Carbon trade programs developed by countries in an effort to address climate change are entering the arena of cross-border trade, with potentially serious implications for developing countries, particularly those whose economies are dependent on tourism.

These programs operate as a market-based mechanism for controlling the emission by industry of harmful pollutants, particularly carbon. Carbon, which is present in all forms of hydrocarbon fuels, notably petroleum, coal, and natural gas, is released as harmful carbon dioxide when these fuels are burnt. The emissions trading programs operate by placing a cap on the amount of carbon emissions allowed on a yearly basis. The cap is allocated to firms as permits which represent the right to emit a specific volume of carbon. Firms are required to hold a number of these permits, which are equivalent to their emissions volumes. The total number of permits cannot exceed the cap, limiting total emissions to that level.

Companies respond to this cap in the manner that best suits their needs and their pocket. They may either:
(1) Reduce emissions by developing cleaner technology, leaving them with excess permits; or
(2) buy the excess permits from their more efficient rivals so that they can continue to pollute at the same level.

The transfer of permits between companies is called a “trade”. The United States has initiated the “cap and trade” program. The European Union Emissions Trading System (ETS) is the largest such program in the world.

Extending to Cross-Border Trade
The European Union has extended the ETS to cross-border trade, notably the airline industry, to the vociferous opposition of its trading partners and airlines around the world. Starting January 1, 2012, the reach of the ETS was extended beyond companies operating within the EU, to all airlines flying in and out of EU airports. Any airline that does not comply could face a fine of €100 or US$128 for each ton of carbon dioxide emitted for which it has not acquired a permit. Thomson Reuters has calculated that airlines face a carbon pollution bill of €505 million or US$670 million for 2012 under the ETS. Persistent offenders could be banned from EU airports.

An unlikely coalition, led by China and the United States, has taken the lead in protesting this application of the ETS beyond the EU’s borders. China has been particularly vociferous and has barred its carriers from taking part. A key argument against the EU plan is its discriminatory application, which penalizes those airlines, and eventually their passengers, which make stop-overs at an EU airport as opposed to flying non-stop. Governments also argue that the program is exceeding its legal jurisdiction by calculating carbon costs over the entire flight rather than just over Europe.

Another key concern is the very real possibility of overlapping programs and fines. Although not cap and trade programs, other European countries have initiated environmentally-motivated taxes on airlines. The United Kingdom’s Air Passenger Duty (APD) program assesses a per-passenger tax on airlines depending on placement of the flight within four geographical bands based on the distance from London to the capital city of the given country. This approach, however, results in an APD tax which can at times bear little or no relationship to the distance travelled by a given passenger, and therefore to actual carbon emissions. Austria and Germany have similar taxes.

Developing Country Concerns
Developing countries that operate their own airlines face the difficult choice of either bearing these additional costs or making themselves less competitive by passing the costs onto their passengers. South Africa has spoken about the competitive disadvantage for South African carriers, as well as the potential for the double counting of emissions under the conflicting measure of the EU ETS and the other environment-related departure taxes.

The international travel association, ABTA, has expressed great concern that the APD bands based on the distance from London to the capital city are illogical from an environmental perspective and puts off travelers to such tourist destinations as the Caribbean and Kenya. As an example, a higher tax is assessed against the passenger on a flight from London to Honolulu, which is calculated as a London-Washington, DC trip, than against the passenger on a London-Jamaica flight, which is actually half the distance. Competing tourist destinations, this situation places Jamaica at a competitive disadvantage.

Need for Global Framework
The obvious solution is to develop a multilateral framework for addressing the important issue of curbing carbon emissions by airlines. There appears to be general agreement that such a framework would best be developed by the United Nation’s International Civil Aviation Organization (ICAO). What appears lacking so far is the political will to accomplish this goal. This failure is in fact what has spurred the EU to act unilaterally to implement the ETS. At the same time, as noted by Andrew Herdman, director general of the Association of Asia Pacific Airlines, the European policy alienates the United States, China, Russia, India, and three dozen other countries and so “is simply not going to work.” Meanwhile, the EU continues to insist that it is going ahead. This EU insistence has in fact spurred countries into action, although unfortunately the focus appears to be to thwart the EU program.

Meanwhile, as is often the case, developing countries which have the least room to maneuver, stand to lose the most as this impasse continues. There is urgent need for a solution which does not place an inordinate burden on developing countries, especially those dependent on tourism for their livelihood.