The EU's aviation carbon tax, included in its Emissions Trading System (ETS), has rapidly become one of the hottest global issues with more than 20 countries, including the U.S., Russia China and India expressing their disapproval of the scheme as well as their joint refusal to comply with the EU ETS aviation directive. However, the EU has underlined its commitment to the tax and it appears that a trade dispute – or even a full-out trade war – could be looming. It is therefore imperative that both China and EU discuss the issue so that a global consensus can be reached.
Motives behind ETS
The EU has pledged its commitment to the EU ETS despite criticisms from other countries. It continues to apply the tax to non-EU members based on its own agenda. So what is the thinking behind the tax?
The first point is that the EU is striving to become global leader in terms of regulating low carbon economic systems so that it can successfully implement plans for the transition to a green economy. The fact that the EU has lost ground to the U.S. in the past decade with regard to this new economy could well be motivating the EU's actions, at least in part. In 2000, the EU launched the "Lisbon Agenda" with the aim of making eurozone economies the most competitive and dynamic knowledge-based economies in the world 2010. It also launched "Europe 2020: A strategy for smart, sustainable and inclusive growth", which was a public statement of its determination to develop a low carbon economy and increase its economic strength.
The EU is renowned for its innovativeness, and it believes that in the ETS it possesses the first – and most important – tool for reducing industrial greenhouse gas emissions and combating global climate change in a cost-effective way. It remains to be seen whether or not the EU's ETS will be effective in mitigating climate change. Regardless of its eventual success or failure, it is an innovative method of developing a green economy. However, the EU's real aim is to compel other countries to comply with its regulations and directives with the implement of the carbon trading market mechanism.
It could also be that the ETS will stimulate ailing eurozone economies and prevent the viral spread of eurozone debts. It is a fact that some EU members, such as Greece, Portugal and Spain are crippled by high public debt and financial deficits. They require extra finances to stimulate their economies and save their banking systems from bankruptcy.
Negative effects on China's aviation industry
The EU could benefit greatly, both economically and morally, if the ETS goes into global operation. According to the China Air Transport Association (CATA), Chinese airlines will suffer a cost increase of 900 million yuan in 2012, with total costs rising to 17.6 billion yuan during the 2013-2020 period. Obviously, it will be a great challenge facing Chinese airlines and other industries. The EU's aviation carbon tax will push up Chinese airlines' operation costs and weaken their ability to compete globally.
It is possible to predict certain negative knock-on effects for China, at least in the mid-term. The cost of high carbon emission goods to Europe will be higher than before and the commodity price of exportation also will be higher. These factors will weaken the performance of Chinese products in the global market. In addition, the total volume of manufacturing exports to Europe related to high carbon emissions will fall, having implications for the export-import commodity pattern, as well as possible increased friction between China and the EU.
In the worst case scenario, the ETS will become legally binding for other countries, with the aviation industry at the top of the hit list. The EU would then actively regulate the industry, and later broaden the scope of the ETS's application. As a result, an increasing number of directives would come into force as well as new legislation. More companies and industries which still produce large carbon emissions would face higher taxes and greater financial pressure.
Possible solutions
In order to break the EU-China carbon tax impasse and quickly alter China's current passive stance on the issue, it is imperative that we:
Organize a special working group including researchers, officials and legal experts to clarify whether or not the EU's ETS directive can be legal applied to non-EU countries.
Make an in-depth analysis of why the American air carriers' lawsuit failed.
Look for a global solution for tackling the present carbon tax dispute via multilateral mechanisms. Multi-level negotiations will be necessary to achieve this.
Take the opportunity to establish a Chinese Emission Trading System and increase spending on research and development for the use of energy saving and high efficient fuel in the aviation industry.
It is our institute's belief that this global problem must be solved through multilateral channels. There is the possibility of solving the carbon tax issue through the International Civil Aviation Organization's (ICAO) framework, based on common but differentiated responsibilities between developed and developing countries. In addition, the new monitoring tools and evaluation system will be set up via comprehensive negotiation among stakeholders.