House Airline Bill Risks Diplomatic Fallout and Disaster to U.S. Industry

Legislation Is Harsh and Inappropriate Reaction to EU Emissions Trading System

On Monday the U.S. House of Representatives took the unusual step of passing a bill, the European Union Emissions Trading Scheme Prohibition Act of 2011, which would forbid U.S. airlines from participating in an EU law requiring that CO2 emissions from all commercial flights coming in and out of the European Union be accounted for in the EU Emission Trading System, or ETS, regardless of the nationality of the carrier. This move by the House risks an unnecessary diplomatic flare-up between the United States and its closest allies in the midst of an economic emergency in Europe. And it will do nothing to stop the EU program.

What the EU law does

All parties involved, including U.S. aircraft operators, knew for years that the European Union was moving toward this new rule, which will become effective January 1, 2012. Several years ago, when the European Union announced their intention to fold all airline emissions in their airspace into the ETS—the principal mechanism for capping and reducing carbon pollution across Europe—they asked all commercial carriers to begin gathering data on the amount and intensity of their emissions on flights in and out of EU airports. All U.S. air carriers have so far complied.

Starting next year those same carriers will have to begin purchasing permits for carbon emissions above a set cap calibrated to hit economywide goals in the ETS. The initial goal for this part of the ETS is to reduce total commercial airline emissions 3 percent from average 2004 to 2006 levels by 2013.

Legal wrangling over the law

The EU program drew fire from a variety of countries claiming that it is a unilateral, extraterritorial imposition of the European Union’s policies on other countries.

Among other charges, some parties assert that the law violates the recognition in the key international aviation agreement signed in 1944 —also known as the “Chicago Convention”—that “every State has complete and exclusive sovereignty over the airspace above its territory” (Article 1).

On September 30 the United States and 20 other countries signed a joint declaration in India urging the European Union to rescind its policy. Most of these same parties, plus seven others, then submitted a working paper to the International Civil Aviation Organization, or ICAO—a U.N. body that sets aviation standards and regulations—on October 17 arguing that the governing council of the organization reaffirm its commitment to investigate the feasibility of a global market-based airline emissions trading mechanism. The paper proposes that regional schemes such as the EU program undermine ICAO’s leadership in this area.

But despite these objections the European Union is resolute in its defense of both the practical need and legality of their carbon-reduction program.

With respect to the preference of the United States and other parties to create a global program though ICAO, European Union Commission spokesmen argue that they turned to their own program only after the ICAO’s failure to create a global program after trying for 14 years.

As to the legality of this policy, a court case initiated by three American airline carriers and the Air Transport Association in 2009 is slowly working its way through the European justice system. The European High Court of Justice in Luxembourg heard the case last summer, and in early October the court’s advocate general issued an advisory opinion that the law “is compatible with the relevant international agreements.”

The High Court will issue its formal ruling early next year. But so far there is no reason to believe that an EU court will strike down an EU law. And even if the ICAO governing council were to side with the sentiments expressed in the October 17 working paper, this would not in and of itself compel the European Union to back down from this position.

This back and forth between the European Union and other nations over the legality of this law is vigorous and even heated at times. Nevertheless, it is still being carried out through the stepwise paces of established diplomatic channels. One of the reasons institutions like ICAO were created was to provide an orderly forum for airing such disputes. In contrast, the House of Representatives’ answer to the EU program has as much strategic and diplomatic nuance as a blindfolded 10-year-old whacking away at a birthday piñata.

What the House bill does and how it would affect airline operations

The House bill would simply ban U.S. carriers from complying with the EU ETS. It directs the Department of Transportation to prohibit U.S. aircraft operators from participating in the program and further stipulates that revenues raised from the purchase of allowances by airlines will not be used for environmental purposes.

Compliance with this bill would put U.S. carriers in a desperate position. They would be left with essentially two options.

First, they could “comply and fly,” meaning they could continue using EU airports but not pay into the EU ETS for the impact of their flights. According to the working papers submitted to ICAO from the Obama administration, this means that they will face “approximately 100 per missing allowance … [and] may even be banned from operating in the EU” (section 1.3).

