Resentment and confusion were in the air at this year's Aviation Carbon event in London. Airlines had come to learn how to develop a carbon-trading strategy to comply with the European Union's emissions trading system (ETS), which came into effect on 1 January. But many were taking part under protest, amid a gathering political storm.
US delegates knew that, back home, Congress had passed the Federal Aviation Authority's re-authorisation bill, which includes strong anti-ETS language. Another bill - which proposes banning US carriers from complying with the EU directive - has gone through the House of Representatives to the Senate.
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Is it time to clear the air?
Meanwhile, China has banned its carriers from complying, insisting that the ETS - which requires all airlines flying to and from the EU to purchase allowances for their carbon dioxide emissions - should not be unilaterally imposed on non-EU countries.
China and the USA are among a group of at least 26 countries set to meet on 21 February, in Moscow, to discuss joint action against the scheme. The EU promises "appropriate measures" if airlines fail to comply, which could include banning operators from flying to and from Europe. This has sparked threats of retaliation.
European airlines are concerned. "If the scheme is not complied with by everybody in the same way, it will saddle EU carriers with more costs, make them less competitive and do nothing for the environment," says Simon McNamara, deputy director general of the European Regions Airline Association (ERA). "In the current economic environment, the last thing we need in Europe is some kind of trade war."
Jonathon Counsell, British Airways' head of environment, says: "We're extremely concerned about retaliation and non-compliance." EU carriers should, he says, be exempt from ETS charges on routes where competing airlines are refusing to pay, or at least should be compensated from a reserve fund built up by auctioning of allowances.
Some airlines have called on the EU to suspend the ETS while the International Civil Aviation Organisation (ICAO) explores alternatives that could be applied across all countries equally. But Philip Good, from the European Commission's climate action unit, says suspension of the ETS is unlikely: "That's not the way we work. The ETS is a law. We're perfectly willing to come forward with a revised legislative proposal - in the event a global deal is reached - but that process typically can take two years to go through Brussels."
EMISSIONS TRADING: FOR AND AGAINST
Who supports the inclusion of aviation in the ETS?
Who is battling against it?
The EU plans to review the legislation in 2014. Meanwhile, says Good, it would be easier for non-EU countries to put in place equivalent measures for reducing their emissions, exempting them from paying the ETS charge on inbound flights to EU member states. He says the Commission has already had "serious conversations" with several countries about what could constitute an equivalent measure.
Some speculate that only a similar cap-and-trade scheme or market-based system would qualify, rather than large-scale production and use of biofuels, for example. Yet there is concern that this would lead to a patchwork of regional carbon trading schemes. "The problem is that they end up charging airlines more than once for the same CO2 emissions," says Mark Watson, head of environmental affairs at Cathay Pacific. As a member of IATA's environment committee and the Aviation Global Deal group, Watson has been involved in UN climate change processes in ICAO. "As the regulatory framework becomes ever more fragmented and complicated, airlines will be faced with further cost and complexity," he says. "Market distortion is highly likely, as some carriers take steps to pass on the cost to passengers." Watson cites the situation faced by Qantas, which is covered by three carbon pricing schemes, set by the EU, Australia and New Zealand.
Early this month, Qantas said it would raise fares by A$3.50 ($3.77) per passenger each way on flights to London and Frankfurt, to cover the cost of the EU ETS. "Monitoring is becoming increasingly complex," says Andrew Sellick, Qantas's manager of environment and carbon. "We now have three different schemes; we have three different ways we have to monitor our recording and compliance obligations."
However, Sellick can see some benefits to the EU's scheme. He points out that the transitional assistance provided - airlines will receive 85% of their emissions allowances free in 2012 - makes it easier to comply with than Australia's scheme, which covers 100% of domestic emissions. He also says both schemes will accelerate commercialisation of biofuels.
As airlines struggle to come to terms with the system, non-EU governments seek ways to oppose or obstruct it. Some experts consider a successful legal challenge unlikely following the Court of Justice of the European Union's (CJEU) ruling in December 2011 that the scheme did not break international law.
"Effectively, the European court has blocked out any challenges to the ETS," says Andrew Waite, a partner at Berwin Leighton Paisner. At an international level, ICAO and the World Trade Organisation have complaints procedures, but Waite dismisses the former as "not particularly successful in the past", and the latter as "unlikely to deal with this issue in the long term".
Airlines for America (A4A), a body challenging the ETS in the CJEU, says it is exploring whether it could take further action in the UK. "We will continue to take all steps that are available to us," vows Nancy Young, A4A's vice-president of environmental affairs. Like many ETS opponents, Young argues for a global framework produced through ICAO. In January, ICAO secretary general Raymond Benjamin said he would produce a proposal on how to regulate aviation emissions on a global scale by year-end.
But Watson is concerned that ICAO will come up with a trading scheme based on the principles and mechanisms of the ETS: "An EU ETS writ large across the globe is far from desirable. Given the stunningly high price of fuel and the continued volatility of our operating environment, we can ill afford to end up with a scheme which means more distortion, complexity and high costs."
ICAO is assessing which market-based measures could underpin a global scheme, and has been working to quantify the potential emissions reductions and market distortions under each scenario, says Watson.
The measures under discussion include a global departure levy, setting fees for all departing passengers and for cargo, a global carbon levy charged on fuel consumption, a global offsetting scheme, a global carbon levy and offsetting scheme combined and, finally, a global emissions trading system.
On whether ICAO can come up with a solution acceptable to a majority of countries, scepticism reigned at Aviation Carbon, but Watson says it can and must be achieved: "We need a global scheme based on a number of already-agreed core principles, including cost effectiveness, equity, transparency, non-distortion and environmental effectiveness - [one] that can accommodate the differing needs of states around the world."