SINGAPORE Global planemaker Airbus joined a chorus of concern that a European scheme to charge airlines for carbon emissions risks triggering a full-blown trade war, with implications for plane deals and even Europe's crippling sovereign debt crisis.
The EU's Emissions Trading Scheme (ETS), introduced on January 1, has drawn howls of protest from airlines around the world, with China banning its carriers from taking part.
The escalating row comes on the eve of a China-EU summit in Beijing, with the EU looking to China to dip into its huge foreign exchange reserves to help the eurozone tackle a debt build-up that threatens its economic stability.
Airbus EAD.PA Chief Executive Tom Enders said he was increasingly concerned at the potential fall-out if tensions are not defused.
"I am very worried about the consequences of that. What started out as a solution for the environment has become a source of potential trade conflict and that should be a worry for all of us," he told an aviation conference on Monday ahead of the Singapore Airshow.
China is a strategic market for the world's two big planemakers, as it coordinates purchases centrally and regularly places orders with Airbus and Boeing (BA.N) in batches of 100 or more to coincide with high-level political contacts.
Chinese domestic air traffic quadrupled in the last decade and is expected to keep growing at more than 7 percent a year up to 2030, according to Airbus research, and Boeing predicts China will be the second-biggest market for new aircraft behind the United States between 2011 and 2030.
China last year delayed the final signing of a deal for 10 A380 superjumbos worth $4 billion (2 billion pounds) for Hong Kong Airlines in a signal of its displeasure over the EU plans, and in the mid-1990s, it refused to buy French products such as wheat and Airbus planes in retaliation for France selling fighters and frigates to Taiwan.
Last week, Beijing banned its airlines from joining the ETS without its permission, and threatened to take unspecified measures to defend itself against the scheme, which levies charges for carbon emissions on flights in and out of Europe.
Foreign governments argue Brussels is exceeding its legal jurisdiction by calculating the carbon cost over the whole flight, not just Europe.
Non-EU airlines say the levy is discriminatory. Increasingly, governments and the EU's executive European Commission are looking to the U.N.'s International Civil Aviation Organisation (ICAO) to find a global scheme that curbs airline emissions.
Singapore Airlines (SIAL.SI) CEO Goh Choon Phong said opposition to the scheme was based on the way it is applied.
"I was quoting the example of us flying non-stop from Singapore all the way to Europe. We get charged the whole journey, when somebody who could fly passengers to an intermediate point, and from there go to Europe, ends up paying much less," he told the same aviation conference in Singapore.
Andrew Herdman, director general of the Association of Asia Pacific Airlines, said any European policy that alienates the United States, China, Russia, India and three dozen other countries "is simply not going to work."
"The risk for the airlines if this generates into a tit-for-tat trade war, is that airlines will be caught in a cross-fire from both sides," he said.
During an industry panel discussion, Cathay Pacific (0293.HK) CEO John Slosar took a senior European Commission official to task.
"You can't have it both ways. There's a difference between leadership and bludgeoning. You guys applied the latter, and now you're discovering it works both ways," he told Matthew Baldwin of the directorate-general for mobility and transport.
EU Transport Commissioner Siim Kallas acknowledged the growing opposition to the scheme, and said he was willing to be flexible in finding a solution, but the 27-nation bloc would not bow to pressure to suspend the scheme, which it says is part of a global fight against climate change.
Aviation accounts for around 3 percent of mankind's greenhouse gas pollution. The ICAO predicts the number of air passengers will hit 6 billion a year on scheduled services by 2030, roughly double today's level.
"If you think Europe will be forced to suspend, this is not the case. We must have a real global solution," Kallas said in an interview in Singapore.
"Europe will implement its system with difficulties, with conflicts, with court cases, whatever, the system will be introduced," he said.
French Transport Minister Thierry Mariani said both Airbus and Air France (AIRF.PA) had expressed their concerns that the dispute should not be allowed to harm French competitiveness.
Some European airlines worry the scheme could backfire on them if foreign governments retaliate by limiting traffic rights or imposing tit-for-tat taxes and charges.
An analysis by Thomson Reuters Point Carbon last week shows airlines face a carbon pollution bill of 505 million euros ($670 million) for 2012 under the ETS.
Roberto Kobeh Gonzalez, president of ICAO's council, said he was confident the 191-member world body would find a solution.
"I am confident. What will be the level of agreement, I can't tell you; what will be the scheme, I can't tell," he told Reuters.
ICAO's last assembly, in 2010, tasked the body's elected council to work on a series of areas, including alternative fuels, more fuel-efficient airplanes and market-based measures to tackle emissions. That work will be presented in 2013.
Critics note the ICAO's failure over more than a decade to find a global solution on aviation emissions, but Gonzales said the fact there was agreement to work on a solution was positive, and the current row over Europe's ETS might push things along.
A potential trade war comes as carriers and plane makers are vulnerable to the economic slowdown, with Boeing predicting global airline passenger growth will slow to 5 percent this year from around 6 percent last year.
This week's Singapore Airshow is likely to see U.S. and European arms makers Boeing, Lockheed Martin Corp (LMT.N) and EADS slugging it out for contracts as there is a growing appetite for military equipment in Asia, and beyond.
India plans to spend about $100 billion over the next decade to upgrade its largely Soviet-era military equipment, which would make it a lucrative market for Boeing and Dassault Aviation SA (AVMD.PA).
Dassault's Rafale is also set to become Brazil's fighter jet of choice, with government sources saying Brazil is "very likely" to choose the French plane to refurbish its air force.
If confirmed, the deals would enhance France's partnerships with two of the world's biggest up-and-coming economic powers, and provide a boost to President Nicolas Sarkozy, who has cast himself as a champion of French industry and an energetic salesman of the Rafale in particular as he faces a tough re-election fight this year.
European and U.S. defense companies, feeling the impact of budget cuts in their home markets, are also competing for jet contracts in the United Arab Emirates, Qatar and South Korea.