REGULATION:

Airline maneuvers intensify as E.U. cap on jet emissions looms

While American airlines are heading to a court battle with the European Union over including their European flights in the European Union's carbon dioxide emissions cap-and-trade program, their Chinese competitors are trying to fly under the regulatory radar by pushing for an exemption.

The European Union is examining China's plan to cut domestic aviation carbon emissions to see if it qualifies Chinese airlines for an exemption from the E.U. Emissions Trading System (ETS).

"The civil aviation authorities in China have announced that they are looking at cutting emissions by 20 percent compared to business as usual by 2020," said Isaac Valero-Ladron, a spokesman for the European Commission, the European Union's executive arm. "We are looking at this as a possible equivalent measure, but it's still too early to say. We are very open. The definition of equivalent measures is a very flexible concept."

Air China, China Eastern Airlines, China Southern Airlines and HNA Group will be affected by the ETS just as they aim to expand their flights to Europe. China says including these airlines in the ETS will cost Chinese carriers 800 million yuan ($123 million) in 2012 and more than 3 billion yuan per year by 2020.

China has threatened to retaliate against European airlines as well as passenger jet maker Airbus if Chinese airlines are not exempt from the ETS. Lufthansa CEOs Christoph Franz said last week in Berlin that Chinese officials have warned him they would consider imposing fees on European flights into China. Valero-Ladron declined to comment on the European Union's potential reaction to such a move, reiterating that discussions with the Chinese authorities continue.

The China Air Transport Association (CATA) called the ETS a "unilateral mechanism" that "violates international aviation convention and intrudes into China's national sovereignty" and declared that it wouldn't recognize it. It said the ETS is "defective" and "cannot produce any direct, practical effect on energy saving and emission reduction." CATA said it would ask the Chinese government to take unspecified countermeasures against E.U. airlines operating flights into and out of China.

"The E.U. needs to take into account the different development status of countries," Li Jiaxiang, head of China's Civil Aviation Administration, said on May 10 in Beijing, according to news agency Xinhua.

Emissions of 171 million metric tons of CO2 over Europe, and growing

Air travel is responsible for approximately 2 to 3 percent of greenhouse gas emissions currently, but CO2 output is expected to increase as the industry grows. Under the E.U. plan, airlines landing or taking off in Europe will join the ETS on Jan. 1, 2012, getting 85 percent of their emissions certificates for free and buying the rest at auction.

Aircraft operators' carbon dioxide emissions will be capped at 97 percent of their average 2004-2006 levels in 2012 and 95 percent from 2013. Airlines that do not use all their allowances can sell the excess, while those that are short will have to buy more. This will also affect U.S. carriers such as Delta, United and American, and even the U.S. Navy.

Consulting firm RDC Aviation said airlines put 171 million metric tons of CO2 into the atmosphere in 2009 in the European Union. Air China alone accounted for 1.2 million metric tons, up 13 percent on 2009. Emissions are bound to go up, as the number of flights in Europe is set to almost double to 16.9 million a year by 2030, according to air-traffic body Eurocontrol.

Consultancy Point Carbon estimates airlines will face a total €1 billion per year ($1.408 billion) in costs associated with the ETS. The Association of European Airlines (AEA) says the costs will be five times as high.

Lufthansa's Franz said the cap-and-trade plan will put Europe's airlines at a competitive disadvantage even as his airline is already buying up emissions certificates in order to get a better idea of how much it would cost to comply with the system. He estimated the additional costs to be from €100 million to several hundred million euros, and said Lufthansa won't be able to pass them along to customers because of intense fare competition.

The European Commission has said airlines could recoup the cost of buying carbon allowances by increasing round-trip airfares by between $14 and $58. But the industry counters that costs will be higher -- it gives as an example a cost of $88 one way for a Frankfurt-Moscow flight -- and claims it is impossible to fully pass them on to travelers.

Increasing air fares, or flying with biofuels?

To cut emissions, airlines could buy newer, more efficient planes, wash turbine airfoils more often to maintain optimal thrust and aerodynamics, land in a straight line guided by satellite rather than the traditional meandering approach and, eventually, power their jet engines with biofuels.

Virtually 100 percent of the activities of European airlines will fall under the ETS, while airlines from other continents are only affected when they touch down in Europe. Only about 16 percent of Air China flights and 12 percent of American Airlines flights are exposed to the ETS, according to the AEA.

