(BRUSSELS) — Is the United States heading toward a new trade row with the European Union? After the House of Representatives, the U.S. Senate has now approved a bill that would make it illegal for American airlines to participate in the EU Emissions Trading System (ETS). This would give Transport Secretary Ray LaHood, who stated his opposition to the ETS, the possibility to order American carriers not to comply with the EU system. U.S. airline representative body Airlines for America, said it welcomes the move.
Launched in 2005, the EU ETS imposes a “cap” or limit on the total amount of certain greenhouse gases that can be emitted by factories, power plants and other installations in the system. Within this cap, companies receive emission allowances which they can sell to or buy from another as needed. At the end of each year, each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If the company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The idea is to reduce the number of allowances given over time to as to reduce the emissions produced by companies.
The ETS operates in 30 European countries (the EU-27 plus Iceland, Liechtenstein and Norway) and covers carbon dioxide emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, bricks, ceramics, pulp, paper and board. The limit on gas emissions normally only affects plants from countries that have joined the system. When the airline industry was added to the scheme earlier this year, the question was raised about carriers originating from other countries and flying to Europe. The EU decided that it would be fair to make them limit their emissions as well; hence foreign aircraft landing in EU countries would also be charged for carbon emissions.
The system allows for “equivalent measures,” meaning that a non-European airline would be exempted if the country it originates from has a similar scheme in place to offset international emissions. This has not prevented an international outcry after the EU’s decision. China, India and other countries have called the European law a violation of sovereignty. U.S. Congress says it objects to the unilateral character of the scheme and the U.S. administration is considering retaliatory steps of its own to pressure Europe to retreat. It wants to force Europeans to work toward a global sectorial approach through the International Civil Aviation Organization (ICAO); or, alternatively, push its aviation carbon emissions policy into the UN Framework Convention on Climate Change negotiating process.
This smacks of hypocrisy. The U.S. has systematically refused to ratify the Kyoto Protocol to the U.N. Framework Convention on Climate Change aimed at fighting global warming. This protocol was initially adopted in 1997 in Kyoto (Japan) and entered into force in 2005. As of September 2011, 191 states have signed and ratified it. The United States is the only remaining signatory state that has not ratified it.
As for the ICAO, although there are moves to find alternative market-based mechanisms, the EU decided to include aviation in its ETS after years of talks at ICAO had failed to deliver a solution. It says it agrees and wants to find a global solution but in its absence, the urgency of global warming has compelled it to act alone. Predictions by the ICAO that airline emissions would soar – by 88 percent between 2005 and 2020 – called for urgent action. European Commissioner for Climate Action Connie Hedegaard recently confirmed that she stands by the ICAO as the way out of the current dispute.
On the other hand, the U.S. is itself the greatest champion of extraterritorial laws. To name but the most famous – or rather infamous – ones: the Helms-Burton Act imposed on Cuba and the Iran and Libya Sanctions Act (ILSA). This last Act not only prohibits American companies from investing in the development of Iran’s petroleum resources. The bill also calls for “extraterritorial” or secondary sanctions on any foreign corporation that invested in Iran’s oil industry in excess of $20 million. Yet, secondary sanctions are directly contrary to the principles of free trade, which the U.S. claims to promote; and they are also forbidden by the World Trade Organization. As soon as 1997, the EU expressed in a very clear language its concern about the increasing use by the American administration of extraterritorial laws:
The European Union […] is opposed to the use of extraterritorial legislation, both on legal and policy grounds. In the last few years there has been a surge of U.S. extraterritorial sanctions legislation both at federal and sub-federal level. […] The EU has expressed its concern about this development on numerous occasions. Such laws represent an unwarranted interference by the U.S. with the sovereign right of the EU to legislate over its own citizens and companies, and are, in the opinion of the EU, contrary to international law.
Nothing has changed since. In the framework of the recently approved U.S. Iranian Financial Sanctions Regulations, the American president has the power to impose sanctions on non-U.S. financial institutions engaged in transactions with the Central Bank of Iran and other designated Iranian banks. Under these new sanctions, non-U.S. banks risk losing access to the U.S. financial system if they continue doing business with Iranian banks. Hence, criticizing Europe for imposing extraterritorial laws is like seeing the mote in another’s eye and not the beam in your own. Additionally, nothing prevents the United States from adopting “equivalent measures,” thereby removing any argument for the EU to impose its ETS. This is what Australia has done, with the two sides deciding this week to link their emission trading systems.
The potential for a trans-Atlantic trade row is not the only issue the EU-ETS is facing. The system has recently suffered from an over-allocation of allowances due to the economic downturn and drop in production. This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap. And since the total number of permits issued determines the price for carbon, too many allowances lead to a low carbon price. In April, carbon prices dropped to their lowest level – €6/ton of carbon dioxide – since trading started in 2005, down from €20 in 2008. The European Commission now proposes to delay the sales of new allowances in the next phase of the scheme, starting in 2013. Oversupply of emission allowances also means the objective of the scheme, reducing emissions, is lost.
The idea behind the scheme is that by making companies pay for polluting, they would opt for cleaner production methods. The risk though is that production be delocalized to other countries with less severe environmental rules. The aviation industry complained that the ETS will simply push carbon emissions outside EU’s borders. What will happen, they fear, is that hubs in Europe will be removed and airlines will bypass Europe and take different routes. Another problem is that a system based on “the polluter pays” principle does not do much to change mentalities.
The bill on aviation passed by the U.S. Senate still needs presidential approval and while President Obama has said he disapproves of the scheme, it remains to be seen whether he’ll approve a bill that would place the U.S. in direct conflict with the EU. As for the European Union, it seems to have understood the message: Since the International Maritime Organization (IMO) has difficulty in developing international regulation for reducing gas emissions from ships, the European Commission had committed itself to also include shipping in the existing reduction scheme. After its recent experience in international aviation, the European Commission is now considering other possible options.