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Mounting Pressure To Revise EU Carbon Emissions Tax

18 Apr

The European Commission is facing criticism for a controversial carbon emissions tax included in the EU Emission Trading Scheme (ETS). According to a provision in the ETS enacted Jan. 1, every airline arriving in or departing from European airports must pay an undetermined fee on carbon gas emissions. So far, more than 30 countries have denounced the tax, claiming that it is an affront to their sovereignty. China already has prohibited its airlines from participating in the ETS and has suspended its orders from a European airline manufacturer, prompting France to join the ranks of fellow EU member state Germany to call on the European Commission to resolve the dispute.

Retaliatory measures alone probably will not convince the European Commission to revise the legislation, but they will prolong and exacerbate the dispute for the remainder of 2012. The European Commission is not interested in waging a trade war with dozens of disgruntled countries, nor is it immune from French and German pressure, so it likely will revise the legislation before April 2013, when initial payments on the tax are due.

Analysis

The ETS, a system that tries to limit greenhouse gas emissions by putting a price on carbon and creating a market for companies to trade emission permits, has been in place for several industries since 2005. But it was not until the beginning of 2012 that it included legislation over the aviation industry, which according to the International Civil Aviation Organization (ICAO) accounts for 2 percent of worldwide carbon emissions. The new legislation makes airlines from 62 countries liable, and while it is unclear exactly how much will be charged (the price for carbon in the ETS regularly fluctuates), it is currently estimated to raise roughly 9 billion euros ($11.8 billion) by 2020.

However, the cost of the tax is an ancillary issue for countries on which the tax is imposed. Under the new law, airlines will be charged even for carbon emitted in their own airspace. Since the airspace over a country is its own sovereign territory, many countries believe the tax infringes on their sovereignty.

Several countries, including the United States, Russia and Saudi Arabia, are considering implementing measures to counteract the European Union if the new law is not revised. They have threatened to lodge a formal complaint with the ICAO, end talks with European airlines on new routes and impose special fees on European airlines. And in March, India joined China in declaring that it would not sign on to the ETS.

Several European airlines believe any countermeasure from non-European countries would hurt them financially, and they have voiced their concerns to their respective governments. Of all EU member states, France and Germany may have the most to lose from the current row. The visible countermeasures have targeted Airbus, an aircraft manufacturer that employs tens of thousands of people in France and Germany. Unsurprisingly, France and Germany have recently urged the European Commission to resolve the issue.

France is particularly vocal about the dispute — and for good reason. 2012 is an election year. Incumbent French President Nicolas Sarkozy has promised to reduce the unemployment rate — currently 10 percent — and the trade deficit, which totaled roughly 70 billion euros in 2011. In doing so, he has pledged to revive the French industrial sector. Retaliatory measures targeting Airbus, such as those of China, could put at risk the livelihoods of any of the 15,800 people the company employs in France. This would not be the image of a revived industrial sector Sarkozy wants to project, and it is little wonder that French Prime Minister Francois Fillon recently called on the European Commission to end the dispute.

The pressure put on the European Commission so far will be insufficient to bring about any revisions to the ETS. In 2009, EU member states agreed to include the aviation industry in the ETS, which gave the commission, as the EU executive body, complete autonomy on the issue. This will make it more difficult to get the commission to change its position. Furthermore, ongoing ICAO negotiations on the matter will have little bearing on the commission because many countries involved in the dispute are not EU members. For these reasons, the dispute will continue for the rest of the year as countries continue to retaliate against the European aviation industry.

This article:  Courtesy of Sratfor

However, Stratfor believes that France and Germany will likewise continue to pressure the European Commission throughout 2012 and that the pressure will compel the executive body to revise the law before April 2013, lest it prove too inflexible and incite a trade war. Once revised, the law probably will still lead to bilateral disputes between the European Union and some non-EU countries, inducing higher costs to the European aviation industry.

Read more: Visit Stratfor

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