EU bows to pressure over airline carbon tax

Intense pressure from outside the European Union has paid off as a plan to force airlines to pay for carbon emissions is put on ice.

Intense pressure from outside the European Union has paid off over a controversial plan to force all airlines to pay for their carbon emissions for flights into and out of EU airports.

The EU executive yesterday said it would freeze implementing the rule for a year, following threats of international retaliation.

Connie Hedegaard, the EU's climate commissioner, said she had agreed "to stop the clock" to create a positive atmosphere for international talks on an alternative global plan, although flights within the EU will still have to pay for their carbon emissions.

"But let me be very clear: if this exercise does not deliver, and I hope it does, then, needless to say, we are back to where we are today with the EU ETS [emissions trading scheme]. Automatically," added Ms Hedegaard

The United States, China and India had ratcheted up pressure on the EU. Debate in the US congress is set to resume this week on legislation to counter the EU rules.

"The EU's announcement does not rule out future efforts to tax foreign carriers," said senator John Thune, who led efforts in the senate to block the law.

China likewise had opposed what it said was the EU's unilateral move. "China always maintains that under the multilateral mechanism, such as the UN framework convention on climate change ... international cooperation should be carried out to tackle climate change," said Hong Lei, a Chinese foreign ministry spokesman.

EU member states must still formally endorse the European Commission's proposed freeze.

Andrew Herdman, the director general of Asia Pacific Airlines, ,described the freeze as "long overdue" but said it might not go far enough. "The implied threat of an automatic snapback in a year's time means that the EU will still be seen by some as negotiating with a gun on the table," he said.

Arabian Gulf carriers had also been vocal in their objections to the scheme. Etihad Airways said this year it would increase prices by US$3 (Dh11) per passenger for flights into and out of Europe and 0.03 cents per kg for cargo shipments, to offset the costs.

Dubai's Emirates Airline said last year the scheme may cost it as much as $1 billion over 10 years.

The UN's International Civil Aviation Organisation (ICAO) is seeking an alternative global deal.

Mr Herdman said the ICAO was the right forum for a global agreement. "The alternative would be disastrous - a patchwork of overlapping national schemes and punitive taxes."

The proposed year-long waiver - meaning no carbon payments before April 2014 for international flights - gives the ICAO until its general assembly late next year to reach a global deal.

Meanwhile, the EC may be forced to weaken its plan to temporarily remove 900 million tonnes of carbon allowances from its emissions market to reduce oversupply, Deutsche Bank said yesterday.

The EC is seeking to postpone permit sales, known as backloading, during the three years through 2015 to the last two years of the next trading phase, which ends in 2020, according to a draft document published on an EU website on Monday.

Emission prices may climb to €15 (Dh69.92) a tonne in the three years starting next year, according to assumptions used by the commission to assess costs to industry. Assuming emitters receive 704 million tonnes of free allowances, they may need to buy 84 million tonnes of allowances in the three years through 2015, the EC said.

That would cost €840 million at €10 a tonne. Every €1 a tonne of price gain will increase the value of surplus permits held by industries by at least €704m, it said. The commission is aiming for a decision on the backloading plan before the end of this year.

But analysts said backloading was fraught with risk. "This is a very dangerous proposal where the commission plays with fire," said Per Lekander, UBS' global head of utilities research in Paris.

"This could drive the price very high and then it crashes. Here, there is no genuine scarcity."

* Compiled from Reuters and Bloomberg News