Up in the air: Can the EU’s tax on airline emissions ever work in its current form?

You can’t say Brussels wasn’t warned. After protests and criticism from various non-member states and international organisations, the European Union’s decision to impose a carbon tax on flights in and out of the EU has fallen flat, as China announced it would ignore it and the US Congress prepares to ramp up action against it. It seems quite a feat, even for the EU, to get China and the US on the same side of a trade dispute.

The new legislation, which came into effect this year, forces all airlines flying in or out of Europe to buy carbon permits (from the EU’s Emission’s Trading Scheme) to cover their emissions. This is intended to help Brussels meet its 2020 commitment to reduce greenhouse gas emissions by 20% from 1990 levels. Until now, the aviation industry’s environmental impact had not been regulated – and in that sense the EU’s proposal may be positive as a first salvo. The move has been welcomed by environmentalists, who point out that airlines’ share of world emissions (currently 3%) is set to soar in the coming years.

Interestingly enough, governments are far more vocal about the drawbacks of the trading scheme than its impact on the airlines specifically. This is because airlines could actually stand to gain under the new scheme, according to a report in The Economist. Under the plan airlines will only be charged for 15% of the carbon that they emit – or possibly less if their government has an offsetting scheme. The scheme will give airlines a valid excuse to raise prices to compensate for the higher operating costs – although the chances of them using the opportunity to squeeze out more profits cannot be ruled out. By increasing ticket prices by just 25 eurocents, Ryanair stands to gain more than €10 million from the new scheme. The lax carbon quota also means that the scheme is unlikely to achieve its environmental aims, although this is true of much of the EU ETS. In sum, there is a good chance that consumer behaviour won’t be affected by the small price rise, and that airlines will increase the number of flights as their profits rise. This would further undermine the weak environmental credentials of the policy.

It’s likely that non-EU member states are kicking up a fuss because the new scheme implies a loss of sovereignty. China’s foreign Ministry accused the EU of applying “unilateral” measures to the global airline industry. Under the new scheme, airlines (all of which are state-owned in mainland China) pay for 15% of the carbon burnt across entire trips, rather than just that used flying over Europe. Airlines would therefore essentially be taxed outside of the EU’s jurisdiction. In addition, there is less scope for non-EU governments to impose their own tax to off-set carbon emissions – a big issue given the questionable format of the EU tax.

Beijing and Washington are also wary of Brussels’ wider meddling in global environmental standards. The EU’s mooted Fuel Quality Directive is set to impose regulation which would reduce the lifecycle intensity of greenhouse gasses emitted by the transport industry. Such a move would jeopardise US and Chinese interests in high carbon fuel, which has a ruthlessly efficient lobby industry. It’s likely that China and the US are partly arguing against the current measures, as they hope to thwart further EU plans and avoid setting a precedence of adhering to EU environmental standards.

Regulating the airline industry has valid environmental aims but in this case the EU’s proposal looks to not only fall short of these goals but also of foreign policy and consumer protection consideration. This comes as no surprise given the EU’s track record on the environment, as Open Europe has shown. It’s a reasonable opening gambit, but the EU should now focus on negotiating with China and the US to find a global consensus on how best to approach the issue.

EU green fatigue

An increasing number of countries in Europe are beginning to suffer from what can best be described as 'green fatigue'. In fact, the mood has changed radically since March 2007 when EU leaders agreed to their ambitious green targets.

This is particularly obvious in Germany, Europe's industrial powerhouse and paymaster.

Over recent days, the EU's directive on biofuels (soon to be overtaken by the Renewables Directive) has been absolutely hammered in the German press. As it stands, the Directive requires gas stations to sell fuel with 10 percent ethanol content - which has triggered boycotts, due to drivers’ fears that the new fuel will harm their vehicles.

Der Spiegel notes:

"All EU countries were supposed to have introduced E10 by the end of 2010, but only France and Germany have complied. And problems have not been limited to Germany. Because of slight differences in the E10 biofuels used in France, the ADAC, Germany's largest automobile association, is recommending that German drivers avoid E10 fuels should they cross the border into France."

In a comment, Handelsblatt criticises the Directive, arguing that due to rising food prices and environmental concerns "In 2008, EU Energy Ministers opposed extending the share of biofuels to beyond 10 percent". But, it notes:

“That isn't the end of the story however...Stable or falling prices for farm products, about which the agricultural lobby - led by France - is complaining, will be a thing of the past. The ones who need to pay, are consumers. In Europe, but especially in developing countries."

It concludes: "to burn food in order to obtain fuel is just a crazy idea."

We've warned against the EU's biofuel policies on several occasions, for example in January 2008, when we wrote that allocating more resources to biofuels would be a serious mistake:

"Biofuels are only likely to achieve between 0.9% and 1.1 % reductions in total EU emissions. This is a serious misallocation of resources. If the huge expense of achieving the miniscule reduction in greenhouse gases through biofuels were to be redirected towards reforestation projects, almost 28% of the EU’s total emissions would be saved. Even if it were to be redirected towards (relatively cost inefficient) renewables (at current costs), these funds would deliver a 2 – 5% reduction."

Meanwhile, the European Commission has just announced that EU climate policy will cost €270 billion annually, over the next 40 years. This is a massive amount. But the Commission is still intent on raising the EU's targets from the current levels of 20%.

FAZ comments:

"The ability of European industry to compete internationally will be undermined as a result of unilateral climate change targets. Energy-intensive production, for example of metals, is merely being transferred to third countries (...) without improvements to the world's climate. The Commission doesn't ask itself these fundamental questions."

