As a follow-up to our October 20, 2010 post entitled “Climate Change: International Regulation of GHG Emissions From Aircraft,” on June 6, 2011 the European Commission (“EC”) confirmed its earlier March 2011 announcement that the aviation sector will become the second-largest industry in Europe’s carbon Emissions Trading System (“ETS”), behind only power generation. The aviation sector is set to join the market on January 1, 2012, giving airlines an initial 213 million metric ton carbon dioxide (“CO2”) limit in 2012 and a 208.5 million metric ton limit in 2013. European Union (“EU”) climate commissioner, Connie Hedegaard, states the reason for the aviation sector’s inclusion is that “emissions from aviation are growing faster than from any other sector, and all forecasts indicate they will continue to do so under business as usual conditions.” 

The EU’s carbon cap-and-trade system is the world’s largest, allowing businesses that exceed their CO2 allowance levels to buy spare permits from companies that do not reach the limit, or else pay a fine. The fine for exceeding the CO2 allowance level for the aviation sector will be 100 euros for every ton of CO2 emitted above the limit. The EU is presenting the ETS as a “pollution ceiling” not a tax, stating that “airlines have the choice to reduce emissions or buy allowances.” Either way, the cost will be passed on to passengers. Lufthansa airlines has estimated that joining the carbon market will cost 350 million euros annually. The EC has estimated a rise in airline fares within Europe between 1.80 euros and 9 euros. In addition, the airline industry has estimated that the inclusion in the ETS will increase the cost of a roundtrip flight from New York to Brussels by 15 euros.

Last month, Steve Ridgway, Chairman of the Association of European Airline and chief executive of Virgin Atlantic along with Tom Enders, chief executive of commercial aircraft manufacturer Airbus warned that including the aviation industry in the emissions trading system would create a trade conflict with the world’s major economic and political players. International Airlines Group (“IAG”) chief executive Willie Walsh has voiced fears that Chinese, American and Russian governments will retaliate if forced to participate in the ETS starting next year. The ETS is already being challenged by the American Air Transport Association (“ATA”) in the European courts and Mr. Walsh fears more conflicts are to come. In response to the latest EC move, the head of the China Air Transport Association (“CATA”), Wei Zhenzhong, said: “I believe we have to take legal action.”

Despite the possible competitive disadvantage created for European airlines and harsh criticism from non-European airlines, the EU’s governing bodies “do not intend to back down” and insist that their plan to include the aviation industry in the ETS is entirely consistent with International Law. As this issue progresses, please check back to this blog for future posts.