Europe probably won’t back down on this year’s expansion of its carbon market to include aviation, while airlines will comply with the program, according to Eneco Energy Trade BV.
“The scenario that the European Union backs down is not very plausible,” said Edit Kiss, the Rotterdam-based carbon portfolio manager at the unit of Dutch utility Eneco Holding NV. “Ultimately, airlines are not suffering that much from the EU emissions trading system,” she said today by phone.
The EU expanded the world’s biggest carbon market by traded volume to include flights into, out of and within its borders. It can replace its carbon curbs on aviation with a global measure as long as the broader program is as ambitious as the EU plan, Connie Hedegaard, the bloc’s climate chief, said Feb. 17. Meanwhile, the U.S. House of Representatives last year backed a bill to bar American carriers from participating in the EU’s cap-and-trade market.
The 27-nation bloc won’t abandon the expansion in the face of opposition from nations outside the region, Hedegaard said that day. The first expansion of the cap-and-trade system abroad has drawn fire from countries including the U.S., Russia and Japan, which said the measure was inconsistent with international law.
The United Nation’s International Civil Aviation Organization, or ICAO, holds the key to resolving the row, Artur Runge-Metzger, the EU head of climate strategy, said today.
“The ICAO discussions in coming weeks and months will be critical to resolving the issue,” Runge-Metzger told a seminar in Brussels today. “Our preferred option is something global and the EU emissions trading system was a second option.”
Airbus SAS, the world’s biggest maker of civil aircraft, and Europe’s largest airlines on March 12 called on the bloc to find a compromise on aviation carbon curbs, warning that the limits on foreign carriers may lead to increased retaliation. ICAO, the regulator, said in November it was canvassing the world’s 50 biggest nations on a global emissions program to be proposed this year.
“If it becomes a trade war, the outcome becomes more difficult to judge,” Kiss said. It’s also uncertain that airlines will carry out threats to ignore the bloc’s carbon curbs, she said. “I doubt any airline will seriously consider not complying” because of the 100 euro-a-ton fines and other sanctions.
Carbon for December rose 4.2 percent to 8.13 euros ($10.62) a metric ton on the ICE Futures Europe exchange as of 1:07 p.m. London time. They’ve dropped 53 percent in the past year.
There is a “small chance” some nations will propose equivalent measures such as carbon taxes that are accepted by the EU and that would erode demand for EU carbon allowances, Kiss said.
The “first best” solution would be a global carbon market for the airline industry around 2015, where EU airline carbon allowances are converted into global permits, she said.
The bloc may reverse its position and drop aviation from the trading program even before a market that may be proposed by ICAO begins, according to Societe Generale SA.
“The EU is close to the point of backing down,” Emmanuel Fages, an analyst at the bank in Paris, said yesterday in a telephone interview.
“It’s becoming one of the big risks in this market” and may already be driving carbon prices lower, he said.