Second, they could “comply and not fly,” meaning that to avoid these damages, they could simply stop flying to destinations such as London, Paris, Frankfurt, Rome, Amsterdam, and thousands of others, which amounts to corporate suicide against their competitors from other countries.

The bill instructs the secretary of transportation, the administrator of the Federal Aviation Administration, and other U.S. officials to make sure operators are not harmed by the ETS. But none of these organizations can stop a sovereign country from imposing its own laws on U.S. corporations operating in their jurisdiction.

Putting U.S. carriers in this obvious double bind is curious at best given the purported purpose of the bill.

Economic consequences of the bill

When he introduced the House bill this past July, Transportation and Infrastructure Committee Chairman John L. Mica (R-FL) argued that the EU ETS aviation program “is a clear violation of international law that puts U.S. air carriers at a competitive disadvantage, kills U.S. aviation jobs, and may lead to a trade war.”

Clearly, though, any form of compliance with this bill will do to the U.S. air carriers exactly what Chairman Mica says the European policy will do: put them at a competitive disadvantage and, as a result, potentially destroy thousands of jobs in an industry that has struggled for decades while Americans flying to or through Europe have no choice but to choose foreign carriers.

According to the Department of Transportation’s Bureau of Transportation Statistics, more than 10.6 million passengers flew to the European Union on U.S. carriers in 2010 alone. We don’t need a sophisticated economic model to demonstrate that the U.S. airline industry can ill afford this loss and that the cost of compliance with the EU program would be comparably tiny.

Unfortunately, the smartest thing for U.S. carriers to do would be to not comply with this bill and suffer whatever fines might be imposed from the Department of Transportation. As to a trade war, surely the House bill puts us a step closer in that direction rather than away from it.

Still, all of this may end up being yet another artificial Washington tempest. Most emission allowances in the program (85 percent) will be given away for free during the first few years of its enactment. Many U.S. carriers that already upgraded their fleets flying to Europe to more efficient aircraft will make money by selling their emission allowances to carriers with older fleets.

And while various analysts speculate that the impact on the cost of an average flight to Europe may eventually be between $7 and $57 per flight, analysis released yesterday by Bloomberg New Energy Finance argues that at the current carbon prices, the out-of-pocket costs faced by the aviation industry under the ETS will be “small compared to other costs the industry has to contend with.”

Just how small? According to one analyst connected to the study, “0.24 percent of the revenue associated with flying the routes covered by the EU ETS in 2012 and 0.54 percent of revenue in 2020.”

More importantly, the full cost of the airlines’ compliance will not be passed on to consumers because of competition from non-EU ETS-regulated operators on some routes and potential reduction in demand from higher prices. From an industry perspective any reduction in demand for flights will be less than any increase in ticket prices.

In an interview, Guy Turner, Bloomberg New Energy Finance analyst and author of the report, told Reuters, “On the aggregate we think the industry is going to benefit in the long run, at least up to 2020, by the inclusion of the sector in the EU ETS.”

Conclusion: The bill is divisive, bad for business, and bad for the climate

What this all means is that this destructive and unnecessary piece of legislation should be resisted if it moves to the Senate, and the Obama administration should reject it. House Republicans are calling this legislative front a coordinated effort with the administration, but so far the White House has not said that the United States should not comply with EU law.

One last point: The European Union is now arguing that this law serves a greater good of protecting environmental health and safety. We would do well to remember that the United States has done the same in the past. In 1990, when the United States passed legislation gradually barring single hull tankers from trading in U.S. waters—which combined with other efforts forced a change for the better in the global industry—it accepted it as a prudent measure in the public interest. In contrast, the House bill serves no interest other than those who have already decided that carbon pollution is not a problem.

Andrew Light is a Senior Fellow and Rebecca Lefton is a Policy Analyst, both specializing in international climate policy on the energy team at the Center for American Progress.