Aviation is a growing source of emissions. Emissions from aviation are increasing against a background of decreasing emissions from many other industry sectors. Airlines – with their international reach – are facing a confusing welter of regulation that makes emissions reduction difficult.

Worldwide, there are piecemeal moves to address the problem. Yet the UN has, since 1994, failed to reach any kind of consensus on a comprehensive approach to aviation and climate change.

The failure is all the greater when one considers that, based on IPCC calculations, aviation’s contribution to total emissions, estimated at 3%, could be as low as 2% or as high as 8%.

Under the Kyoto Protocol, developed-state parties to it (including Australia) “shall pursue limitation or reduction of emissions of greenhouse gases … from aviation … working through the International Civil Aviation Organization” (ICAO).

In other words, aviation is excluded from the world’s primary climate change instrument. It leaves the aviation emissions problem up to ICAO, a UN agency.

Given aviation’s absence from Kyoto, and the UN’s failure to address the aviation emissions problem, individual states and coalitions of states are taking action. Such action, however, has resulted in threatened lawsuits, legal action, and the possibility of a trade war.

Aviation has an emissions problem.

Under Directive 2008/101/EC on the inclusion of aviation in the European Union’s emissions trading scheme (ETS), all flights (EU and non-EU) landing at or taking off from any airport within an EU member state from 1 January 2012 must surrender emissions allowances equal to the emissions created from the entire flight. Most of these allowances (85%) will be allocated to the airlines for free.

The EU ETS includes Australian airlines landing at or taking off from such airports.

International airlines, led by those in the US and China, vigorously oppose the inclusion of aviation in the EU ETS. They have challenged its legality in the European Court of Justice (the ECJ). The ECJ’s Advocate General, however, recommended that the ECJ find the scheme legal. And, in a 21 December, 2011 decision, the ECJ did just that.

It is possible that this dispute could result in a trade war between the EU and non-EU states. In late October, 2011, the US House of Representatives passed legislation that would make it illegal for US airlines to comply with the EU law. It’s unlikely that the US Senate will do the same. But if the legislation does pass the Senate, as James Kantor has noted, airlines would be unable to fly to and from Europe without breaking either a federal US law or an EU law.

In November 2011, ICAO endorsed – remember, this is the UN body responsible for reducing aviation emissions – a working paper approved by 26 states (including the US, China, Russia, and India) calling on the EU to exclude non-EU carriers from the EU ETS. And the Chinese government this week barred its airlines from joining the EU ETS.

It is not possible to make all of this up.

Against this background, Australia is the least problematic (emissions-wise) of all jurisdictions.

Rather than paying a carbon price through amendments to fuel tax credit and excise schemes, domestic Australian airlines may choose to participate in the Commonwealth’s ETS from mid-2013 through an “opt-in” scheme. (The legislation for this is Part 3, Division 7 of the Clean Energy Act).

For airlines, the rationale for participation is clear. As one commentator has noted:

“[a] tax is cumbersome and a blunt weapon – both airlines are used to managing massive price hedges for fuel. Qantas faced a bill of more than $110 million on its domestic operations, and Virgin a bill of around $40 million – both feel certain that the carbon cost will be far lower under a market mechanism.”

Opting-in offers airlines an opportunity to source abatement measures at least cost. Put another way, airline participation in the ETS enables carriers to manage both their fuel and carbon-cost liability more effectively.

Ticket surcharges to cover the costs of carbon pricing have recently been announced by Qantas. Flights to Europe (to and from London and Frankfurt) will cost an additional $3.50 each way per passenger and per applicable sector. From 1 July 2011 – the start date for carbon pricing in Australia – domestic carbon costs start at $1.82 one way per passenger for a flight of up to 700 km and increase to $6.86 one way per passenger for flights of 1,901 km or more.

These costs, of course, are additional to any charges which Qantas and other airlines will levy as a result of increases in the cost of jet fuel. Jet fuel is often the biggest operational cost for airlines.

It should be noted that Qantas is not participating in any legal challenge to the validity of the EU ETS. It should also be noted that Qantas may be subject to three different emissions trading schemes – those of Australia, New Zealand and the EU.

I have previously argued that, given the lack of success of international climate change negotiations under the auspices of the UNFCCC, we need an alternative approach. One solution may be to break the climate change problem up into different pieces and sectors, and address the pieces in more specialised fora – a “bottom-up” rather than a “top-down” approach.

However, the current international aviation emissions dispute augurs nothing good for such an approach. As the Deputy Director of the Center for Climate Change Law at Columbia University has said:

“… countries are retrenching to protectionism when faced with the EU’s attempt to seriously address one major emitting source in an equitable manner, [which] suggests little hope that these same countries might soon take bold stances in committing to the long-term, deep emissions reductions necessary to avoid the worst effects of climate change.”