China Unlikely to Win Suit Against EU Carbon Tax

Chinese airlines are unlikely to score a victory in their bid to challenge the legality of the European Union's plan to apply its Emissions Trading Scheme (ETS) to non-EU airlines, analysts said.

The European Union Court of Justice on Wednesday dismissed arguments from North American air carriers that the EU's ETS infringes on national sovereignty or violates international aviation treaties, a ruling Chinese airlines are also likely to face if they launch a lawsuit against the scheme.

"We know that the prospect of victory is dim, but we want to show our firm opposition by launching a lawsuit," said Chai Haibo, deputy secretary of the China Air Transport Association (CATA).

The scheme, due to take effect on January 1, 2012, is one of the widest-reaching measures adopted by any country or regional bloc to regulate emissions of greenhouse gases blamed for climate change. It is estimated that around 4,000 airlines will pay the EU for the carbon they emit.

Violates existing regulations

The unilateral extension of the ETS to non-EU airlines violates the Kyoto Protocol, which stipulates that developed and developing countries have common but differentiated responsibilities in coping with climate change, said Shen Jiru, a senior researcher at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.

Meanwhile, the EU's decision to charge money for carbon potentially emitted outside of its airspace runs contrary to the customary international legal principle that each state has complete and exclusive sovereignty over the airspace above its territory, Shen said.

"The extension of the ETS to international aviation is the latest example of unfair competition, as the EU can use the money it collects from other countries' airlines to subsidize its own aviation industry or its aircraft manufacturing sector. That will be an obvious breach of the WTO's principle of free trade," he added.

Adds to higher costs

Already squeezed by high fuel prices, Chinese airlines will face tougher times because of the carbon tax.

CATA estimates that the carbon tax will cost Chinese airlines 800 million yuan (126.98 million U.S. dollars) in 2012, and 3 billion yuan in 2020.

Chinese airlines can not bear an extra 800-million-yuan burden every year after reporting huge losses during the global financial crisis, said Li Xuerong, a researcher at China Investment Consulting.

Air China Ltd., the country's flagship carrier, currently operates 14 Sino-EU flight routes. CATA said the carbon tax will add 200-300 million yuan to the company's operating costs in 2012 alone.

"Air China's European routes just swung into profits last year. A large part of the company's profits are generated by domestic flights. Another 200-millon-yuan in costs will undoubtedly weigh on its profitability," said Li.

Chinese airlines will probably redirect stopovers from European cities to other places to avoid taxes, even if it means burning more fuel, she said, adding that the introduction of the carbon tax will not be good news for customers because they may pay higher plane fares if airlines can not absorb the potential costs.

Airlines file lawsuit

China's "big four" airlines -- Air China, China Eastern Airlines, China Southern Airlines, and Hainan Airlines -- have reached an agreement with CATA to jointly sue the EU in Germany at the end of the month, Chai Haibo said.

"Curbing carbon emissions by charging for them is not necessarily a bad idea, but the EU should take the development stages of various countries' aviation industries into consideration," he said.

His view was echoed by Li Jingyun, a researcher at the Department of Policies, Laws and Regulations under the Ministry of Environmental Protection.

"Chinese airlines have been in a period of rapid expansion and are looking to increase their aircraft fleet to meet the growing demand for international travel. Therefore, it will be difficult for them to cut aggregate carbon emissions in the short term," Li said.

She suggested Chinese airlines join together to pressure the EU by threatening to reduce purchases of Airbus aircraft.

The EU should levy carbon taxes on airplane manufacturers instead of airlines, because it was the former that failed to produce energy-efficient aircraft, Li said.

"China must accelerate the development of the aviation biofuel industry. That is the fundamental means for reducing the country's carbon footprint," Shen Jiru noted.