Euro carbon taxes are coming: How airlines can stay airborne

December 15, 2011, 5:14 PM UTC

FORTUNE — The skies are not looking too friendly these days, at least for an airline. Already crunched by high fuel prices and struggling customers, airlines will face tougher rules on carbon emissions for flights landing and taking off in Europe as of January 1, if the European Union has its way.

The U.S. government is fighting to keep American companies from having to comply, but airlines must prepare for the worst-case scenario.

The situation is already bleak. Oil prices have been increasingly volatile in recent years, and airlines are particularly exposed to these fluctuations. Add to that, consumers have started flying less often since the global recession started in late 2008.

To stay above ground, almost every company has piled on extra fees where they can — surplus legroom, baggage check, in-flight food — irking passengers who had already cut back on flying. Some companies, such as United Airlines (UAL) and Continental, have combined in an attempt to seek safety with sheer size. On the other end, American Airlines (AMR) declared bankruptcy in November.

And now, the European Union is cracking down on carbon. Next year, airlines will have to pay the EU for the carbon they emit — past a certain threshold — during every flight that graces a European runway. No airline is pleased.

Curbing carbon emissions by charging for them isn’t necessarily a bad idea says Chris Goater, a spokesman for the International Air Trade Group Association, as long as the process is controlled by an international organization, not one region.

Airlines based in the U.S. are particularly opposed to the idea. “We think this unilateral scheme is a violation of international law and it should not stand,” says Nancy Young, the vice president of environmental affairs at Airlines for America, a U.S.-based trade organization.

See also: American Air workers set to lose big

The U.S. government agrees with Young on the premise that Europe has no right to charge money for carbon potentially emitted outside of its airspace; say, on a runway in LaGuardia. The U.S. House of Representatives even passed a bill in October that makes it illegal for U.S. companies to comply with the new pieces of the EU’s carbon trading scheme, creating the possibility of a situation where any flight leaving from the states and landing in Europe would break either U.S. or European law.

Hopefully, we will not reach that level of absurdity. While airlines want to avoid paying for excess carbon, they are preparing for the worst, Young says. They can do this in a couple of ways.

Pass it on.

“Anybody that has to pay is most likely going to try to pass it on to the customer in the form of another tax,” says Helane Becker, an analyst with Dahlman Rose & Company.

The EU has said that in the first year, the tax would probably work out to about two or three dollars per ticket. But any added fee can harm airlines, Young says, partly because customers are already fed-up with fees and adding more would only fuel that fire.

Cut your flight schedule.

That’s already happening. And while it would be nice if fewer jets were taking off to cut CO2, the change actually reflects a decrease in consumer demand. Analysts believe airlines’ total number of flights will decrease in 2012, Becker says.

Avoid Europe at all costs.

Companies directing flight traffic between Africa and China, for example, will probably re-direct stopovers from Frankfurt to, say, Dubai, if possible. Anyone who can will try to avoid Europe altogether, Becker says, even if it means burning slightly more fuel on an un-taxable route.

Do the hard work and become more efficient.

Everybody wins if companies can fly the same amount of planes more efficiently. Airlines say they agree, but claim that they are already investing money in new aircraft and working with international air traffic control centers to create more efficient flight paths.

The price of oil already makes fuel-efficiency in airlines’ best interest, Young says. In fact, the industry aims to become so eco-friendly that any corporate growth after the year 2020 — for example, more planes — won’t increase carbon emissions at all.

The EU, however, thinks that companies need more of an incentive to make those improvements faster. Either way, the effort to deliver greener skies could get ugly come New Year’s Day.

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