China Bans Airlines from Paying European Union Carbon Tax

At its outset in 2005, the European Union Emissions Trading System (EU ETS) was designed to reduce the greenhouse gas (GHG) emissions produced by factories, power plants, and other energy-intensive installations. At the beginning of this year, however, ETS began imposing the cap-and-trade system on all airlines with flights departing from or arriving at EU airports. In response, China barred its domestic airlines from complying with the system last week.

The Chinese government says the new rules outlined by the EU are both costly and illegal. The China Air Transport Association (CATA) estimates ETS will cost its airlines nearly $127 million this year, and nearly $2.8 billion over the next nine years. Industry air groups cited by the Wall Street Journal say it could cost the entire aviation industry more than $26 billion by 2020. The European Commission (EU executive branch) estimates the increase in airfare to be between €2 and €12, depending on the length of the flight.

In regard to its legality, the Civil Aviation Administration of China (CAAC) argues that the EU does not have the right to charge non-domestic airlines for carbon emissions. “ETS has violated the UN Framework Convention on Climate Change…and regulations of the International Civil Aviation Organization.” Several U.S. airlines also filed a lawsuit against the EU, saying it could not charge for carbon emissions outside EU airspace. However, the European Court of Justice dismissed it in December after ruling it does not infringe on “the principle of territoriality, nor the sovereignty of third countries[...and] does not constitute a tax, fee or charge on fuel.” Other prevailing arguments against the system are that it acts as a trade barrier and impedes international efforts to achieve a more agreeable approach to addressing climate change.

Besides China, more than two dozen other countries have expressed opposition or threatened counter measures to the EU. Last October, the U.S. House of Representatives approved a bill similar to China’s, which, if passed by the Senate and signed by President Obama (as expected), will make it illegal for domestic airlines to comply with ETS fees. As recently as November, Russia’s Transport Minister warned that overflight rights could be revoked as a countermeasure, and landing rights of EU airlines were threatened by India (Lufthansa Policy Brief). A few other notable countries that oppose ETS’s involvement in the aviation industry include Japan, Korea, Brazil, and Mexico.

The EU contends that including the aviation industry in ETS is not only legal and fair, but also necessary to control carbon emissions. By 2020, the EU projects that the system will reduce carbon dioxide emissions by 13 megatons in the aviation sector. Though small when compared to the estimated 170 megatons mitigated in other ETS-regulated industries, the EU hopes it will serve as a model for widespread global action.

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