According to targets set for the third phase of the EU emissions trading scheme (EU ETS), from January 1, 2012, the scheme will cover electricity generation and all the main energy-intensive industries – including oil refineries, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering and vehicle manufacture. Crucially, it will present a challenge to China's airlines since aviation will also be covered. At a recent meeting, airline managers and experts from China's Civil Aviation University expressed serious concern about the potential costs involved.

"If China's airlines don't take timely and appropriate measures – if, for example, an airline only obtains a limited amount of free-of-charge emissions permits, or perhaps none at all, it could face an annual bill of many millions, or even hundreds of millions of RMB for the purchase of emissions credits. This would be in effect a penalty charge for emissions violations imposed on China by the EU. China's civil aviation authority needs to pay close attention to this issue."

The industry's concerns are well-founded. A one-way flight from China to EU consumes between 10 and 100 tons of fuel. Based on a rough estimate that burning 100 tons of fuel generates 200 tons of carbon dioxide, an airline running approximately 5000 flights to or from Europe annually would generate carbon dioxide emissions of around 1 million tons. The international market price of a permit to generate a ton of carbon dioxide emissions is currently around 10 Euros. So if the airline fails to obtain free-of-charge emissions permits from the EU, it will have to buy around 10 million Euros (100 million RMB) worth of CO2 emissions allowances from "greener" industries to help the EU reach its targets under the Kyoto Protocol.

Of course, few expect this worst-case scenario to be realized. If airlines take positive steps they should be able to obtain free allowances to cover 950,000 out of every million tons of emissions, leaving just 50,000 tons to be paid for. But if they fail to buy sufficient emissions credits, airlines will face heavy fines of up to 100 Euros per ton – and the fines will get even higher over time.

Facing this looming emergency, since 2010, China's airlines have been calculating the volume of their own carbon dioxide emissions and will submit a detailed report to the EU in early 2011. The report contents will be used by the EU to help determine the allocation of emissions allowances. But it is difficult for China's airlines to monitor their carbon dioxide emissions because they lack sophisticated monitoring techniques, and their data may be unreliable. The report will have to be audited by an independent third party organization approved by EU commission. There is a danger that the report will not be approved.

China's airlines need to do their utmost to submit accurate data in their monitoring report and apply for as large a free emission allowance as possible. China should also pass legislation on the issue and use the law to change the airlines' currently passive approach to the EU ETS.