China and India lead boycott of Europe’s carbon tax regime

Asia is taking the global trade war to the skies. Following the outcry over the January 1 decision by the European Union (EU) to levy carbon taxes on all airlines serving EU airports, China and India are leading a boycott of what they call a trade levy disguised as an attempt to fight climate change.

Uniting a group of 27 other countries in the Russian capital of Moscow on February 22, the two Asian giants helped shape an agreement that experts have dubbed a “strategic blueprint for global trade war”.

The Moscow Declaration prohibits the national airlines of the signatory countries from participating in the carbon scheme and established a “basket of actions” against the EU if it failed to back off on the tax.

What makes the fiery clash significant is that it is the first real clash in the debate on climate and trade.

Jayanthi Natarajan, India’s environment minister, said on April 11 that the EU move was “a deal breaker” ahead of global climate change talks. Natarajan is India’s negotiating leader at the global climate change talks and her statements are the toughest by India so far on the EU move.

The EU is sticking to its guns, arguing that the Emissions Trading System (ETS) is not a trade levy and its only objective is to reduce emissions.

Imposed on January 1, the carbon tax scheme makes it mandatory for airlines flying into European airspace to provide data allowing EU regulators to measure their carbon imprint. No airline will face a bill until 2013, when the year’s emissions are tallied.

Neither India nor China is buying any of it.

On March 24, India’s Civil Aviation Minister Ajit Singh told parliament that “the imposition of carbon tax does not arise” because Indian airlines would simply refuse to hand over their emissions data.

In February, China ordered its airlines to ignore the EU directive. The scheme could cost Chinese airlines about US$123 million on European air routes for carbon emissions in the first year, and about US$2.77 billion from 2012 to 2020, said the China Air Transport Association. The price of a flight from China to Europe might increase by US$50, going by statistics provided by the China Beijing Environment Exchange.

China and India believe that the inclusion of international civil aviation in the EU carbon tax regime leads to serious market distortions and unfair competition. Their principal argument is that any imposition of carbon tax on aviation or maritime activity must adhere to the principles of the United Nations Framework Convention on Climate Change. The convention ensures that it is the manufacturers of inefficient craft, and not consumers, that are taxed for emissions.

Support for the boycott is growing. Already, 26 of the 36 members of the International Civil Aviation Organisation, a global body for aviation regulation, have announced their opposition to the inclusion of non-EU airlines in the ETS.

To ensure that the EU does not go ahead with its ETS, the Moscow Declaration mentions prospective retaliatory air, and trade measures targeted at individual European economies. The measures review bilateral air service agreements with individual EU states and impose additional levies or charges on EU carriers.

The ‘threats’ have already started to have an effect on European players. In March, aircraft maker Airbus, plus half a dozen airlines including British Airways, Lufthansa, and Air France, wrote a letter to the British, French, German and Spanish governments warning that the ETS could cost them billions of dollars in lost orders and business, and lead to the loss of thousands of jobs.

A subsequent letter by French Prime Minister Francois Fillon to European Commission head Jose Manuel Barroso made similar points, noting that China had already suspended orders for 35 European Airbus A330 jets, worth more than US$14 billion, and was threatening to cancel ten more.

In India, Airbus has a 73% share of the commercial plane market. It has orders for more than 250 planes with IndiGo, GoAir and Kingfisher Airlines, making the South Asian country a crucial growth market.

India has no plans yet to ask airlines to cancel Airbus purchases, but an unnamed senior Indian government official told Reuters news agency on March 20 that if the dispute escalates, India would retaliate with similar moves and consider charging an “unreasonable” amount for flying over India.

“We have lots of measures to take if the EU does not go back on its demands [as mandated by the ETS],” the official said, adding that Europe’s position would harm its own economy and airlines.

In March, India delayed approval of some European summer schedules by a day, which disrupted the flight schedules of many European airlines. Experts suggest India might use that example to show how disruptive a dispute with the country could be.

China and India are not the only Asian countries at war with Europe on the issue. Japan, South Korea, Malaysia, Philippines, Singapore and Thailand were the other Asian signatories to the Moscow Declaration.

Indonesia’s state-owned airline Garuda said in March it might stop flying to Amsterdam in response to the EU move. Similarly, Thai Airways President Piyasvasti Amranand said the state-controlled airline also opposed the EU law, but declined to comment on its impact on plane purchases.

“If nothing changes, this will cost us 200-300 million baht (US$6.5-9.75 million) a year starting 2013,” Piyasvasti told Reuters last month.

Both China and India question Europe’s real motive for the scheme, and suspicions about hidden agendas have given the economic dispute a political colour. The two rising powers do not want to budge from their stands because they suspect that in the coming years, climate change will serve as a pretext for protectionist policies.

No matter who blinks first, one thing is for certain: the clash between climate concerns and commercial necessities will continue for many years. And China and India will play an increasingly crucial role in the debate.  AR


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