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Carbon Trade Wars: Why U.S. Should Accept EU Rules on Aviation Emissions

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Transatlantic trade conflict is yet again looming large. As the European Union has been moving ahead to cap the emissions of airlines using European airports, it irked the Obama administration. The latter responded with serious threatening gestures vis-à-vis the European Union. Yet there are strong political reasons for the U.S. -- domestic and international alike -- to de-escalate the dispute over climate policy and to not back domestic carriers in the battle.

As the world's first regulatory effort to curb emissions from aviation, the EU Aviation Directive includes all flights from and to European airports in its emissions trading scheme as of January 2012. It is the latest in a series of EU environmental and safety regulations that have sparked transatlantic conflict. The U.S. recently joined the governments of Brazil, China, India and other countries to sign a statement opposing the EU effort. Meanwhile, the U.S. House of Representatives passed the "European Union Emissions Trading Scheme Prohibition Act of 2011" that -- if passed by the Senate and signed by the president -- would prohibit U.S. airlines to comply with the EU rule.

These warning signals follow in the wake of outspoken opposition to the plan by U.S. airlines led by the Air Transport Association of America. The trade association, together with its members American Airlines and United Continental Holdings, filed suit against the inclusion of U.S. carriers in the EU plan. As a first milestone in the legal battle, the European Court of Justice published an advisory opinion in early October, arguing that the inclusion of U.S. carriers was lawful. As the dispute between the EU and airlines continues, the U.S. administration is well advised to refrain from backing domestic airlines.

First, while easily painted as protectionism, the inclusion of non-European airlines using EU air-ports under the rule is fair play. It creates a level-playing field in transatlantic competition and prevents carbon leakage. In a highly competitive industry such as aviation, where fuel is a big cost factor, the exemption of non-European airlines from the rule would create undue competitive advantages. What is more, it would likely shift business to un-regulated airlines, potentially increasing the overall amount of emissions. Note, this logic is not foreign to U.S. legislators. The Waxman-Markey bill, a comprehensive cap-and-trade bill which was passed by the House of Representatives in 2009, included provisions for border adjustments for competitiveness reasons. Such measures would -- most likely -- be in line with international trade law. It should be in the interest of the U.S. not to discredit measures that address competitiveness concerns and leakage by fighting them internationally.

Second, a multilateral approach to regulating aviation emissions is -- as the U.S. and other signatories of the recent statement are arguing -- clearly preferable, but it is unrealistic. With the exception of the Kyoto Protocol, multilateral negotiations under the United Nations have failed to make significant progress. Talks under the International Civil Aviation Organization, a specialized UN agency, have consistently fallen short of delivering an agreement. In fact, any meaningful progress in climate politics over the past decade has come from bottom-up leadership by states, countries and regions. The EU's emissions trading scheme has consistently played a crucial role in this game of push-and-pull. If the Obama administration has any interest in moving forward on international climate policy, it may want to keep one of the few driving forces in global climate policymaking alive.

Third, refraining from overt opposition to the EU move promises domestic political benefits down the road. The Obama administration has been struggling with significant political resistance toward domestic climate policy, in particular from parts of industry. The foreign regulation of the emissions of U.S. airlines offers regulatory inroads to the U.S. economy. This will lead to airlines developing capacity to comply with carbon regulation. More importantly, any future domestic cap on emissions from aviation will critically depend on airlines in Europe being under a cap. If the administration is serious about reducing emissions, it should let Europe set the stage for eventual domestic regulation of airlines.

The EU's move on aviation emissions is leading the way on climate, potentially triggering an upward spiral of climate regulation. If the U.S. government continues to push back the regulatory effort in support of U.S. airlines, it would undermine policy principles of fair competition, seriously damage the engine of progress in climate policymaking and render the potential domestic regulation of airlines more difficult. For once, disengagement on climate would be the better way ahead.

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