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Benny Peiser: EU Emissions Trading Could Escalate Into First Green Trade War

India, China and the United States are not bluffing over their discontent about the inclusion of airlines in the EU’s emission trading scheme – warns think-tank

Europe is facing the threat of a global trade war over its unilateral climate policies. A group of nearly 30 nations gathered in Moscow last month to consider retaliation against the European Union’s new emissions trading law – which obliges international airlines, regardless of nationality, to pay for CO2 emissions when using European airports. Airlines have until April 2013 to submit carbon allowances to cover their 2012 emissions, before facing possible fines or bans under the new EU law.

The emissions trading scheme is the main vehicle of the EU’s climate policy. Its unilateral cap on emissions remains a huge and growing burden on European economies and industries because all other major trading nations have rejected similar measures. So now European consumers are facing up to the reality that their political leaders have already squandered more than €200bn on a completely inane and ineffective project. A recent report by Swiss bank UBS revealed that the ETS has cost European consumers a staggering €210 billion – for “almost zero impact” on cutting emissions.

For more than 15 years, the EU has failed to reach a global agreement on greenhouse gas emissions. As a result, the ETS has become a growing threat to competitiveness and economic recovery. Now, the EU’s unilateralism is turning into a risky game of protectionism. When the union added aviation to the ETS on January 1, it forced all global airlines that use European airports to join up. Carriers that refuse to participate will be subject to fines of €100 per ton of carbon dioxide that exceeds the ETS limits, and they could be banned from operating in Europe altogether.

A growing number of airlines and governments outside the EU are, of course, opposed to this kind of protectionism and regard the new rules as illegal – not least, because carriers are also charged for emissions that happen outside of Europe. City analysts estimate that the cost for airlines of joining the ETS will be around €1bn this year and €10.4bn in total between now and the end of 2020. By then, it will cost airlines some €3bn annually. The new green taxes will inevitably increase the cost for airlines and much of this will be passed on to passengers.

Opposing countries – including India, China and the United States – are known as the ‘coalition of the unwilling’ and have agreed to retaliate with the stated aim of getting the EU’s measures either cancelled or postponed. The US House of Representatives has passed a bill, which prohibits American airlines from participating in the ETS. It is estimated that the ETS would cost US airlines $3.1bn from 2012 to 2020. China too has banned airlines from taking part in the scheme, saying it violates international rules. And India has asked carriers not to give emissions data to the EU. Meanwhile, Russia is considering restricting European flights over Siberia. The world’s most powerful nations are not bluffing. Unless the EU reconsiders and allows for an international agreement, these threats are likely to escalate into the first full-blown green trade war. The EU leadership would be well advised to pull back from the brink.

Dr Benny Peiser is the director of the Global Warming Policy Foundation think-tank, in the United Kingdom

Public Service Europe, 1 March 2012