Thursday, September 20, 2012

EU ETS, policy and unilateralism - what next?

The controversy over the EU ETS covering the aviation sector has not died down yet. I have blogged about it here, here, here and here. Are there benefits for other countries to comply with the scheme? Does a cost-benefit analysis indicate that compliance is better than non-compliance? The scheme raises, inter alia, issues relating to the extraterritoriality of domestic legislation, balance between environmental goals and development, unilateral national measures vis a vis global efforts to combat climate change.

Joshua Meltzer has recently written about how it is more beneficial for the U.S. to comply with the EU ETS in the aviation sector rather than defy it. Arguing the prohibiting US airlines from complying with the EU ETS is a bad policy, he posits that costs of compliance as compared to non-compliance is much lower. Further, the burden of compliance would be the "rich" airline traveller while the cost of non-compliance would be on the tax payer. And finally, that it would be good geopolitically to comply since non-compliance creates a precedent for countries not to comply with environmental measures of other states.
"So what are the costs of the ETS? Analysis by Merrill Lynch concludes that the costs to airlines of purchasing the carbon permits needed to comply with the ETS will add approximately $5.00 to ticket prices. However, failure to comply leads to a €100 penalty per ton of CO2, plus the ongoing obligation for airlines to submit permits that cover their CO2 emissions. Whatever the final costs for complying with ETS are for airlines, the costs of non-compliance includes an additional €100 per ton of CO2 , and should the airlines fail to comply the EU can seize airline’s assets. 
Secondly, there is the question of who will bear the costs of the ETS. In the event that the airlines comply, the costs can be expected to be reflected in ticket prices. Conversely, in the event that airlines are prohibited from complying with the ETS, the costs will not only be higher, but they would be borne by all taxpayers. In this sense, the Prohibition Act is also regressive as while airlines passengers tend to be more affluent, all taxpayers will be responsible for the costs of airlines non-compliance. 
Prohibiting U.S. airlines from complying with the ETS might also have geopolitical implications. For instance, it could set a precedent for other countries to imitate when faced with an environmental scheme that places additional burdens on foreign businesses. And in this regard, India and China have already indicated they will prevent their airlines from complying with the EU ETS."
R.V.Anuradha in this policy brief for the South Centre argues that the EU's measure is a unilateral step that is not founded on the principles of multilateralism and consensus. She argues that though a legal challenge to the extension of the EU ETS to the aviations sector is on weak grounds, the measure does not augur well for multilateralism.
"To state the obvious, any unilateralism would make a mockery of the multilateral processes. Under the United Nations Framework Conven- tion on Climate Change (UNFCCC), any unilat- eral action would run contrary to the principle that only Annex I (i.e. developed) countries have quantitative legally-binding emission reduction targets, while other countries have no binding quantitative targets of any kind. This principle - also referred to as the principle of ‘common but differentiated responsibilities’ (CBDR), is clearly violated by EU’s ETS requirements which effec- tively treats Annex I and non-Annex I countries (or at least their airlines) in the same way. The Kyoto Protocol to the UNFCCC required Annex I countries to pursue reduction of aviation emis- sions by working through the International Civil Aviation Organization (ICAO). ICAO resolu- tions in 2007 and 2010 emphasized that countries should undertake market-based measures (MBMs) relating to aviation emissions only sub- ject to multilateral or bilateral agreements. Such a mandate essentially means that measures such as the EU’s Aviation Directive can be enforced against an aircraft operator from a third country only if the EU has entered into an agreement with such country. EU’s move under the ETS however ignores this principle."
She calls for a "graceful suspension" of the measure by the EU and a  consensus for a multilateral solution to the problem.

How will countries take this forward? Will there be increasing instances of non-compliance from the U.S., China and India? Will that lead to imposition of penalties by the EU which would have to be borne by the tax payers or airline operators? Further, will countries impacted but the EU ETS measures undertake unilateral measures against EU airlines or will the tit for tat policy spread to other sectors? Will China decide to stop buying Airbus aircrafts? WIll that lead EU to agree to a negotiated settlement? What will the compromise to this long pending stalemate be?

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