Airlines, EU in escalating trade row over emissions

By David Fogarty and Pete Harrison

SINGAPORE/BRUSSELS (Reuters) - Global airlines attacked the European Union on Sunday over its plan to force them into the bloc's emissions trading scheme, as the EU vowed to stand firm against threats of retaliation.

Aviation chiefs spoke out against the EU move in Singapore at the start of a meeting in a glitzy casino resort, with some warning of the danger of a trade war and airlines from poorer nations saying they would pay a high price.

The EU will require all airlines flying to Europe to be included in the Emissions Trading Scheme (ETS) from January 1 next year. The system forces polluters to buy permits for each tone of carbon dioxide they emit above a certain cap.

The scheme is meant to tackle growing emissions from the $500 billion aviation sector, which is responsible for about two percent of mankind's greenhouse gas pollution.

Airlines say the scheme will increase costs and comes at a time when fears are growing about a faltering global economy, which could slash industry profit expectations.

Governments and airlines have been piling on pressure, some describing the forced inclusion of global airlines as illegal.

"The last thing that we want to see is a trade war," said Giovanni Bisignani, director-general of the International Air Transport Association. The EU had to heed a "growing chorus of countries strongly opposing an illegal extraterritorial scheme."

"We have to absolutely avoid this because the risk of retaliation for Europe that is in survival mode would be the kiss of death," he told Reuters on the sidelines of IATA's annual meeting in Singapore.

Chinese and U.S. airlines have been among the most vocal, with Beijing's aviation authority saying the EU move will cost Chinese airlines 800 million yuan ($123 million) in the first year and more than triple that by 2020.

The U.S. industry group Air Transport Association of America is challenging the move in EU courts. A U.S. industry official said separately the suit by a number of U.S. airlines would be heard in Luxembourg on July 5.

EU STANDING FIRM

Europe's climate chief said the EU would stand firm against any threats of retaliation.

"When some parties start to threaten specific European companies, I think Europe should be very firm," Climate Commissioner Connie Hedegaard told Reuters in an interview.

But she said there could be a solution if China and other nations carry out steps to cut emissions.

The European Commission wrote to the China Air Transport Association last week offering a solution -- using provisions in the ETS rules to exempt airlines of countries that can prove they are taking equivalent steps to cut emissions from aviation.

The Commission has not spelled out what those steps could be, nor have EU member states finalized details of penalties, such as seizing aircraft should an airline fail to comply.

Under the scheme, the aviation sector will receive 213 million carbon permits, called EU Allowances (EUAs) in 2012 and then 209 million from 2013 to 2020, representing the cap. As many as 82 percent of them will be given free to airlines, meaning most of the rest will have to be bought from the market.

With six months before the sector joins the ETS, opposition is growing.

A China Southern executive has said the China Air Transport Association is preparing to sue the EU over the issue, a Chinese media report said.

"The opposition is broad," said Andrew Herdman, Director-General of the Association of Asia Pacific Airlines, which represents 15 airlines such as Cathay, Japan Airlines and Singapore Airlines.

"The EU wanted to do something ambitious but they have underestimated the political price will have to pay."

China says Europe should adjust the ETS to reflect the differences between rich and poor countries, while Vijay Mallya, chairman of India's Kingfisher Airlines, said he could not accept it.

"It is unfair on developing countries. There is no playing field," he told Reuters.

(Additional reporting by Tim Hepher, Harry Suhartono and Alison Leung; editing by Andrew Roche)