Have we got the imagination to do better? A positive alternative to the EU Emissions Trading Scheme

“Europe Airline Losses Expected to Soar”

So screamed a recent Financial Times headline. In such a climate, it is not unreasonable to expect resentment and resistance to the imposition of yet more regulatory costs on airlines in the form of the EU Emissions Trading Scheme (ETS).

I believe regulatory costs should be minimised, but I am also of the opinion that the arguments being used to airline opposition to the ETS are unsustainable.

Airlines are in a position to explore other, more productive avenues – ones that would allow them to move towards outcomes that benefit their own business success as well as the public interest.

POLLUTER PAYS

First, let us examine the idea of the ETS itself. There is little doubt that setting up such an ambitious scheme is likely to be fraught with teething problems. Nobody should expect it to be perfect straight out of the box; nor can they reasonably use the argument of imperfection to block and delay its introduction. Imperfection is a fact of life for all of us and, through experience, things can hopefully be improved over time. But, in principle, is it a good idea to tax emissions? Is the imposition of the costs of that taxation on business a good approach to solving environmental issues?

Even if we dislike the idea of regulatory impositions of this nature, we need to accept that sometimes there may be little alternative. It seems to me that attempts to mitigate economic externalities through the principle of ‘polluter pays’ are reasonable and widely accepted. Since the damage caused by carbon emissions cannot be overcome by asking the polluter to pay directly for a cleanup, then some form of levy is a reasonable remedy.

Simply not paying for the damage caused by pollution is certainly not a reasonable alternative. We would not accept that if it were a chemical company throwing toxic chemicals into our drinking water and neither should we accept it with carbon emissions. On the contrary, it may be unreasonable only to be paying for carbon emissions when airlines and others, including all of our own cars, are emitting many pollutants other than carbon.

ARE AIRLINES SPECIAL?

If we accept that the ETS is a broadly reasonable approach to the ‘polluter pays’ principle, then are there reasons why airlines be exempt from it?

Two reasons have been put forward for why exemptions may be reasonable. The first we can easily dismiss. It goes along the lines of airlines being a special and important contributor to the economy and burdening them with unnecessary regulation harms the overall economy. Throughout my life in business, I have not yet come across a business sector that does not consider itself ‘special’. OK, let’s accept it, we’re all special and therefore we all need to be treated well. All business contributes to the economy and none should be burdened with unnecessary regulatory cost. Yet regulation is necessary as are its attendant costs. We all accept this in our everyday lives and the current financial and economic debacle should remind us of the huge economic, social and human costs of inadequate regulation. The cost of the lack of regulation can sometimes be significantly higher than the regulatory cost. This is probably the case for carbon emissions and other air pollution.

The second, and more persistent, reason put forward is that the EU has no right to impose its regulatory framework on other countries. This argument also fails to stand up to scrutiny. First of all there is precedent. All our international travel today is plagued by security checks that have, to a significant extent, been driven by the post 9/11 national security requirements of the United States. From the collection and use of personal information to the degree of security checking to which passengers are submitted, the demands of one country drive requirements in other countries. This is inevitable in international travel – and widely accepted. Airlines happily (well, maybe not happily, but anyway…) submit to receiving countries’ security requirements even though, in theory, they are not regulated by that country. The ‘you can’t regulate others’ argument does not stand up. It merely attempts to make use of a peculiarity of the airline industry to avoid the levy. In a globalized, interdependent world on the brink of economic collapse, whipping this issue up into one of imagined national sovereignty and taking it to the brink of a trade war smells of vested interest straying towards irresponsible behaviour.

IS REGULATION THE ONLY OPTION?

If we accept the principle of ‘polluter pays’ and that airlines are just as special as everyone else and therefore should be treated equally, we come back to the original question – is regulation the only option? In this particular case it is not. There are other opportunities that airlines could explore if they were so minded.

Airlines have advantages over many other polluters in having the ability to sell carbon offsets directly to their customers. So far, airlines’ attempts in this field have been half-hearted to put it mildly. Yet here is a potential market mechanism whereby the ultimate user pays for environmental damage not through imposition but through choice. Imagine how different the airline industry’s negotiating position on the ETS might have been had it been able to show that its members were already collecting hundreds of millions, or even billions, from their customers through voluntary carbon offset schemes and that that money was already being properly invested in environmental protection, carbon sinks or whatever. Further, through their access to captive audiences during flight, airlines have broad opportunities to influence large numbers of people to the benefit of the environment. Had airlines been turning some of their marketing know-how in these directions, their overall environmental balance sheet would have looked much healthier than it does today. In such circumstances, arguments for some sort of relief from the ETS would not have been based on non-credible special pleading but on hard evidence that the industry was already doing its part and that its net environmental impact was much lower than imagined.

It is not too late to start down this road. The industry’s advantageous market position allows it to replace the current adversarial climate of negotiation with a positive, market-oriented approach to decreasing its net environmental impact. Going down this route will not be easy. It will require significant marketing savvy to re-brand and re-position carbon offsets so that they are appealing to passengers – a situation that certainly does not prevail today. Through partnerships with governments and environmental organisations, credible and practical programmes can be implemented on the ground and funded through monies raised from passengers. The end game is not only a healthier environmental balance sheet but also the creation of a broad coalition of interests that would support this approach to the polluter pays principle rather than the regulatory one.

A further important benefit is that monies raised in this way will actually go directly to environmental protection initiatives rather than disappearing into the deep black hole of the general EC budget. This will be a true ‘cleanup’ operation rather than what might be seen as bureaucrats hiding behind ‘green policies’ to raise more general taxation.

Yes, there will be problems. Yes, there will be free riders – both among passengers and among airlines. But that hardly matters. The opportunity is there to achieve something meaningful; to move away from being seen as yet another polluting industry defending its turf with spurious arguments to one that is taking a positive approach to a sustainable economy. The opportunity is there to find ways to move away from regulation as the only viable approach. By taking its own initiative and assuming a degree of control, the industry also stands to gain additional business opportunities. As shown in some early models in the energy industry, such environmental initiatives can be integrated into airlines’ own marketing and customer loyalty programmes thereby yielding additional business benefit.

SUCCESS THROUGH IMAGINATION

At a recent conference where I was a speaker, the chair summarised the proceedings by saying that our relative lack of progress on environmental matters does not arise from a lack of information but from a lack of imagination.

So far, the airline industry’s approach to the questions raised by the ETS has shown just such a lack of imagination. It has remained stuck in determined attempts to preserve an outdated status quo, in the tactics of special pleading and the ‘let’s get our government to defend us’ approach. We’ve seen all of that before in almost every industry and most of us are tired of it.

The ‘polluter pays’ principle is a reasonable one. Do we have the imagination and determination to come up with innovative approaches that make bureaucratic regulatory schemes either unnecessary or marginal?  A positive approach to the issues will benefit both business and society.