Opposition to EU plans to include non-European airlines in its Emissions Trading System from 2012 erupted this week with Airbus and Virgin Atlantic warning of a potential trade war with China.
But the European Commission has said it will not back down - a position supported by environmental NGOs and carbon market investors.
The US and Chinese aviation industries have been unhappy with the EU's plans since their inception. Their grievances were given renewed publicity this week when Tom Enders, chief executive of Airbus, and Steve Ridgway, chief executive of Virgin Atlantic and chairman of the Association of European Airlines (AEA), sent a letter to EU climate action commissioner Connie Hedegaard warning it would be 'madness to risk retaliation' from countries such as China by including their planes within the EU ETS.
Their concerns were reiterated by Willie Walsh, chief executive of International Airlines Group, at the annual general meeting of the International Air Transport Association (IATA) in Singapore, who said that if major powers were forced to pay for carbon dioxide emitted by services to and from the continent, they could impose aviation taxes on European carriers or block flights.
Rather than include non-European airlines in the EU's cap-and-trade system, Walsh said he wanted a global emissions trading scheme for airlines and suggested that until this happens, the EU should introduce a 'plan B' that would only charge carriers for regional and domestic flights.
ETS expansion 'nothing but a cash grab' - IATA
Meanwhile, Giovanni Bisignani, IATA's director general and CEO, told delegates at the meeting that the EU was 'ignoring international law with its plans to include international aviation in its ETS. He called the move 'a $1.5 billion cash grab that would do nothing to reduce emissions'.
Hedegaard has refused to give in to these threats. In a strongly worded letter, she highlighted that 85% of emissions allowances for aircraft carriers would be allocated for free and said that if the EU backed down, 'it would send an extremely unfortunate signal and create problems not just for the global climate but also for European companies and businesses'.
The Carbon Markets & Investors Association (CMIA) insisted that 'in the absence of a market-based proposal from the airlines' governing bodies, the EU has rightly legislated to bring all emissions from flights taking off or landing in the EU within the ETS.'
It added that 'if commercially motivated calls from non-EU airlines operating within Europe to be excluded from the EU ETS were to be answered, this would run counter to the principle of equal treatment, destroy environmental integrity and increase uncertainty within the EU ETS'.
Airbus is scaremongering - transport NGO
Jos Dings, director of the NGO Transport & Environment (T&E), said that accusations from Airbus and AEA that the inclusion of aviation in the ETS was a 'unilateral tax imposed on third-country carriers' that 'will create a trade conflict with the world's most powerful economic and political players' was 'industry scaremongering'.
In a letter published in the Financial Times on Wednesday, Dings said that the description of a unilateral tax imposed on third-country carriers 'perfectly fits the US international transportation tax (currently $16.30 a passenger) which applies to all international flights arriving in or departing from the US'.
He said that this had been 'in place for at least a decade' and 'does not seem to have caused the 'trade conflict' predicted by Airbus'. Moreover, he said the EU ETS 'cannot even be described as a tax because airlines can reduce their exposure by cutting emissions'.
The EU Court of Justice is likely to be the next body to comment on the matter - it will hear a legal challenge against the ETS by the Air Transport Association of America on 5 July.