The not-so-friendly skies of Europe
The EU's proposed greenhouse emissions cap could add billions of extra costs to the already-fragile airline industry.
By Ken Stier, FORTUNE contributor

(FORTUNE Magazine) - The European Union is moving ahead with a plan to cap the greenhouse-gas emissions of airlines - including U.S. carriers that fly to Europe - a move that could add billions of dollars in extra costs to an already fragile industry.

The plan would require all airlines operating in Europe to submit to the European Union Emissions Trading Scheme, which went into effect last year. Airlines are currently exempt from the scheme, which mandates that industrial plants either stay under a cap or buy credits to allow higher emissions. But in December, Europe's environment ministers said the scheme should apply to all flights departing from EU airports.

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The EU still has to approve the legislation, which isn't expected to come into force before 2008. But the plan is already the subject of intense lobbying.

"To some outside the industry, this is under the radar," says Betty Hawkins, assistant general counsel for the Air Transport Association and a spokeswoman for the U.S. industry on the issue. "But to the airlines, it is very much a current issue of great concern."

In December, days before Europe's environment ministers made their recommendation, Sharon Pinkerton, a senior U.S. Federal Aviation Administration official, was dispatched to Brussels to urge that American carriers not be covered by the emissions-trading scheme. There are "serious and fundamental questions" about the plan, Pinkerton says, including the science behind it, its economic impact, and its legality if applied to U.S. carriers.

Washington insists that the International Civil Aviation Organization, based in Montreal, is the proper forum for working out such measures on a global basis. But EU officials say getting anything through the Montreal organization would take years. And they're not keen on disadvantaging their own carriers.

"There is some appetite in the EU to have a fight about this," says a senior official at Britain's environment ministry, who asked not to be identified because he is not authorized to speak on these matters.

The issue is of mounting concern in Europe because aviation emissions are the fastest-growing source of greenhouse gases. They rose 73 percent from 1990 to 2003, at the same time that overall emissions in Europe fell 5.5 percent and fuel efficiency for jets improved 32 percent. With air traffic growing 5 percent a year, aviation will account for the EU's entire "carbon budget" by 2045.

While there's no unanimity on emissions controls among European carriers, there is a growing appreciation that the industry must be seen to be doing its fair share and that a trading scheme is the most economically efficient and environmentally meaningful approach.

Andrew Sentance, chief economist and head of environmental affairs for British Airways, says an emissions-trading scheme is better than "political pressure getting channeled into other approaches, such as taxes." Lufthansa insists that other steps, such as relieving airport congestion, should be taken first.

Most studies project relatively modest additional costs to airlines if they are included in the emissions-trading scheme. One consultancy, C.E. Delft in the Netherlands, calculated it would cost European carriers an extra $1.1 billion a year to achieve its target under the Kyoto agreement and add up to $3.10 to the price of a round trip ticket. But an analysis by the International Civil Aviation Organization put the extra cost to the industry if a trading scheme is applied globally at between $17 billion and $60 billion a year. Top of page