In a struggling economy, what would encourage the European Union (EU) to throw away a certain $3.8 billion order and risk destroying a $388 billion industry?

Starting Jan. 1, 2012, any domestic or international flight landing in or departing from an EU airport will come under the hammer of the EU Emissions Trading System (ETS).

This means that carriers whose planes are flying in and out will have to buy the right to pollute the EU skies. To be specific, 85 percent is free, but the airline will have to bid in an auction to buy the rights for the remaining 15 percent of their own emissions.

The system is described in detail here, but the short version is that it will add $1.9 billion in costs to the global airline industry in 2012, which will allow planes to emit 213 million tons of carbon dioxide. The costs will rise to $9.89 billion by 2020.

The matter has been on a slow boil for the past year or so, but things came to a head at the recently concluded Paris Air Show, where Hong Kong Airlines was expected to formally announce a $3.8 billion order for 10 Airbus A380 planes. The order was put on hold by Beijing.

Airbus chief Tom Enders had, in fact, explicitly warned the EU about this in a letter sent on May 24, 2011. Here’s how it has played out since then:

Tom Enders, Airbus chief executive: “Particularly during these times of austerity, it is madness to risk retaliation against a €275 billion industry which supports a massive 4.5 million jobs.”

Wei Zhenzhong, head of the China Air Transport Association: “I believe we have to take legal action.”

FAA Reauthorization Bill text in the U.S. House of Representatives: “Officials [of] the United States Government, and particularly the Secretary of Transportation and the Administrator of the Federal Aviation Administration, should use all political, diplomatic and legal tools at the disposal of the United States to ensure that the European Union’s emissions trading scheme is not applied to aircraft registered by the United States.”

Giovanni Bisignani, IATA director general: “The last thing that we want to see is a trade war.”

Connie Hedegaard, EU climate commissioner, in response to an article in Financial Times: “Glad that FT agrees that Europe needs to stand up to threats. Am sure that European companies get why this principle is worth fighting for.”

Isaac Valero Ladron, spokesman for EU climate action commissioner Connie Hedegaard: “Whatever the Chinese or the Americans are saying, there is no Plan B–we don’t intend to back down.”

The Americans and Chinese don’t intend to back down either. China has already hit the EU with the $3.8 billion Airbus order. The Air Transport Association of America (ATA) is fighting it in the European Courts.

The next hearing is on July 5, 2011 in the European Court of Justice in Luxembourg. Depending on what happens there, the United States and the ATA will decide what to do next. But the court proceedings could take months and the clock is ticking.

One possible solution being pursued by both the United States and China is that they could be given special exemptions, based on a loophole that allows countries to be exempt from ETS if they have their own domestic greenhouse gas reduction plan.

But if the discussions over the exemption don’t pan out, and the courts can’t decide by the end of the year, then air travel to and from Europe is suddenly going to get more expensive starting 2012, and there’s going to be an aviation trade war.

Photo – Karen Eliot

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