This week on Monday, I read an editorial in favor of the European Union’s Emissions Trading Scheme (ETS) in the New York Times, and decided to respond with a op-ed.
In your editorial published on Monday, February 27th, your paper made the claim that Washington and other critics of the European Union’s (EU’s) new Emissions Trading Scheme (ETS). Your editorial, while well intentioned, contained numerous misconceptions, and is, I believe, flawed at its core. Reduction of greenhouse gas emissions is an admirable goal, but doing it through this particular design is erroneous for both economic and sociopolitical reasons.
In the first case, air travel helps power the global economy, in multiple ways. If facilitates quick and easy transport of human capital and goods around the world, while simultaneously enhancing interpersonal relations and global awareness by transporting passengers to vacation and visit family around the world. The economic impact of the air transport is huge, accounting through direct, indirect, induced, and catalytic forces, for $2.5-$3.5 trillion annually, or 5-7.5% of global GDP. Our industry generates some 32 million jobs globally through the same confluence. Yet despite its position as a vital economic engine, the airline industry is a highly unprofitable venture; global commercial airlines lost a cumulative $5.5 billion between 2003 and 2011. And the European Union is no different. The region already has some of the highest aviation taxes in the world, with a myriad of passenger duties, entrance tariffs, and general taxes that have rendered its airline industry stagnant. The fallout from the EU’s misguided policies have already manifested themselves this year in the collapse of Spanair and Malev, and ETS will only serve to continue that trend.
In your piece, you claim that because the added cost increases would be of magnitude less than the $25 typically charged for checked baggage (though they will almost certainly be greater than the $2.60 claimed by the EU), they are not of consequence. While this relationship might hold true in most industries, the airlines are a special case. Airline flights are marginal at best; the profit margin on individual flights is often as low as 20 or 30 dollars in total. And because air travel demand, especially for long haul flights, is highly price elastic (meaning that a 1 % increase in price will decrease quantity demanded by greater than 1%). According to a compilation of estimates from various government sources and industry bodies, the price elasticity of air travel ranges from 1 to 1.1. Given that the price increases created by ETS range from 3-6% on most flights, the EU is facing a worst case scenario of losing up to 66 million passengers or $2 billion in revenue, or a best case scenario of losing 33 million passengers and a billion dollars of revenue. Can Europe’s tottering airlines afford such losses? The most likely answer, especially for marginal airlines, is no. Whenever taxes are increased, businesses at the margins suffer the most, and in the EU, that could mean the loss of dozens of valuable air service providers.
Secondly, and more importantly in most eyes, ETS represents a violation of the national sovereignty of other nations. Under the ETS, the EU will tax not only the portions of the flight that occur over its airspace, but all portions of a flight. This is akin to the US government taxing Chinese companies that sell in the US for their pollution in China; it is overstepping logical and legal boundaries. Moreover, the EU’s member nations (if not the EU itself because it is a trans-national body) are all signatories to various conventions of the air, none of which allow it to regulate the airspace outside of its borders as the ETS attempts to do. Thus Russia, China, India, and the United States are right to band together and denounce the European Union for this violation of their sovereign rights to the airspace in their country.
The worst part about ETS is that it hurts the EU’s own airlines the most. With emissions surcharges being levied on the whole portions of intercontinental flights, fast growing airlines such as Emirates and Turkish Airlines would have an advantage in transporting long haul European passengers because their flights would only face EU surcharges on less than half of the total distance of many itineraries. Europe’s economy is already tottering under the weight of its unbalanced debt structure. Is now really the time to be choking off a vital economic engine, especially with the threat of a double dip still looming?