Can beggars be choosers?

EU infuriates China with new carbon tax, but still asks for bailout billions

Can beggars be choosers?

EU levy: turbulence ahead?

This week the president of the EU Herman Van Rompuy and Jose Manuel Barroso, president of the European Commission, were both in Beijing to meet Chinese leaders. Their dilemma: what tone to strike at their meetings in the Chinese capital.

On the one hand, the two arrived cap-in-hand, requesting Chinese assistance for a eurozone bailout fund (Premier Wen Jiabao stuck to his formula of vague offers of help but no concrete commitments).

On the other hand, Van Rompuy and Barroso will have been reminded by Wen that this is a two-way relationship and that ‘friends’ seeking help should be willing to return the favour.

The context here is the EU’s new carbon tax on the aviation industry, which has sparked Chinese ire. The new tax came into effect on January 1, but the State Council has already ordered Chinese airlines not to pay it.

“Domestic airlines have been banned from complying with the European Union’s scheme to impose charges on carbon emissions from flights to and from Europe,” reported the China Daily. The newspaper added that the levy was “an unreasonable charge”, offering evidence of the “hypocrisy and condescending manner of the EU lording it over the rest of the world.”

The levy – which is designed to tax producers of greenhouse gas – forces airlines flying into the EU to buy tradable carbon credits. What has stunned the Chinese (as well as a number of other non-EU countries) is that the Europeans plan to levy the tax not only on distances flown within its borders, but for the entire journey. That means that a Chinese airline flying to a European destination will be taxed even for the part of its journey that goes through China’s own airspace.

“The scheme constitutes an infringement on the sovereignty of other countries,” continues the China Daily editorial. “It does not conform to international legal principles that each state has complete and exclusive sovereignty over the airspace above its territory.”

In practical terms the China Air Transport Authority thinks the levy will cost Chinese airlines Rmb17.6 billion ($2.79 billion) over the next eight years, and add about Rmb300 to the price of each ticket to an EU country.

According to Xinhua, 35 countries now oppose the tax, including the US and Russia. But the EU has taken a tough line with opponents, warning that airlines refusing to pay will be fined €100 per tonne of carbon emission.

Tony Tyler, the head of IATA (the International Air Transport Association), told Dow Jones that the Chinese airlines now find themselves in “an impossible position”. Ever since January 1, they have been faced with the prospect of breaking the law either in Europe or in China.

Securities Daily reports that this means that litigation is likely, with China’s four biggest airlines – including flag carrier Air China – planning to sue the EU over the emissions tax, probably in a German court. Chai Haibo, a senior official at the China Air Transport Association, says the lawsuit is unlikely to be a success but is more a strategy to ratchet up the pressure on the EU.

For its part, the EU has insisted that it won’t back down, although it is “ready to discuss the scheme”, says the BBC.

Of course, if the eurozone does want China’s aid on a bailout, it seems likely that Beijing will be looking for a wider quid pro quo – and the shelving of the carbon tax will surely be high on its list.

Until then it seems that China’s airlines see deadlock as the more likely outcome, and Air China has lowered analyst expectations for its financial performance next year.

“Air China’s degree of internationalisation is relatively high,” concludes Li Xuerong, a senior fellow with CIConsulting. “It has relatively more international flights, so the carbon emissions plan will increase its operating costs.”

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