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EU's carbon tax will make it hard for global aviation and trade to recover

ET Bureau Jul 12, 2012, 04.39AM IST

Sreeram Chaulia, Dean, Jindal School of International Affairs

India's decision to fight the European Union's (EU) impending carbon aviation tax highlights the politics of linkage between climate change and trade. New Delhi is in the company of several other emerging and advanced economies that are peeved at the EU's insistence that civilian aircraft flying into or via European ports must pay a tax for polluting the environment.

Tying climate-change mitigation goals to trade by aviation is an unacceptable burden being imposed by the EU at a time when the aviation sector is facing high jet fuel costs and lower passenger demand under duress of the global economic crisis. Carbon surcharges in a geographically-central location such as the EU region, which connects Asia to Africa and Latin America, can exacerbate an already bleak scenario and possibly tip more precarious airline companies into bankruptcies.

The downside of a carbon aviation tax is not just limited to the business risk it poses to state and private aircraft carriers, but also to global trade in high-value, time-bound commodities that are predicated on the aerial medium. Aviation supports 40% of the total value of international trade and accounts for 8% of global economic activity. The EU's push for taxing airlines that are essential lifelines is a misguided one that threatens to slow down trade and chances of recovering from the current economic crisis.

According to the World Trade Organization (WTO), global trade growth is at barely 3.7% in 2012, which is way below the long-term average growth of 6% between 1990 and 2008. The EU's carbon aviation tax has been painted as a painful but necessary measure to protect the outer environment from airline emissions, but it could undermine the viability of economies that are particularly dependent on aviation-bound merchandise, tourism and overseas workers.

The EU is conceptually correct in arguing that airline companies around the world must adopt newer, cleaner technologies that reduce their carbon trail in the atmosphere. But the timing of this carbon tax move is contrary to the logic that adjustments are easier when they are attempted in normal times. Since 2008, the global economy has been abnormally buffeted by headwinds and it could do well to avoid another trade war involving retaliatory taxes and countervailing duties over aviation emissions.

Since the advent of the WTO in 1995, there have been attempts to use trade as not only a means to economic growth and poverty alleviation but also as an instrument to force states and corporations to improve their moral behaviour vis-a-vis labour standards and the environment. But neither a social clause nor a green clause could be inserted into the binding multilateral trading system because of the obvious hypocrisies inherent in such linkages mooted by countries of the North.

In both issue areas of unfair treatment of workers and in polluting the environment, a systemic perspective reveals that advanced economies, including those of the EU, bear the bulk of the blame for lowering standards. Foreign direct investment emanating from the richer parts of the world in search of low-wage destinations has played a decisive role in the phenomenon of sweatshops in the manufacturing sector.

The stockpile as well as current flows of greenhouse gases from advanced economies remain demographically disproportionate, although emerging economies are disturbingly adding to the problem now.

  To be fair, the EU has been more progressive than the US on environmental concessions and adoption of green technologies. The powerful presence of green political parties and of environmentally-sensitive consumer movements stands the EU apart on mitigating climate change as better than its peers in the Organisation for Economic Cooperation and Development.

But the EU, which claims to be a champion of multilateral diplomacy on the world stage, cannot foist a unilateral regime on aviation taking unfair advantage of Europe's geographical location as a major market for consumption and a hub connecting many global travel routes.

India and fellow targeted countries are mulling a series of countermeasures if they are punished in the European hit list for carbon aviation taxes. An economic war that has been looming on the horizon owing to protectionism in trade, finance and currency manipulation since the crash of 2008 might be compounded by the EU's obstinacy on carbon taxes for aviation, and even more controversially, for maritime transport.

If the EU is plotting to gain market share for its manufacturing major, Airbus, by forcing countries to buy new planes that meet its emission standards, then this aviation carbon tax is ruthless strategic jingoism disguised as environmental conscientiousness. One item in the 'basket of actions' that India and other allied states have threatened the EU with is to assess if this carbon tax is violating WTO rules.

Better sense must prevail in Brussels before bad blood spills over a relatively minor cause of global warming (aviation emissions contribute to only 3.5% of it). After externalising economic shock through the eurozone's woes, the EU should display greater responsibility.