Emissions Hijacking

Wall Street Journal
Thursday, July 17, 2008

The mood at this week's air show in Farnborough, England, is less optimistic than in years past. Aerospace companies are still making deals, but the credit crunch, high fuel prices and the ever-weaker U.S. dollar loom as concerns.

All of which means the European Union's stubborn push to add airlines to its CO2 emissions-trading scheme couldn't come at a worse time. The European Parliament voted last week to require emissions permits starting in 2012 for all flights that land or take off in the EU -- regardless of the airline's nationality or how much of the trip takes place in European airspace. Member-state governments are expected to approve the measure soon.

There would never be a good time for Europe's unilateral move to regulate other nations' airlines, which comes over the objections of nearly every other country on the planet as well as the U.N. body for civil aviation. So much for Europe's commitment to multilateralism.

But this cowboy environmentalism isn't even necessary. Carbon trading is supposed to encourage airlines to reduce their emissions by putting a price on CO2. How would they reduce their emissions? Well, besides better air-traffic management -- which could reduce emissions by more than 10% but, inconveniently for politicians, would require actions by government -- they would need to buy newer, more fuel-efficient airplanes.

Airlines had an incentive to do that well before oil prices started spiking. From 2000 to 2004, when crude cost less than $40 a barrel, fuel made up about one-sixth of carriers' expenses, according to the International Air Transport Association. The industry lost money in four of those five years as it recovered from the travel slump that followed the 9/11 terrorist attacks. So cutting costs by any means, including fuel efficiency, was already on its radar. That much is borne out by the thousands of commercial-aircraft orders that Boeing and Airbus recorded over the past few years, many of them for new kinds of jets that guzzle less gas.

Now oil prices are closer to $135 a barrel. If they stay that high, IATA estimates that airlines' fuel costs could skyrocket to $190 billion this year and $250 billion in 2009, up from around $40 billion earlier this decade. The industry would be back in the red this year and next after having finally returned to profitability in 2007.

To put those numbers in perspective, consider that Boeing values its 3,600-airplane order backlog at $271 billion. Experts say the order books at both Boeing and Airbus could shrink by about one-third in coming months as airlines try to conserve cash or even go bust. That means more older planes would still be in service.

All of this would be true even if carbon trading weren't in the picture. But now that it's on the way, upgrading fleets with more fuel-efficient planes will be even more difficult. IATA estimates that EU emissions trading could cost airlines $3.5 billion in the first year and as much as $13 billion by 2020, depending on how the permits are allocated and priced.

An additional $13 billion in expenses would have turned each of the industry's last four profitable years into losers. Even at $3.5 billion carriers would be hard-pressed to find the funds to upgrade their fleets with more fuel-efficient aircraft. As Cathay Pacific CEO Tony Tyler noted yesterday at Farnborough, "The more governments make it difficult for airlines to make money, the more difficult it is for them to invest in new technologies."

Making matters worse, the single-aisle Airbus A320s and Boeing 737s that make up the bulk of airlines' short-haul fleets are about a decade away from being updated. Both companies say they want to wait for a big step forward in engine technology.

Engine makers are racing to meet their request, but they aren't expected to reach the needed breakthrough until at least 2016. So airlines will be stuck with a carbon-trading bill for at least five years before they can even improve their fleets -- which of course will only reduce their ability to purchase the new planes once they do become available.

The alternative, and the green utopians' real dream, is to sharply reduce the amount of air travel. That would only add another anchor to an already dragging global economy, all to curtail a sector that accounts for only 2% of global CO2 emissions.

The U.S. and other countries have threatened to sue the EU at the International Court of Justice over its airline-emissions hijacking. That may be the only way to keep the eurocrats from bringing the industry down.