Tormented aviation industry and China, Russia and the United States cry blue murder: New EU rules for CO2 emission make flying more expensive

The European Union is slowly starting to diminish the effects of the special legal status that is taken by the aviation industry.

As you might know: the aviation industry doesn’t pay excise duty and other taxes on aviation fuel, due to an old, worldwide accepted agreement that prohibits this explicitely. Also the right to produce CO2 was free for the aviation industry, in contrary to other industries like manufacturing, forestry, cattle-breeding and transport that had to pay dearly for these rights.

This is now going to change due to new legislation of the European Union. The Dutch financial newspaper Het Financieele Dagblad (http://www.fd.nl/) writes on this story. Here are the pertinent snips:

Flying inside the EU costs millions of Euro’s more, due to new CO2 regulation (link in Dutch).

From next year aviation companies are going to pay hundreds of millions of Euro’s for the exhaust of CO2. German-based aviation company Lufthansa expects additional expenses of €350 mln per year. This was stated by the company.

Cause are the new European environmental rules. Companies that fly inside the EU, will have to pay for their exhaust of greenhouse gasses. Last Monday, September 26, new rules for CO2 emission were set by the European Commission.

The member states will distribute the largest part of the emission rights free of charge to the aviation companies. In 2012, this will be 85% and this will be further diminished to 82% in the years after. For the remaining part, aviation companies will have to purchase additional rights or they should start flying more economically.

After 2013, 3% of the total rights will be reserved for new and fast-growing aviation companies.

The Commission had calculated earlier that the introduction of CO2 emission rights would have a limited influence on the ticket prices. A return ticket from Brussels to New York would be at most €12 more expensive than currently.

The decision led immediately to mixed reactions on Monday. Lufthansa estimated the yearly damage to be between €150 and €350 mln. KLM-AirFrance didn’t yet have an estimation of the additional costs.

The International Air Transport Association (IATA) turned against the European plan from the beginning, and states that the deployment will turn out bad for Europe. According to the IATA, it is not sensible to lay extra charges upon the aviation companies, regarding the current weakness of the European economy.

Trading C02 emission rights is not new. The European manufacturing industry is already tied to a maximum exhaust of greenhouse gasses. If companies want to grow, they have two options: producing more efficiently (i.e. with an equal exhaust of greenhouse gasses) or purchasing emission rights from other companies that have a surplus. Lately the price per metric ton of CO2 emission rights is €14.

The aviation industry didn’t have to pay for their exhaust until now. Also, jet fuel is free of excise duties and taxes. Therefore, the railroad industry is already complaining for years about the unfair competition of the aviation industry.

You can call me a left-wing idiot, but for me this is a good plan. It is ridiculous that the aviation industry is the only transport industry that is totally free of taxes and excise duties on fuel. And the only industry that doesn’t have to pay (in any form) for the massive pollution it causes.

But the exclusion of excise duties for the aviation industry is a worldwide accepted agreement, that made much sense at the moment when it was signed many years ago. For global political reasons, this agreement is not likely to be withdrawn within the next 15 years.

However, nobody can deny that the pollution by the aviation industry is enormous on a global scale; especially in countries with an obsolete air fleet that, as a consequence, uses excess amounts of jet fuel.

Therefore, it is a logical step that the EU tries to do something to stimulate countries and airliners in finding more (fuel-) efficient ways of flying, through the sales / auctioning of CO2 emission rights. Whether this is an effective way, or not is a different discussion.

Nevertheless, I understand the pain of the aviation industry; this industry suffers already for years from minimal net margins and a fierce competition that suppresses the ticket prices. The cost of these emission rights could lead to distortion of competion as European airliners have a competitive edge, due to the received free emission rights.

But this initiative can eventually lead to a worldwide trade in emission rights for the aviation industry. This would help to make this industry more fairly priced against other means of transport, like trains, road transport or container ships. These suffer currently from the unfair advantage for the aviation industry.

You can imagine that many people and countries were not amused. BNR (Dutch Business News Radio; www.bnr.nl) reports on the (anticipated) reaction of other parties towards this EU-plan (link in Dutch). Here are the pertinent snips:

Dutch employers’ association VNO-NCW is fiercely objecting the system for CO2 emission rights that will be introduced in the aviation industry by the EU. Chairman Bernard Wientjes calls it ‘totally unfair’.

This was stated by Wientjes at BNR News radio. According to him, the new system will lead to a trade war.

The United States have already filed a legal case at the European Court in Strassbourg, China reconsiders the purchase of an Airbus plane and Russia considers charging costs for ‘passing the Russian airspace’.

It is logical that the non-EU countries see this as distortion of competion and that they, in the current grim economic climate, take their measures against Europe.

But we should not throw the baby out with the bathwater: the aviation industry needs to be more fairly priced, so travellers and transport companies see the real price of air transport, instead of the heavily subsidized fantasy price is currently has.