago, told The Atlantic, "there's no longer going to be a 'law'-war, there's going to be a trade war."

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