The European Union’s Emissions Trading Scheme (ETS) aimed at reducing the carbon footprint of airlines, if successfully implemented, could erode more than 30 percent from the struggling industry’s profits, Tony Tyler, CEO of The International Air Transport Association (IATA), said.
“We estimate that in the first year of application it will cost the industry some $1.2 billion. Now that’s a lot of money in an industry that we forecast, if things go well, will make a worldwide profit of $3.5 billion this year,” Tyler told CNBC at the Singapore Airshow.
He adds there is a good chance costs, as a result of the scheme, could increase further over time and become a “massive drain” on airline profitability.
“The amount of energy and emission units that airlines might have to buy may be increased very significantly in the future, so costs could balloon in future years,” he said.
Under the emissions trading scheme, all airlines flying in and out of European airports must have enough carbon credits to cover the emissions of their flights. Initially, airlines will be given allowances to cover 85 percent of their emissions, but additional credits will have to be acquired through trades or purchases from other airlines or industries.
Foreign governments, the most vocal being Chinaand the United States, have lashed out at this plan, arguing the EU is exceeding its legal jurisdiction by calculating the carbon cost over the whole flight, not just Europe.
“Governments recognize that this is an infringement on their sovereignty. Why should Europe be able to tax a Chinese airline flying in Chinese airspace? They [Europe] would object if the Chinese attempted to tax a European airline flying in European airspace, it’s exactly the same thing,” Tyler said.
“The problem is the European scheme is a regional scheme attempting to address a global problem,” he added.
The airline industry, which is currently in a fragile state in the face of rising competition and declining profitability, cannot afford to be caught in escalating political or trade conflict over the ETS, Tyler said.
"Why should Europe be able to tax a Chinese airline flying in Chinese airspace? They [Europe] would object if the Chinese attempted to tax a European airline flying in European airspace."
In order to prevent a trade warand achieve a sustainable solution to reducing carbon emissions, Tyler says the implementation of Europe’s ETS should be suspended and all countries should come together under the United Nation’s International Civil Aviation Organization to formulate a new global deal.
“Positive economic measures such as emissions trading are necessary…(but) to be effective and avoid market distortions these measures must be globally coordinated…its [Europe’s] unilateral approach must change,” he said.