To be fair, Germany's Commissioner in charge of the energy brief, Günther Oettinger, has been very critical of his own institution's attempt at raising CO2 targets. "I believe 20 percent is the right, middle way," he said, warning that if the EU would go it alone, "than we not only lose jobs, taxes and social contributions. We will also have no reduction of CO2 levels."

He seems to have lost, though, as the Commission has just announced that it will be pushing for a 25% target, up from 20% compared to 1990 levels.

Still, opposition to the EU's green agenda - agreed at a time when Europe's economy was booming and the EU was looking for a new role for itself (the 'world peace' theme was getting a bit dated) - is clearly growing.

Biofuels: will the Commission start listening?

We would never accuse them of lacking persistence… the EU Commission is sticking to its guns on biofuel targets, despite a wave of negative press coverage brought on by soaring food prices, and – perhaps most significantly – outbreaks of hunger-related violence in the developing world. This has so far occurred in several West African countries, Egypt and Haiti (leading to the fall of the Government there). We are also told that the Bangladeshi army has had to take control of food distribution.

Meanwhile the list of international institutions calling for the immediate suspension of biofuel targets grows ever bigger: the UN, IMF, World Bank, OECD, European Environment Agency and the EU Joint Research Centre are those we can think of (the latter two are responsible for providing scientific advice to the EU Commission).

Despite all this, the Commission still has its head in the sand on biofuels. Andrew Bounds at the FT reports that Barroso will continue to push ahead with the 10% target. Meanwhile, Energy Commissioner Andris Piebalgs, in an extraordinary blog post, attempts to make the Commission’s case:

“In Europe, we use less than 2 percent of our cereals production for biofuels, so they do not contribute significantly to higher food prices in the European context.”

This is misleading in a number of ways. A relatively small amount of cereal production may be currently diverted towards biofuels, but Europe has always been a far bigger producer of biodiesel, which is derived from oilseed plants such as rapeseed – not cereals. So the total crop production devoted to biofuel production in Europe is already far higher than 2%.

More importantly, consumption of biofuels in Europe may be very low at the moment, but the target for 2020 will change this dramatically in the future – use of these fuels would have to increase around fivefold. Academic estimates suggest 38% of current agricultural land in Europe would need to be turned over to biofuel production in order to meet that demand. The IMF note that biofuels were responsible for just under half of the increase in the consumption of major food crops in 2006–07. Of course, a great deal of this is due to the separate US targets. But the EU targets are just as ambitious as those in the US, and America has had a highly interventionist biofuel policy for the past couple of years, whilst Europe’s hasn’t really kicked in yet – meaning that much of the future escalation of demand will most likely come from this side of the Atlantic.

Piebalgs continues:

“Even if we reach our 10% biofuels target by 2020, the price impact will be small. Our modeling suggests that it will cause a 8 to 10% increase in rape seed prices and 3 to 6% increase in cereal prices.”

Exactly the same thing was being said by the farm lobby in the US prior to the introduction of biofuel subsidies over there. Moreover, the Commission’s modelling is based on the assumption that ‘second generation’ biofuels (which would be derived from wood etc, rather than food crops) will be developed in the near future, and can satisfy around 30% of demand. But this is a non-existent technology, and there is no scientific consensus as to whether these fuels can actually be produced cost-effectively on an industrial scale. The Commission also assume imports from cheaper biofuel producers (such as Brazil or Indonesia); but at the same time the EU maintains big import tariffs on ethanol. In any case, importing palm oil from South East Asia raises some serious environmental concerns – massive deforestation is already happening in this region in anticipation of future import demand from Europe.

The Commission’s figures for commodity price changes are therefore likely to be a big underestimate. But even if they are correct, this increase in price is highly significant for the world's poorest people, who already spend 50 to 80 percent of their total household income on food. Profs. Runge and Benjamin Senauer estimate that for every percentage increase in real prices of staple foods, 16 million extra people will be drawn into food insecurity. Those in the most marginal positions will starve.

The Commissioner responds with the following:

“The charge now is that EU biofuel policy will contribute to third world poverty by driving food prices up. My impression from this debate sometimes is that we the Europeans know best what is good for people in developing world. Let them speak for themselves.”

Clearly Piebalgs hasn’t been reading the news lately – the message from developing countries seems pretty clear...


“Without a good domestic production base for so called first-generation or crop based biofuels, the more innovative and efficient products will probably never take off. We need to use first-generation biofuels as a bridge to the second generation biofuels using lignocellulosic materials as a feedstock.”

Apologists for biofuels usually argue that we need targets for biofuels now in order to spur development of new and better versions of the Victorian-era first generation agrofuels we rely on now. But according to the EU’s Joint Research Centre, €33-60bn will be spent on subsidising biofuels up until 2020. To reemphasise the point: there still no viable industrial process for producing second generation biofuels – it is pure theory. Is this really the time to be throwing taxpayers’ money at something that might prove to be a mere pipe-dream? If second generation biofuels can in fact be developed, fair enough: but surely the research funding necessary to work out how would come in at a tiny fraction of this insane cost? Why does the EU continue to defy all scientific and economic logic to promote a policy which wastes such vast amounts of our money, pushes the poor towards starvation, and will harm rather than help the environment? Piebalgs in fact answers this question in the conclusion of his blog piece:

“The EU’s ambitious but realistic 10% target will provide the market pull stimulation that farmers need to face a future market based agricultural economy and less dependence on EU subsidies.”

Translation: it’s a great way of replacing the CAP. Direct farm subsidies can be scaled down and substituted with binding targets which create artificial, state-mandated demand – another mechanism of price support for EU agribusinesses. In this light, it is abundantly clear why Brussels is so determined to press ahead with its lonely campaign for the promotion of biofuels.