The EU ETS: Desperately seeking compromise to avoid trade wars; roles for ICAO and the EU

As tensions remain high over the European Commission’s imposition of an environmental tax on air services operating in European airspace, the threat of confrontation grows. Problematically, at a time when the airline industry is confronted by a startling array of cost and competitive challenges, disputes of this kind are often not simply confined to the immediate issue and can easily overflow into other government relations.

Talk of suspending overflight rights and other forms of direct retaliation have seemingly awoken European diplomats to the importance that foreign governments attach to this issue. But the EU may have painted itself into a corner. As IATA CEO Tony Tyler said in India in mid Mar-2012, “No one wants a trade war. But the prospects are growing more likely…..Why? Because non-European states…see the intention to tax non-EU airlines for emissions over non-EU territory as an attack on their sovereignty.”

Looking for a compromise is clearly a useful interim strategy. Last month, Mr Tyler's predecessor at IATA, Giovanni Bisignani, offered a simple suggestion which both offers a bit of breathing space and allows a little more time for the global aviation organisation, ICAO, to lay down concrete multilateral goals for industry responses to concerns about climate change.

Pinning hopes on ICAO: The right way – but perhaps more optimistic than realistic?

At IATA’s recent Air Transport Action Group (ATAG) Aviation & Environment Summit, Mr Tyler said he believed: “There is a solution. And that is ICAO – where global standards and solutions for air transport are made. The EU deserves full credit for bringing the emissions issue to the front and centre of the global aviation agenda. And I believe that recent indications coming from Europe point toward their understanding that a global agreement through ICAO is the way forward. Now it is time for Europe sincerely to take a stake in making the discussions and decisions at ICAO a success.

"I chose these words very carefully because, if I understand the international mood correctly, non-European states will be looking for some proof of Europe’s sincerity. That will mean doing more than simply reiterating its determination to implement its scheme even as it professes to support a negotiated agreement through the ICAO process.”

The Bisignani environment compromise proposal

In Feb-2012, while accepting the Singapore Public Service Star, Mr Bisignani offered his suggestion: “The environment is of great importance for all of us, and is today at the centre of a political debate. The ongoing battle on the EU Emissions Trading Scheme [EU ETS] is of great concern to an industry vital to the world’s economic recovery.

In the past months, I have met with representatives of the European Commission and most of the governments concerned. The time has now come to stop the hostilities and work on a solution where all will be winners: the environment, governments and the aviation industry.

Let me highlight the key points of my proposal. Three steps are required:

Step 1: Governments fighting against the EU ETS should recognise the positive role played by Europe for a stronger environmental commitment;

Step 2: The EU should modify its approach and only implement a European ETS by 2013

Step 3: In parallel, all countries should commit to implement a global ETS by 2014 under the leadership of ICAO.

I invite the Singapore government, the European Commission and other governments to consider this proposal as a contribution to seek a fair and balanced solution to the current deadlock.”

Mr Bisignani’s idea was more or less supported by Marthinus van Schalkwyk, South Africa’s Tourism Minister, at the ATAG Environment Summit:

“If the EU is committed to a global solution, which I believe they are, and if the rest of the world is seriously committed to providing new political momentum to negotiations under ICAO, which I believe they are, there may be very good reasons for the EU to suspend the inclusion of aviation in the EU ETS for two years. I believe the EU should go the extra mile and give the negotiating parties in ICAO, all of us, a fair chance to conclude negotiations on a global, sectoral emissions trading scheme. Let me repeat: Given that multilateral negotiating options are not yet exhausted, we call on the EU to do the sensible thing and suspend the extension of the EU ETS to aviation for two years.

“Aggressive unilateralism and extra-territorial measures are not the way to go in an increasingly globalised world. It may look attractive in the short-term, but it will sow seeds that will only reap the whirl wind of confrontation in the medium- to long-term.”

This is not the time for confrontation, but can ICAO rise to the occasion?

As fuel prices severely challenge the airline industry in the EU and the taxation virus spreads through Europe, the last thing needed is government confrontation. The only losers in that are the aviation industry and consumers.

See related article: ETS and WTO confrontation raise the spectre of aviation protectionism at the worst possible time

The onus therefore turns increasingly towards ICAO, not an organisation known for its speed of action – mainly because consensus among its worldwide government membership is required.

But there is just a chance that the unilateral action of the EU may galvanise ICAO’s members into positive action – and along lines that are both effective and broadly acceptable. Earlier ICAO “solutions” have been subject to so many exceptions as to make agreement near-worthless.

And the EU needs to grant some breathing space

Meanwhile, the EU is faced with an obvious, but uncomfortable decision: offer a compromise delay and commit to having another serious effort to work through ICAO. As concerted opposition mounts to the EU ETS, European Union member states will be increasingly concerned that their individual interests and national airlines will suffer. This in turn generates internal pressures for change – and a responsible Commission will recognise the risks to the industry of further conflict.