US Weighs Retaliation Over EU ETC

January 6, 2012

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The US administration is laying the groundwork for possible retaliation in response to a European law requiring airlines to pay for carbon emissions.

Discussions between key agencies have ramped up recently, although there is no consensus yet on what, if anything, the US government should do unilaterally or in concert with other nations also upset with the law.

The EU law went into effect on January 1 and requires global airlines to pay for carbon emissions on flights to and from Europe.

Several experts said one option the United States could pursue would involve charging European airlines to maintain US access to pressure EU policymakers. This strategy was used by the United States in a recently concluded dispute with Argentina over landing fees.

"We are contemplating a wide range of possible steps that we could take, or actions that we might take," a senior administration official said.

"All these are on the table, we haven't decided how to move forward on any specific one," the official said, while declining to give specifics on the possible steps.

US airlines, some of which have already raised fares to offset the EU carbon trading scheme, expect a formal response from the Obama administration.

"We take the White House at their word that they are prepared to take action, which could include a country-to-country legal action, retaliatory measures or any number of steps to urge the withdrawal of the EU's unilateral scheme in favour of a global approach," said Steve Lott, a spokesman for the US industry's leading trade group, Airlines for America.

The State and Transportation departments warned the European Union in December that the administration was prepared to "respond appropriately" if the EU did not reconsider the measure or seek a negotiated settlement through the United Nations.

Neither occurred before the law took effect, prompting outcry from airlines globally. Carriers said the change amounted to a new tax at a time when they are wrestling with historically high fuel costs and softening demand in domestic flights, especially in the United States.

COSTS PHASED IN

Under the mandate that puts a price on pollution, airlines must buy permits to offset emissions from jets operating in, to and from the 27-nation EU and three neighbouring countries.

Costs under the emissions trading scheme will be phased in with carriers expected to cover 15 percent of the carbon they emit in 2012. Payments would not be due until next year, and fines would be levied for non-compliance.

In the meantime, airlines are already passing along the costs to consumers.

American Airlines, US Airways, Delta Air Lines and United Airlines imposed USD$3 surcharges each way this week on fares purchased in the United States for European routes. Germany's Lufthansa also told passengers to brace for higher prices.

Chinese airlines are refusing to pay any new EU charges.

The United States, China, India and others have attacked the scheme, saying it infringes on their sovereignty. They argue the EU should not act alone and instead work through the United Nations to resolve the problem.

DIPLOMATIC SOLUTION?

Much of the world is looking at how the United States, with its mature airline industry and its deep commercial and travel ties to Europe, will react.

Current and former US government officials insist the administration has made no decisions.

But while US officials are talking to the Europeans and other countries in hopes of a diplomatic solution at the United Nations, they nevertheless have begun to prepare for a possible retaliatory step against European airlines.

The Transportation Department recently closed a successful case in which the Bush administration retaliated against Argentina for charging US carriers more for ground services in Buenos Aires than was paid by flagship carrier Aerolineas Argentinas.

The case has been cited by lawyers and others familiar with the EU dispute. Moreover, Transportation Secretary Ray LaHood has sought information from both US and European airlines about how the pollution law would affect them - groundwork necessary for any retaliatory action, according to agency documents.

"It's a significant step, but we'd have some concern about a trade war. The EU is charging big money and then we start charging them big money. Unless there's an end game, that could be difficult," said an airline industry official involved in the matter.

Other sources said transportation planners have a number of tools to address international disputes and could legally pursue retaliation in the EU matter, even though there is no outright discrimination against US airlines, as was the case in Argentina.

Retaliation against European airlines to influence European policymakers would be painful for British Airways, AirFrance-KLM and Lufthansa, but would not threaten to disrupt service, insiders said.

US AIRLINE EXEMPTION

Europeans are most concerned, however, with pending legislation in Congress that would exempt US carriers from the law. The House of Representatives has passed a version and another has been proposed in the Senate, but the fate of a compromise bill is uncertain with election-year politics in play and Congress preoccupied with spending and economic priorities.

US airlines are mulling legal options in Europe and some within the Obama administration believe a complaint should be taken to the UN's civil aviation body in Montreal. There, an attempt would be made to craft global strategy for combating carbon emissions.

Europeans say they have always been willing to find a solution, but noted the UN opted against a broad approach several years ago.

"We're unhappy that we get all this resistance when we're talking about a problem that needs addressing," G√ľnter Hoermandinger, environment counsellor for the EU's Washington delegation said.

Annie Petsonk, a lawyer for the Environmental Defence Fund, said her group worked with the EU on the case and noted the Obama administration has yet to provide any legal rationale for challenging the emissions policy.

"I have looked at the legal issues here pretty thoroughly," she said. "Of course there are people inside the administration that deal closely with airlines that have helped the airlines over the years. These people have become advocates of the airline view."

(Reuters)