EU's emissions trading move poses threat to growth of China's aviation sector

From this year, the European Union's Emission Trading System (ETS) will be applied to the aviation industry, notwithstanding growing international dissent over the move.

All airlines flying to and from Europe are required to monitor and report their emissions, giving them the choice of either operating within their assigned allowances or buying permits for their over-quota emissions.

That means Europe's compulsory charges are set to have great impact on China's aviation industry, and more profound influences may be found in the export sector.

China therefore strongly opposes the EU's unilateral action, viewing the EU's move as violating the United Nations Climate Change Framework Convention and related regulations of the International Air Transport Association. But in response to the boycotts from China, Canada, the US and many other countries, the EU has insisted on putting the ETS into practice. Will their tussles lead to a trade war?

The direct impact from the EU's unilateral move will pose a real threat to the growth of China's newly emerging aviation industry. On the one hand, the EU's ETS will greatly enhance the operational costs of China's airlines. It is estimated that in 2012 alone, China's aviation industry will need to pay extra costs of about 800 million yuan ($120 million; 95 million euros) for the route to and from Europe.

Given that the number of allowances will be reduced over time to make total emissions fall, China's aviation industry will receive lower emission quotas and have to pay more for its emissions if there are no significant emission cuts in the future. By 2020, the costs are projected to skyrocket to 3 billion yuan, while the accumulated expenses in the next nine years will climb to 17.6 billion yuan. Estimated extra costs of 15 million yuan will be required for every flight added.

On the other hand, there is little likelihood that the costs imposed on China's airlines will decline, in line with the view that their emissions are bound to rise. Thanks to a surging number of middle-class Chinese, the Chinese aviation industry has ushered in a golden age in recent years. With 1,417 aircrafts by the end of 2009, the number is expected to hit 4,000 in 2030, while the annual growth rate of the aggregate traffic mileages will be more than 10 percent. With such brisk pace of growth, the total volume of carbon emissions by China's airlines is set to continue growing.

As most Chinese airlines have a relatively low market share in foreign markets, they have embarked on a "going abroad" strategy to try expanding their market shares abroad, in Europe in particular. Thanks to the rise of outbound international flights, it is unrealistic to have zero growth of carbon emissions in China's aviation industry in the future.

The soaring costs imposed by the EU's ETS will deal a blow to China's airlines. For a long time, many airlines were struggling in the red. Only in 2008 had China's aviation industry begun to make some profit. Compliance with the ETS may pull them back to the break-even point, whereas the unanticipated rising costs may dampen Chinese airlines' foreign expansion momentum and even strangle their prospects.

Theoretically, the EU's ETS is conducive to reducing greenhouse gas emissions and hence to countering global climate change. By taking advantage of the cross-border nature of aviation, the EU is not only demonstrating its leadership on the climate change issue, but also striving to forge its global reach. In contrast, this will place China in an inferior position in international negotiations on climate change. The EU may exert considerable pressures on China to carry out more emissions cuts.

But this is not just a climate change policy, it is a political decision. By enforcing the ETS in global aviation, the EU aims to develop itself as the world's largest carbon-related market and thus bring relevant businesses to the region, such as carbon trading, emission monitoring and carbon financing. At the same time, the move will furnish EU companies with an early-entry advantage so that the EU will take the lead in developing the low-carbon economy.

More worrying for China is the possibility that the EU may extend its practice in the aviation sector into other industries. The move will not only consolidate the EU's leading position in climate change and a low-carbon economy, but also give it the initiative to formulate, implement and adjust the mechanisms and regulations as it owns the power over the discourse and the pricing rights. In contrast, China will be put in a defensive position by following the EU's rules.

Having realized these adverse effects, China has decided to say "no" to the EU ETS. In a series of protests against the EU's unilateral action, the Civil Aviation Administration of China, endorsed by the State Council, issued a directive on Feb 6 forbidding Chinese airlines to engage in the EU's ETS without permission, or to raise fees using the ruling as an excuse. Specifically, they are banned from participating in transactions offered by the EU carbon market, submitting any proposal for carbon emission schemes to member states of the EU, or negotiating with the EU regarding favorable polices or exemptions.

China is willing to hold talks with the EU on this issue and hopes to find a solution acceptable to both sides. In the event that there is no compromise from the EU, China is also considering whatever measures are necessary to protect domestic airlines.

Other than political negotiations, there are two other channels that China can rely on - legal procedures and trade war - but neither can address this issue in an effective and win-win manner. First, it remains controversial whether the EU ETS has infringed the sovereignty of other nations. Some countries such as China and the US claim that it has as the EU unilaterally imposes its regulations on other countries' airlines, and that the EU's scheme charges those mileages outside Europe. If other countries take similar action, charges might be repeated.

The EU opposes such a claim. In judging the case against the EU-ETS filed by the US, the European Court of Justice ruled that the EU's scheme is not an infringement and that it is in line with international law. So the prospect of success seems low even if the Chinese side brings a case to an EU court. Second, initiating a trade war to counter the EU's action will harm both sides, and to some extent, bring more harm to China. Since Chinese airlines can pass the costs to passengers and their foreign counterparts competing with them are confronted with similar cost pressures, the Chinese airlines may not necessarily lose 800 million yuan. Even if that is true, this is a relatively small amount compared with the more than 3 trillion yuan bilateral trade between China and the EU. Clearly, it is unwise to launch a full-scale trade war against the EU merely for the sake of the interests of China's aviation industry.

Therefore, political negotiations may be the most viable solution and China should voice its concerns in negotiating with the EU. On the one hand, China should resist the encroachment of the ETS into other industries. On the other, China should highlight the EU's requirement that airlines of developing countries including China pay the same charges as European airlines is a breach of the principle of common but differentiated responsibilities set out in the Kyoto Protocol. According to that principle, developed countries should take major responsibility in addressing climate change and their responsibilities are compulsory, while those of developing nations are voluntary and based on their economic and social development stage. Airlines of developing countries including China should be different from those of airlines of developed nations.

Chen Shaofeng is an associate professor at the School of International Studies, Peking University; Chen Fei is a freelancer based in Beijing. The views do not necessarily reflect those of China Daily.

(China Daily 02/17/2012 page8)