Will Airbus Lose PRC Orders on Emissions Regs?

Environmentalists usually applaud countries or regions where regulations are most stringent for obvious reasons. Aside from encouraging better fuel economy or lower emissions, there can be substantial knock-on effects. Consider America. The United States remains the world's second largest car market after China. With the state of California leading the nation in regulatory standards for automobile emissions--some vehicles sold in the 49 other states don't meet California regulations--auto manufacturers often just adopt the standard mandated by California. End result? Even if other states' lawmakers are not as concerned with the environment, standards are ratcheted upwards by a major market mandating standards exceeding those of others. And it certainly is welcome: those of you who've experienced LA smog at its worst know what I'm talking about.

Now we come to a grander analogy of the California-USA emissions dynamic. The European Union will in 2012 include in its carbon emissions scheme all airlines that fly in and out of the EU--including non-European ones. Certainly this sort of Cali-esque ratcheting up is welcome from my point of view given how recalcitrant the world's two largest carbon emitters--China and the US in that order--have been at venues alike the Copenhagen summit.

That said, the EU may have shot itself in the foot as far is its commercial fortunes go. You see, aside from being the region which will soon lead the world in attempts to curb aerospace emissions, it too is home to the world's bestselling passenger aircraft manufacturer in Airbus. It's a problem familiar to millions when environmental and economic interests seem to collide. The basic contours of the current impasse go thusly: PRC leadership is making its displeasure over EU aerospace sovereignty-at-bay known by jeopardizing previous orders for Airbus jets. Privately owned airlines based in Hong Kong are reportedly not immune since the PRC leadership is busy trying to scuttle previous multibillion dollar deals.

In other words, the PRC seeks to water down carbon trading schemes being applied to its airlines serving EU-27 nations by putting Airbus' order book under pressure. From the WSJ:

China's anger with the European Union's emissions-trading scheme for airlines has delayed the revealing of a major Airbus deal and could undermine upcoming deals, according to people familiar with the situation. Airbus, a unit of European Aeronautic Defence & Space Co., had expected to announce at the Paris Air Show this week that Hong Kong Airlines Ltd. ordered 10 of its A380 superjumbo jetliners, with a catalog value of almost $4 billion. The deal's unveiling was put on ice by officials in Beijing, who must give final approval, these people said.

The Chinese government held off because it disapproves of the EU's intention to regulate greenhouse emissions of foreign airlines operating to and from the 27-country bloc, according to the people close to the talks.

An Airbus spokesman said the company wanted to name the A380 buyer, "but the political environment would not allow us to do that." A Hong Kong Airlines spokeswoman earlier this month said the carrier planned to announce an A380 order at the trade event outside Paris. The A380 deal was completed before Beijing interceded and appears not to be in jeopardy, said one person close to the situation. But other planned orders for big Airbus planes have been frozen, this person said.

"The Chinese have told us directly that their airlines are not allowed to get into deals with Europe," said a person close to the European side of the discussions. A spokesman for the Chinese mission to the EU recently said that the country is "opposed to the EU's inclusion of [Chinese] airlines" in its emissions-trading plan. The spokesman didn't immediately respond to questions about the situation with Airbus.

For now, China's anger is unlikely to hurt the European plane maker, which has an order book of more than 3,500 planes for customers globally. But China is the biggest growth market world-wide for aviation. Airbus in 2009 opened an assembly plant in Tianjin, China, to tap the local market and curry favor with the government.

To no one's particular surprise, the commercial (Airbus) and political interests in the EU are at loggerheads. There is also arm-twisting in the opposite direction as the PRC looks set to put a squeeze on permissions for European carriers wishing to fly to increasingly lucrative Chinese destinations. That is, Europeans may make some of the best commercial passenger aircraft, but the locations to which they will increasingly fly to are in the Asia-Pacific. In other words, this political-economic quarrel is possibly quite evenly matched:

The EU's pollution-control plan, which is set to include aviation starting in January, forces any carrier departing or arriving at an EU airport to buy credits for greenhouse-gas emissions above specified levels, with large fines for noncompliance. China's move appears to be the first retaliation against the EU program. China, the U.S., Russia and other countries have strongly objected to the plan. They see it as unilateral and potentially illegal because it may assert extraterritorial jurisdiction on carriers from other countries.

"A global issue needs a global solution," said the Airbus spokesman, who called the plan "a bureaucratic tiger." Airbus and the Association of European Airlines last month wrote to top EU officials to warn about potential retaliation from China. EU officials have repeatedly said they won't retreat on their program.

Some European airlines have recently held back on asking for permission to increase capacity on Chinese routes because they expected applications to be rejected, said one person with knowledge of the situation.

Aside from Boeing possibly taking away Airbus orders over emissions, those other whiny superpolluters, the Americans, are already complaining at the ECJ:

The U.S. government on Tuesday formally presented its opposition to the EU plan for the first time at a meeting with EU officials in Oslo. A group of U.S. airlines has separately filed suit against the EU plan. The first hearing on that case before the European Court of Justice is due on July 5.

So it seems the world's superpolluters--China and the US which are #1 and #2 respectively in carbon emissions--are keen on punishing those trying to do Mother Earth some favours. Still, I have to applaud the EU stance on this matter. Whether it can hold out on principle long enough to see similarly stringent regulation adopted worldwide--the ultimate goal--will be fascinating to watch. Airbus won't be crying uncle anytime soon, so what the heck...