British Airways, Qantas and other airlines are calling on governments to find a swift resolution to a political dispute over the European Union's carbon scheme, because the deadlock may create competitive distortions.
Since the start of 2012, EU law obliges all airlines using EU airports to be included in the EU Emissions Trading System (ETS), the 27-nation bloc's main policy to fight global warming as it caps emissions on over 11,000 power and industrial plants.
But the scheme, which now puts the cost of carbon on an airline's balance sheet potentially pushing up fares, has drawn ire from major foreign emitters such as China and the United States.
China this week banned its airlines from taking part in the scheme and threatened retaliatory action against the EU if it continues to calculate the carbon cost over the whole flight, not just within Europe.
A group of 26 countries including Russia, India, China and the United States plan to meet in Moscow on February 21 to discuss a plan of action.
But airlines and trade groups warned the row will create a competitive imbalance, with some airlines paying millions of dollars for their annual carbon costs and others not.
"The major losers will be the EU and EU carriers," Simon McNamara, deputy director general of the European Regions Airline Association (ERA), told an industry conference near London's Heathrow airport.
Aviation is the second biggest sector after power generation to be integrated into scheme, which started in 2005 and covers around half of the EU's CO2 emissions.
Initially airlines will be handed carbon permits to cover around 85 percent of their emissions, while the rest will be sold via government auctions.
An official with British Airways recommended that a compensation fund be established from revenue generated by government auctions of carbon permits.
"At least let's create some reserve fund to compensate those carriers which are adversely affected," said Jonathan Counsell, head of environment at BA, part of IAG group.
Until a political solution is found, airlines could be faced with an EU law saying they have to comply with the carbon scheme and a national law preventing them from taking part.
"A political solution is essential and it has to come within the next 12 months in order to avoid a real crisis," said Andrew Waite, a partner at law firm Berwin Leighton Paisner, referring to when airlines must surrender carbon permits for this year.
Andrew Sellick, group manager environment and carbon at Qantas Airways, said his airline was struggling with the administration of complying with the EU scheme as well as preparing for possible inclusion in emerging carbon markets in Australia and New Zealand.
McNamara urged the EU to consider suspending its scheme until a global solution to tackle aviation emissions can be agreed under the UN's International Civil Aviation Organization (ICAO) over the next year or two.
But Philip Good of the EU Commission's climate action unit shot down any chance for any suspension in the cap-and-trade scheme until an international agreement is reached.
"The ETS is law," he said. "There is clear instruction in the legislation that with a global deal we will review legislation. We are perfectly willing to come up with a revised directive if there is a global law."
As an alternative, British Airway's Counsell suggested that any ICAO members signing up to a binding international pact should be exempt from inbound flights to the EU.
Good did not say whether an exemption will be granted to airlines located in countries that pledge to sign an ICAO roadmap. He said the Commission was "in serious talks" with several countries about "comparable measures" which could lead to exemption.
EU law allows for equivalent measures to be taken into account, which could include a domestic cap-and-trade scheme, a carbon tax or other policy to tackle aviation emissions.
"It is not our intention to have differential agreements in different places on equivalent measures," said Good.
Europe's highest court ruled last December that the EU plan was within international law.
The EU has said the inclusion of the aviation sector was necessary after more than a decade of inaction at the ICAO, which has yet to find a global solution to tackling airline emissions.
"The EU is committed to a global approach on emissions, we have never left the (negotiating) table and look forward to some serious political discussion (at ICAO) over the next 12 months," Good said.