Are the U.S. and Europe headed for a trade war over airline carbon fees?

September 25, 2012

Are the United States and Europe poised for a trade war over airline fees? Suddenly, that's not such a ludicrous question. Late last Friday night, the Senate unanimously passed a bill to try to block a European Union plan to cap carbon emissions on all flights in and out of Europe. The bill sets the stage for a cross-Atlantic showdown that could get unruly.


What's all the fuss about? (LM Otero/AP)

The tempest started back in January, when a new E.U. law went into effect requiring all flights that take off from or land in Europe to buy allowances for their carbon emissions. This would fold the aviation sector into the continent's cap-and-trade program for greenhouse emissions. All told, the new law would add about $3 to $6 to the cost of a flight from New York to London, according to an analysis from the MIT Global Change Program.

That may sound like small change in an era of baggage and booking fees—indeed, airlines quickly hiked their ticket prices to cover the cost of buying carbon permits. But Congress didn't take kindly to a unilateral attempt by Europe to tax U.S. airlines. The House has already passed a bill that would forbid air carriers from participating in the program, period. The Senate version is a little more flexible: It would allow the U.S. transportation secretary to determine whether it was in the country's interest to participate in the program. 

Now, here's where things get tricky. Both the House and Senate bills also require the Department of Transportation to hold airlines "harmless" in the event that they get slapped with fines for not participating in the E.U. program. And if U.S. airlines don't comply with the law, they'll face as much as $22 billion in fines between now and 2020, according to one estimate. So who will cover the airlines' fines? Taxpayers? The bills' supporters have remained fairly vague on this point.

There are two possible scenarios here, explains Annie Petsonk, a lawyer for the Environmental Defense Fund. First, if the Senate bill becomes law and airlines are forced to pay fines to the E.U., they could always try suing the government to recoup their losses — in which case they would be paid out of the taxpayer-backed Judgment Fund. Presumably, this wouldn't be a popular option.

An alternative, under an obscure but important U.S. law called the International Air Transportation Fair Competitive Practices Act (with practice, this rolls off the tongue), would be for the United States to declare that the E.U. is acting unreasonably and impose fines on European airlines in retaliation. That money could then be used to reimburse U.S. airlines. The trouble, Petsonk notes, is that Europe has its own laws that allow its regulators to retaliate in turn. Soon we're in a never-ending battle over trans-Atlantic fees and fines. "Then you have a full-blown trade war," says Petsonk.

Right now, it's a stand-off. European officials don't want to back down on their emissions program. That's because E.U. industries that are already regulated by Europe's cap-and-trade program have argued that it's unfair for airlines to be excluded. At the same time, the E.U. is under intense pressure. China and India have prohibited their airlines from taking part in the program. Beijing is also blocking purchases of European Airbus planes. And now the U.S. House and Senate have both passed bills opposing U.S. participation.

So, perhaps the E.U. will just back down altogether — recently, the Associated Press reported that European officials "may recommend the suspension of the continent’s carbon emission fees" to avert a bloody trade onslaught. But Petsonk notes that another possibility is for the United States and Europe to come to some agreement on aviation emissions. Under the Senate bill, the transportation secretary can end the prohibition on airline participation if "an international alternative is agreed to."

Aviation is one of the fastest-growing sources of greenhouse gases. While airlines account for just 3 percent of the world's carbon emissions, that's expected to increase up to 700 percent by 2050. And a recent report from the World Bank found that a modest carbon tax — say, $25 per ton — could cut aviation emissions by 5 to 10 percent in the short term, mostly as airlines retired their older, more inefficient aircraft early. In theory, says Petsonk, the United States and Europe should be able to hammer out a deal on this minor step to address climate change.

"But that would require the U.S. and E.U. to see themselves on the same side of this issue," Petsonk adds, "and not on opposite sides."

Related: Will Europe's airline carbon fee actually work?

Comments
Show Comments
Most Read Business
Next Story
Sarah Kliff · September 25, 2012