* China will not cooperate with EU on ETS – CATA

* Will consider legal action vs EU, but no rush on this

* ETS could cost Chinese carriers $123 mln in first year

* Cathay may raise prices, SIA (SES: E2:C6L.SI – news) to be more fuel-efficient

(Adds Commission penalties for non-compliance, context, paras
5-9)

HONG KONG/SINGAPORE, Jan 4 (Reuters) – China’s
airlines will refuse to pay any carbon costs under the European
Union’s Emissions Trading Scheme, while other Asia Pacific (Chicago Options: ^RASPUSD – news)
carriers, already battling a weak travel market, are likely to
pass on the extra cost to passengers.

The EU’s scheme (ETS) was launched in 2005 as one of the
major pillars of the bloc’s efforts to combat climate change.
From Jan. 1, all airlines using EU airports are included in the
cap-and-trade scheme.

“China will not cooperate with the European Union on the
ETS, so Chinese airlines will not impose surcharges on customers
relating to the emissions tax,” Cai Haibo, deputy
secretary-general of the China Air Transport Association (CATA),
told Reuters by telephone on Wednesday.

CATA represents the country’s four major airlines:
flag-carrier Air China Ltd , China Southern
Airlines , China Eastern Airlines
and Hainan Airlines.

A European Commission spokeswoman had no immediate comment
on any refusal by China’s airlines to pay.

EU law makes a provision to enforce fines of 100 euros for
each tonne of carbon dioxide emitted for which airlines have not
surrendered carbon allowances.

In the event airlines persistently flout the EU law, the
Commission has the option of banning an aircraft operator.

Immediately after a December ruling from Europe (Chicago Options: ^REURUSD – news) ‘s highest
court that inclusion of airlines in the ETS was valid, China’s
state-run Xinhua news agency warned of a trade war, although the
foreign ministry later stated its opposition less stridently and
called on the EU to talk to other governments.

The United States has also warned of possible retaliation,
while a draft law in the U.S. Congress proposes to make it
illegal to comply with the EU legislation.

Chinese airlines will consider taking legal action against
the EU in response to its charges for carbon emissions on
flights to and from Europe, Cai said.

But they will not rush into this, he added, mindful that
U.S. airlines in December lost their legal challenge against the
ETS and given that collection of the carbon cost from airlines
will not be until March 2013.

Australia’s Qantas Airways (Hamburg: 390413.HM – news) has said it was also
considering legal action against the scheme.

“We are now walking on two legs — first, we would not rule
out the chance of taking legal action and, second, to resort to
the government for retaliatory measures. Several departments
have been looking into this,” Cai said.

CATA estimates the scheme will cost Chinese airlines 800
million yuan ($123 million) in the first year and more than
triple that by 2020.

The European Commission has assessed the impact on air fares
at 2 to 12 euros per passenger. For airlines the cost is gradual
as 85 percent of carbon allowances are handed out for free this
year and bills will be due only next year after emissions are
calculated.

HIGHER PRICES

Germany’s Lufthansa (Xetra: 823212 – news) , the world’s second-largest
long-haul carrier after Dubai’s Emirates, warned passengers on
Monday to brace for higher ticket prices as it decided to pass
on costs to the travelling public.

The EU says its ETS, which already applies to other
industries, is the fairest way to cope with aviation’s
contribution to global warming in the absence of a global
scheme, which more than a decade of debate at the U.N.’s
International Civil Aviation Organization (ICAO) has failed to
deliver.

Hong Kong-based Cathay Pacific Airways Ltd and
some other Asian airlines, facing a sluggish economy and weak
cargo demand, said they might impose surcharges or increase
airfares to counter the ETS impact.

“It’s inevitable that increased costs will be passed on to
passengers. We will share the details at the appropriate time,”
said Carolyn Leung, a spokeswoman for Cathay Pacific, whose CEO
has said the ETS would add about HK$50 ($6.44) to a ticket
between Hong Kong and Europe.

Singapore Airlines Ltd (SIA), the world’s
second-most valuable airline, said it would try to offset the
impact of the ETS by improving fuel efficiency and reducing its
carbon emissions, which would lower the carbon charges.

“However, we’re not yet ruling out any options for
recovering the additional cost,” SIA spokesman Nicholas Ionides
said in an emailed response to a query for this article.

Tony Tyler, director general of the International Air
Transport Association (IATA), has said the ETS would cost
airlines 1.2 billion euros ($1.6 billion) this year, and he
warned that airlines could struggle to pass this on to
passengers in a weak travel market.

IATA, whose 230 members carry more than 93 percent of
scheduled international air traffic, forecast a 29 percent drop
in the industry’s profit this year to $4.9 billion, dented by
the weak global economy and high fuel prices.
($1 = 7.7681 Hong Kong dollars)
($1 = 0.7661 euros)

(With additional reporting by Narayanan Somasundaram in SYDNEY,
Edmund Klamann in TOKYO and Barbara Lewis in Brussels; Editing
by Ian Geoghegan and Jane Baird)

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