Collision course

Soon to be taxed in Europe?

“The best lack all conviction, while the worst are full of passionate intensity,” wrote the poet WB Yeats. The Irishman never attended a eurozone summit, but he couldn’t have summed up proceedings better if he had.

Yeats’ apocalyptic poem The Second Coming has long been an anthem for those who stroll around with sandwich boards declaring ‘the end of the world is nigh’.

Sadly those folk don’t look quite so crazy right now. Nightmarish news abounds. There’s the implosion of Greece, as well as the other Mediterranean economies to worry about. The growing risk is that the euro will collapse and prompt worldwide financial contagion. And if that were not bad enough, American politicians are toying with a ‘fiscal cliff’ and a rerun of the debt ceiling debacle – minus deals these two events could cut GDP by 5% over two years and cause a US recession.

But a much less publicised disaster may also be looming: the ongoing spat between Beijing and Brussels over the EU’s new carbon tax on airlines. If left festering, the dispute will come to a head early next year, and could spillover into a wider trade war.

The occasion for renewed fury was the annual general meeting of IATA, the airline industry’s trade group. It was held this month in Beijing and saw European proposals to tax airlines for their carbon emission high on the agenda.

China – as well as India, Russia, the US and 30 other countries – oppose the EU’s emissions-trading scheme, which passed into European law in January. China has banned its own airlines from complying with the law. The China Daily sums up the point of contention: “The scheme constitutes an infringement of the sovereignty of other countries. It does not conform to international legal principles that each state has complete and exclusive sovereignty over the airspace above its territory.”

As we pointed out in issues 103 and 138, it is the sovereignty issue that upsets Beijing’s sensibilities the most. For all flights between the EU and China, Chinese airlines will be charged by Brussels for the carbon emitted, even for the periods when they are flying through Chinese airspace.

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.

So far Beijing has focused its reprisals on what it deems as the EU’s weak spot: its aviation giant Airbus. As reported in WiC143, Chinese airlines have been told to cancel orders for wide-bodied planes, in a move that could cost Airbus more than $14 billion in lost sales. A rumour doing the rounds at the IATA event in Beijing was that the Chinese have also rejected one airline’s request for a new route into the country because it proposed to use an Airbus A380 (it was implied that the route would be approved if a Boeing aircraft was used).

The European company was meanwhile at pains to distance itself from the carbon tax during the IATA meeting. Airbus chief operating officer John Leahy told the Beijing News that it shares the view of the Chinese government that “unilateral” enforcement is wrong. He said Airbus hoped to see a different solution to reducing the industry’s carbon footprint.

IATA also released a statement urging a “globally agreed approach” rather than Europe’s “extra-territorial” measures.

The moment of truth will have to wait until next April. That’s when airlines will surrender their existing emission reduction certificates and the EU’s collection of the carbon tax begins in earnest. For airlines that don’t participate (such as the Chinese carriers), there are legal consequences. As The Economist comments: “European countries must levy hefty fines on offenders and may seize aircraft – which could set off a trade war.”

Could a compromise be afoot? The deadline for airlines to register for the EU scheme was last month. It was flouted by 10 Chinese and Indian airlines. So the deadline was extended by another month – evidence, perhaps, that the EU’s position is not wholly inflexible.

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