Tuesday, March 25, 2008

Carbon credits for airlines

The treaty that guides trans-atlantic flights is up for renegotiation between the European Union and the United States. While the talks are supposed to start this Spring, no movement is expected until next year, that is when a new administration will be in place in Washington. The reasons are pretty clear.

The European want to negotiate on three main areas: 1) the excessive security requirements (passenger data, boarding checks) required for flights to the United States, 2) possible foreign ownership of US airlines, 3) carbon credit for airlines. This post is about the last point.

The EU is implementing a carbon emissions trading scheme for Europe-based airlines. The idea is basically to have airlines buy carbon offsets, thus internalizing the pollution they generate. Obviously, participation in such a scheme needs to be mandatory in order to prevent a free-rider problem. The EU wants in addition to force flights in and out of Europe by non-European airlines to participate in that scheme as well. The problem is that the U.S. is not letting American airlines participate. They would thus have an obvious price advantage (and be free-riding). The Europeans can threaten to withdraw landing rights, and there is no doubt the Americans would retaliate doing the same.

Internalizing externalities makes good sense in general, much more so that imposing emission limits, as we discussed previously. This issue should really have been tackled globally, this being a global market, by the International Civil Aviation Organization or by the industry itself, the International Air Transport Association, as a voluntary self-regulation scheme. Now it seems we have to look forward to a disrupting stand-off, unless the U.S. moves, which may happen with a new administration.

And it is ironic that the United States, which typically believe in market forces and introduced pollution right markets, are the ones opposing a market-based initiative.

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