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Heading for a dust-up - By Kitty Miv, Editor

Kitty Miv, Editor
09 February, 2012

The EU is heading for a major dust-up with other major world powers over the question of carbon emission allowances. Now don't worry, I'm not going to try to discuss or resolve the issue of whether carbon taxation is a Good Thing, or whether global warming is or isn't happening, or whether it even matters in the first place (no, no and no, but don't quote me). Nor am I going to try to explain the EU's Emissions Trading Scheme (ETS), except in the most basic terms, because I'm not sure I understand it myself, and anyway it's all on Wikipedia.

No, what interests me here is how the world is going to resolve an imbroglio that involves issues of sovereignty and extra-territorial taxation. In a nutshell (a very wrinkled one) the EU is charging foreign airlines that overfly its member states' territory for their carbon emissions. Other countries (OK, OK, the EU isn't a country) not surprisingly don't like this, and one by one they are ordering their airlines not to comply. This week China did just that, and prevented its airlines from increasing fares to compensate for the new tax. The US Congress is close to adopting a similar law; and Asian airlines in general have expressed strong resistance to the ETS.

The EU says primly that other countries can avoid being charged under the ETS simply by having equivalent measures themselves; but it knows very well that no other country is likely to hobble its domestic airline industry in such a way. When the EU started discussing the ETS, at the time of Kyoto, carbon limitation was all the rage; now, it has gone somewhat out of fashion, except in Australia, where it is a strictly domestic affair and is being used by a socialist government to attack the mining industry.

There is just time for the world to avoid real confrontation: although the meter is ticking, and charges are already mounting up, they won't have to be paid until April 2013, and (assuming they aren't paid) there will then be a long period of phoney war, court proceedings and such-like before the EU actually resorts to impounding aircraft. Years to play with, in fact, and international negotiations look likely to get under way shortly.

The problem is that it's not easy to see a way out. There is no chance that the EU will back down, and there is equally no chance that other countries will voluntarily impose such burdens on their own cash-strapped airlines. When the European Court of Justice initially rejected an attempt by the US and other countries to challenge the ETS, it gave as its reason that the EU is not a signatory to the Chicago Convention, which binds countries not to impose taxation on international aviation. The Court ducked the question, therefore. It's not clear to me how the individual member states of the EU reconcile their transposition of the ETS Directive into national laws with the terms of the Convention, but no doubt they would supply us with a hundred pages of self-serving legal argument if we asked them.

The truth is black and white: the Convention is right, and the EU is wrong. International air transport, like international shipping, is a crucial part of world trade, and it is to the good of all of us that it should flourish. That's why the Convention exists. But the EU has gotten itself into an untenable position, and I for one can't see how it is going to get out of it.

What will happen when the ECJ's bailiffs try to arrest a Chinese plane on the tarmac at Charleroi?

Oh well, they have a lot of very clever lawyers in Brussels (the EU's main drag isn't called the rue de la Loi for nothing) and I'm sure they'll find a way out.

They need to!





About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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