Wednesday, September 28, 2011

Will Economic Impacts from ETS Help or Hurt Open Skies?

Should the EU ETS take effect in January as planned, the economic effects will reverberate through the industry. By one estimate the total industry-wide cost of compliance in 2012 will be 1.1 billion euros. See Michael Szabo, Easyjet Warns ETS to Erode 2012 Profits, India Rebels, Reuters, Sept. 22, 2011 (available here). Given the already tight profit margin on which most airlines are currently operating, the industry will likely seek some form of political relief. As of now, for non-EU carriers that has manifested itself in opposition to the EU ETS. However, should there come a point in the near future where carriers are forced to accept that some level of emissions reduction costs are inescapable, the question will then become what alternative form of political relief might carriers seek? In short, could ETS be the trigger that provokes a broader and more concerted push for substantial liberalization such as repeal of the nationality and cabotage rules? It is conceivable that once carriers are confronted with permanent costly emissions regulations, they will no longer be willing to tolerate costly protectionist restrictions. The further-reduced profit margins resulting from ETS compliance could leave states with no choice but to allow cross-border mergers and consolidations for carriers to remain economically viable. Conversely, it is also possible to imagine the economic consequences of emissions regulation prompting industry actors to seek out increased rather than reduced state protectionism. As we have seen recently in response to Emirates' success, some states have reflexively adopted a more protectionist posture aimed at reducing access and competition for vulnerable flag carriers. It would be highly unfortunate if a more desperate economic climate brought about by emissions regulation contributed to a global step backward from the progress that has been made toward trade liberalization over the past two decades. This is all speculative for now, but it is worth contemplating the hard-to-predict ramifications of ETS compliance costs on the industry's future.

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