The AEA argues that airlines traveling from North America to Asia will start avoiding Europe and instead stop over in Dubai or North Africa so as not to pay for their carbon permits. But the European Commission believes this is a non-issue.

"We studied this, and including airlines in the ETS is unlikely to significantly erode the competitive position of European Union airports," Valero-Ladron said. "The commuting traffic between North America and Asia is a very small share of the international air traffic through the European Union."

Unlike their Chinese and American counterparts, European airlines have come to accept that inclusion in the ETS is inevitable and are now merely trying to shape the impact of the European Union's decision.

AEA Chairman Steve Ridgway, who is also the CEO of Virgin Atlantic, has called for the European Commission to support the development of alternative airline fuels that could reduce air carriers' carbon emissions. The commission should "ensure that the ETS works as always envisaged and avoids creating unfair market distortions or undermining its environmental effectiveness," he said in a statement.

U.S. airlines argue E.U. rules violate treaties

Meanwhile, U.S. airlines have sued. The Air Transport Association of America, or ATA, is set to argue on July 5 in the European Court of Justice in Luxembourg that the European Union's inclusion of air carriers in the ETS exceeds its jurisdiction and amounts to an improper tax or charge.

"It would be desirable if the U.S. did something similar that would allow us to exempt U.S. airlines, but it's up to the U.S. administration to decide," Valero-Ladron said.

"We intend to defend our legislation and we are confident that the courts will side with us," he said. "Emissions from airlines know no boundaries. Aviation emissions are expected to grow significantly, and as other sectors are included in the ETS it is only fair that aviation will also be included. We must treat all airlines equally to avoid distorting competition. This is fully consistent with international law."

The ATA will argue that the ETS violates the set of international treaties and agreements that make air travel possible. For example, ATA references the Chicago Convention, a treaty signed in 1944, as giving countries sovereignty in their own airspace.

A plane traveling from Dallas to London would cross six states, U.S. offshore territory, Canada and the Atlantic, spending only a fraction of its flight in Europe, ATA says.

The U.S. group wants CO2 to be handled by the International Civil Aviation Organization, the U.N. body that sets some international standards for aviation.

Under ICAO, global airlines have pitched a greenhouse gas plan they say is preferable to regulation by any single government. These goals include improving fuel efficiency every year until 2020; flattening aviation's global emissions by 2020; and halving these emissions, relative to 2005, by 2050.

Nancy Young, ATA's vice president for environmental affairs, said U.S. airlines have also been improving fuel efficiency for decades and working with the U.S. government on alternative fuels that cause less emissions. "We believe our efforts are superior to the E.U. approach," she said.

Nevertheless, it's not certain that the European courts will call these "equivalent measures."

If China gets a pass and America does not, Young said, it won't change ATA's point of view.

Will a global solution fly?

"There is no question that the E.U. ETS as applied to international aviation violates international law and is bad policy," she said. "The strength of this position does not change if Europe exempts certain countries. In fact, it underscores why we need a global sectoral approach under ICAO. "

Annie Petsonk, international counsel for climate and air at the Environmental Defense Fund, called that a dodge.

When the Kyoto Protocol was being negotiated, she said, the U.S. airlines and other U.S. industry protested being included.

But now, the airlines are invoking an international path -- their ICAO commitments, which were requested by the Kyoto Protocol -- as one of the reasons the ETS is illegal. "That's the type-specimen of chutzpah," she said.

"Obviously, we and the airlines would prefer there to be a global agreement on this subject," Petsonk said. "But in the absence of a global agreement, continued delay only risks locking the world into a future of dangerous climate change, catastrophic climate change."

She said the ICAO greenhouse gas plan, which ATA calls the preferable alternative, is non-binding for ICAO members.

The European court's decision in the ATA case will have a lasting impact, said John Putnam, a partner at Kaplan Kirsch and Rockwell who tracks aviation.

The questions at stake: Can a region act alone to soften aviation's climate impact? Or should the process move through an international process that addresses the problem more holistically but comes with procedures that may slow down action?

"Given the difficulty and lack of speed with which ICAO can work, it will have a significant effect on the likely speed with which aviation emissions are addressed on a regulatory basis," Putnam said.

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