In a rare show of bipartisan action, Congress recently passed and the President signed a bill to protect all U.S. Airlines from possible future European Union (EU) carbon taxes.  A planned EU Emission Trading System (ETS) action would require all Commercial Airlines to pay carbon taxes for their emissions when entering and leaving EU controlled and adjacent air space.  With the concerns over climate change and apparent popularity of carbon taxes, why would the President effectively veto U.S. participation in an EU Airline carbon emission program?

Brief History of the EU Airline Carbon Tax Scheme and U.S. Response – Earlier this year the EU announced plans to control and tax Airline carbon emissions within their air space.  Although strongly supported by EU members, this proposal was opposed by a large number of affected countries outside the EU.  Countries including China, Russia, and the U.S. objected to the planned EU Airline carbon tax scheme.  Besides increasing Airline operating costs, the objections included possible conflict with existing International Aviation Treaties.  An earlier EU court decision, however, found no treaty conflict.

The first phase of the EU Airline ETS carbon tax scheme was for the covered or affected Airlines to submit data on their 2011 baseline emissions.  All affected Airlines did so with the exception of China and India.  China further banned its Airlines from paying any carbon taxes associated with the EU ETS scheme.  Possibly due to growing international resistance to their proposed Airline carbon tax, the EU announced November 12, 2012 that they would temporarily suspend their ETS scheme.

Almost immediately following the EU announcement to suspend their Airline ETS scheme, the U.S. Congress passed and the President signed a bill to protect all U.S. Airlines from a future EU action to unilaterally reactivate the Airline carbon tax scheme.

Potential Impacts of the EU Airline Carbon Tax Scheme – The planned Airline carbon tax would be administered similar to how California is implementing its new cap-and-trade system.  The EU would issue a limited number of ‘free’ carbon credits (allowances) to each Airline based on their 2011 actual carbon emissions and require the Airlines to reduce carbon emissions by either changing their operations or purchasing additional carbon credits on the EU ETS market. 

Airlines project that the proposed EU ETS carbon tax scheme would cost $ Billions each year.  These added operating costs will of course be added to the ticket prices for all passengers or the costs to transport goods into or from the EU.  Besides directionally discouraging air travel into and out of the EU, some question whether the purchased ETS carbon credits will actually reduce World carbon emissions.  Also, since the Airline carbon tax is paid to the EU through their ETS, the U.S. would not directly benefit from this program (no carbon revenues, no new domestic carbon reduction projects or associated added jobs).

What are the Airline’s options to paying for EU ETS carbon credits?  Over the years large improvements have been made in Commercial jet aircraft fuel efficiency.  Achieving further substantial efficiency improvement in the future years similar to proposed annual carbon emission reductions (about 5% per year for the next 10+ years) is not feasible.  Another possibility would be to purchase and operate on biofuels or biojet.  Besides potentially being extremely expensive, biojet has very poor low temperature (flow) physical properties and must be blended will substantial amounts of petroleum jet fuel.  Not only does this physical constraint limit the actual carbon (reduction) credit value of finished biojet, it also further increases fuel costs due to required biojet special processing and handling.  Purchasing current ETS carbon credits (<$10/MT) will likely be much cheaper.

One other non-carbon credit option for Airlines is to avoid travel into EU air space.  Airlines could land outside the EU and transfer their passengers or freight to marine or land transport (bus, truck or rail).  This avoids the carbon tax expense, but very likely increases total transportation costs, transit time and actual carbon emissions compared to purchasing carbon credits.

Why Did President Obama Veto Europe’s Carbon Tax Scheme? – The timing of the Congressional-Presidential action to block a future potential EU Airline carbon tax is curious.  Passing and approving the bill to protect all U.S. Airlines following the EU’s announced decision to delay implementing the carbon tax scheme probably had less International political risk.  This action also follows the lead of China in previously banning their Airlines from paying any EU carbon taxes. 

The Federal Government action to directionally protect all U.S. Airlines from the EU carbon tax had many supporters and opponents.  Passage of the bill was based on a number of factors including affects on the U.S. consumers and Airline carriers & operators, and potential negative impacts on the U.S. economy & security (Re. Office Summary, 'Read the Rest').  This Federal Government action also continues to send a mixed message to U.S. supporters of future carbon taxes.  Based on the current condition of the U.S. economy, chronically slow jobs growth rate and growing Federal deficit, preventing the EU from imposing a foreign carbon tax on the U.S. general public was likely an appropriate action and a somewhat rare instance of the current Congress and President making a decision in the best interest of our Country as a whole.