China bans its airlines from paying EU carbon tax

On 1st January this year, the EU introduced an Emissions Trading Scheme (ETS) which levies a charge on flights in EU airspace based on carbon emissions. They estimate that this will add between 2 and 12 euros to flight tickets. Airlines are required to purchase emissions permits, like utilities and heavy industry in the EU, and airlines that do not comply face fines of 100 euros for each tonne of carbon dioxide emitted for which they have not surrendered allowances. In the case of persistent offenders, the EU has the right to ban airlines from its airports.

The Chinese Air Transport Association says the scheme would cost Chinese airlines 800 million yuan ($123 million) in the first year and more than triple that by 2020, and today the Chinese government has “banned” all airlines in the country from joining the ETS and also barred the airlines from increasing their fares or adding new charges for the scheme.

The Chinese are not alone; last year a group of US airlines challenged the EU law and although the European Court of Justice ruled against them, more than two dozen countries, including India, Canada and Russia as well as China and the United States, have opposed the move, saying it violates international law and is an unfair trade barrier. As the BBC report points out, given the global economic conditions and an uncertain outlook for the travel industry, airlines see the extra tax eating further into their profits and are not convinced that this increase in the costs of production (SRAS) can be passed on to passengers.

“The sector is already facing quite severe challenges,” Chris De Lavigne of Frost & Sullivan told the BBC. “The airline industry as a whole has already been hit by high fuel costs in the past couple of years and no one wants additional cost factors coming in.”

The EU could take action against China. However, any fines or prohibitions are likely to provoke retaliation from China, which European airlines could not afford. And this happens just as EU governments desperately need the Chinese government’s help; as Reuters say “The aviation row also comes as euro zone countries have looked to China, with its big holdings of foreign exchange reserves, for a show of economic support while they grapple with the latest phase of their debt crisis” and is one week before the EU-China summit. It would seem expedient therefore to allow the Chinese airlines to avoid the charges - but in that case, there will be no grounds for applying them to any other airlines or countries, and the scheme will be subject to failure.

What would you do?