Beijing's stance on airline emissions stinks of hypocrisy

PUBLISHED : Tuesday, 21 February, 2012, 12:00am
UPDATED : Tuesday, 21 February, 2012, 12:00am


Hypocrites from 26 countries will gather in Moscow today, where they will discuss how to punish the European Union for trying to do something about climate change.

What's got up their noses is the EU's insistence that airlines flying to or from European airports must, like other big polluters, join its cap-and-trade scheme aimed at reducing greenhouse-gas emissions.

No government has been more vocal in its protests than China's. Despite Beijing's claims at last year's Durban summit that it is serious about cutting emissions, earlier this month the State Council barred China's airlines from participating in the European scheme.

Beijing's opposition stems partly from the extra cost burden the scheme would impose on China's airlines. Mostly, however, Beijing condemns the European scheme as an intolerable assault on China's sovereignty.

Neither argument stands up to examination.

Beijing complains that when the EU assesses emissions, it does so for an aircraft's entire flight, not just the portion in European airspace. As a result, Beijing says that charging airlines or passengers for their emissions amounts to an unacceptable extraterritorial tax imposed unilaterally by the EU.

This stance is flawed on several counts. First, the EU has only acted unilaterally because other governments, including China's, have for years blocked negotiations aimed at setting up a multilateral scheme. In any case, the European scheme exempts airlines taking off from jurisdictions operating equivalent local schemes.

Second, Beijing has long accepted the principle of extraterritorial taxation of its airlines. For example, the British government levies an airport tax of ?81 (HK$996) for every economy-class passenger flying from London's Heathrow to destinations in China. In contrast, the tax for destinations in Europe is just GBP13.

Third, as it stands now, there is no actual taxation involved in the European scheme. The majority - 85 per cent - of emission permits are being handed out for free. Airlines will have to buy the remainder via the EU's emissions-trading scheme.

It's true that the airlines could buy the extra permits they need at auction in the primary market, which would raise revenue for European governments, or in the secondary market for EU carbon credits. But under the EU scheme, airlines are allowed to hand over the 15 per cent of their permits they don't get for free in the form of certified emission reductions, or CERs.

CERs represent notional emission reductions from new investment projects in developing countries. As the first chart below shows, these are trading at a discount to standard EU carbon credits of almost 50 per cent. As a result, it is likely that airlines will acquire all their extra permits via the CER market.

This has two important implications. First, the cost of compliance with the EU scheme will be far lower than most estimates. At current prices, the scheme would cost the global airline industry, or rather its passengers, not Euro300 million (HK$3 billion) this year - as, for example, Barclays Capital estimates - but just Euro165 million.

That equates to an extra 178 yuan (HK$219) on the cost of a round trip from Beijing to London, a small amount compared with the 809 yuan passengers pay to the British government in airport tax, and tiny compared with airline fuel surcharges.

So neither China's complaints about extraterritoriality, nor about cost, stand up to scrutiny.

But where China's opposition to the EU scheme really smells of hypocrisy is in Beijing's failure to acknowledge that China itself will be by far the biggest beneficiary.

That's because the airlines will buy the extra permits they need in the form of CERs, and China is by far the world's biggest issuer.

As the second chart below shows, according to the United Nations Framework Convention on Climate Change, China is expected to account for 65 per cent of all CERs issued this year, representing 363 million tonnes of carbon-emission reductions, the majority of which are sold into the EU's trading scheme.

At current prices, those CERs are worth Euro1.8 billion. This makes it seem a little hypocritical - to say the least - for Beijing to complain so vehemently about the few million euros China's state-owned airlines will be required to pay for the privilege of pumping greenhouse gases into the upper atmosphere.