EU Emissions trading in the Dock!

A file from wikipedia of the European Court of Justice in Luxembourg, where the American airline challenge to the ETS will be heard, potentially just as the scheme is supposed to kick off!http://en.wikipedia.org/wiki/File:Europäischer_Gerichtshof.jpg

In a previous post the EU Emission Trading Scheme (ETS) came in for some comment-adverse by me. It is interesting to note that a group of American airlines banding together as the Air Transport Association of America, have recently managed to persuade an English High Court to refer their objections to the ETS to the European Court of Justice. So we are now waiting for a preliminary hearing date, probably sometime in 2012.

I don’t have the exact details of the pleading, but the focus will likely be on the lawfulness of imposing EU rules beyond the territory of the EU and in fact some kind of complex ‘conflict of laws’ pleading citing various international public law regimes that govern civil aviation. So the ECJ will have to decide on whether the ETS can be lawfully extended beyond EU skies.

My rough guess is that the ECJ are more likely to approve this in principle but might find some aspects of the ETS application ‘disproportionate’. Certainly, the Americans are up against it if they expect the ECJ to torpedo an EU law just like that. Prof. Brian Havel, an expert on aviation law from Chicago’s De Paul University suggests that while the ETS is going too far in terms of its impositions on third parties under international law, his hunch is nonetheless that the ECJ will not strike out the law. See: http://www.nytimes.com/2011/04/11/business/energy-environment/11green.html?_r=1

Obviously, the American carriers are piqued by cost-whereas my beef is that emissions trading is too complex and risky an instrument to use to give a clear signal to an industry that has to get a whole lot greener. I object to the fact that most of the permits are given away free (something which the serious economists who support emissions trading argue for) and the entire carbon trading market has a dangerous whiff of cowboyish speculation and general makey-uppyness. Have we learned anything from Lehman Brothers about how markets don’t work well at pricing what become speculative intangible assets and liabilities which have been too far removed from the underlying real world situations? If European firms are producing too much CO2 the direct solution is massive and sudden technological change towards a lower carbon economy-and it is far from that any market approach will deliver that type of massive technological transition by itself.

Moreover, with Carbon credits down around 15 Euro a tonne, and even with high Kerosene prices this year, none of these signals will likely be enough to give a real push to airlines and manufacturers to radically improve the technology.  In fact the last thing airlines will do in a recession depression like this is invest in costly new technology (unless they are based in Dubai!). We see this when we hear Airbus and probably Boeing bleating about tinkering with new engines to basic aircraft designs that are in most cases 30 or 40 years old.

Anyhow the Americans are not alone. In March, a group of Chinese air carriers have declared they also plan to challenge the legality of the ETS as it imposed on them. See:http://www.google.com/hostednews/afp/article/ALeqM5itXV0bAdVV4AywxxsZYhQEwYhLRw?docId=CNG.ec4419f9ec3f98754eb66aaa0b28639d.101

Apparently, they claim the ETS will cost them an additional $122m dollars a year…but then they would say that wouldn’t they? They guesstimate that ticket prices might rise by 200 yuan (which works out at a pretty small 22 Euros in todays prices per long haul ticket). In my view the long haul airlines will have scope to pass on such prices in the short term on to ticket prices. Indeed what many pundits are now noting is that the real costs of the ETS are falling on Ryanair and Easyjet-the short haul ‘no frills’ sector, who fly you to places you never really knew existed before and don’t really want to go to, but hey its 9.99 each way. Not any more!  Of course its good for the environment if excessive flights get curtailed but then short haul operators have done a bit for European integration in the sense that ordinary EU citizens can get to fly around Europe in a way that was impossible just a decade ago. What is a much more open question is how much the ETS could cost over the long term and whether it will prove a stable market….or like the American ( or Irish) sub-prime housing market….it turns out to have been a classic textbook example of trying to be far too smart by half?

Moreover, what do these two court case tell us about the political situation? Even if the ECJ finds that the ETS is legal and can be imposed on American and Chinese aircraft landing in the EU, it suggests that a powerful Chinese/American alliance is emerging to isolate and fight back against the EU within the ICAO (International Civil Aviation Organization) who are mightily piqued that their sway in all of this was trumped by the EU unilaterally since 2008, when the legislation for ETS was agreed.

As the Chinese say we can expect to live in ‘interesting times’.


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