China 'Bans' Airlines From EU Carbon Tax Scheme

by Mary Swire, Tax-News.com, Hong Kong

Wednesday, February 08, 2012

The Chinese government has effectively banned Chinese airlines from participating in the European Union's Emissions Trading Scheme (EU ETS), which was extended on January 1, 2012 to flights using EU airspace.

A statement from China's State Council announced: “The Civil Aviation Administration of China has recently issued a directive to Chinese airlines that without the approval of relevant government departments, all transport airlines in China are prohibited from participating in the EU ETS.”

The Chinese government has also prohibited Chinese airlines from introducing ticket-price increases to compensate for the European scheme.

Following the inclusion of international aviation to the scheme on January 1, after a failed legal challenge by representatives of the US and Canadian aviation industries at the European Court of Justice, the China Air Transport Association (CATA) released a statement confirming that the Chinese industry would not participate in the scheme while the government is formulating a legal challenge.

CATA has estimated that the scheme will cost domestic airlines around USD120m during 2012, ramping up to more than triple that figure by 2020 as China's domestic industry grows. The International Air Transport Association (IATA) has estimated that the cost to the entire aviation industry globally could be USD1.6bn annually, at a time when the industry's profitability has been dented by the global economic crisis

Under the ETS, starting January 1, 2012, in accordance with the European ETS directive, airlines operating into and out of the EU, regardless of how long that flight is in EU airspace, will be required to surrender varying emission allowances, and will be required to purchase any additional permits outside of their free allowance.

Non-EU nations' airlines would also be required to pay such an emissions tax to the EU member state to which they most frequently fly, without any requirements that those EU countries use the funds collected in emissions reduction efforts. As a result of the new provisions, experts have calculated that passengers on long-haul flights may be faced with additional costs of between EUR2 (USD2.77) and EUR12 a ticket.

Airlines are required to immediately begin purchasing emissions allowances, but are only expected to remit the sums in 2013 meaning that European repercussions to China's boycott may not materialise until next year, when on April 30, 2013, airlines will be required to calculate their annual emissions and buy polluting rights for 2012.

The scheme provides for penalties in the event that airlines fail to comply, including fines of up to EUR100 for each tonne of carbon dioxide emitted without the payment of a permit, and eventually an EU-wide ban on the offending airline.

In its defence, the European Union has noted that the Directive provides that airlines would be exempt from carbon charges if their nation were to place equivalent levies on their domestic industry.

The extension of the European Union's Emissions Trading Scheme is opposed by dozens of nations who are due to meet on February 11, 2012, to formulate a joint challenge to the tax.