Airlines have warned the European Union risks sparking an international trade war if it insists on imposing a carbon tax on carriers flying into its air space.
From January 1 next year, airlines landing or taking off within Europe will have to buy permits for carbon emissions over and above a pre-set cap.
Airlines argue that Europe is overreaching its authority in imposing the Emissions Trading Scheme (ETS), which they say penalizes carriers with bases far away from Europe.
"I think the realization is now this is no longer a climate change issue. This is no longer about emissions trading scheme. This is a big political hot potato," Paul Steele, executive director of the Air Transport Action Group (ATAG) told the Greener Skies conference in Hong Kong.
The air industry says the EU is risking retaliation by threatening to punish airlines found to be flouting the rules. Penalties range from fines to flight suspensions.
"While the EU sees the ETS as environmental policy, the rest of the world sees it as an attack on sovereignty," said Tony Tyler, director-general of the International Air Transport Association (IATA).
"The colonial era, when Europe imposed taxes on the world ended some time ago," he added.
Asian carriers are among those who say the charge unfairly targets airlines operating long-haul flights.
"Is it fair to be starting the tax at Bangkok airport? Bangkok is not a part of the EU. That is the problem," said Piyasvasti Amranand, the President of Thai Airways.
"If other governments start doing the same thing, you end up with a total mess. The EU needs to think of something more constructive or they will spend the rest of their lives fighting the airline industry," he said.
Brussels says the ETS is the result of many years of consultation with the airline industry and its objections are being heard.
"Europe is listening and Europe has been listening since we started to design this policy measure. Every single piece of legislation in Europe starts with stakeholder consultation and that's also how it started with this piece of legislation," said Mary Veronica Tovsak Pleterski, Director of the EU and International Carbon Market.
She said the legislation was proposed after the industry failed to agree alternatives to reduce carbon emissions, despite 15 years of talks through the International Civil Aviation Organization (ICAO).
The legislation was adopted in 2008 but is being reviewed by the European Court of Justice after a legal challenge by the U.S. Air Transport Association, American Airlines and United Continental Holdings.
They claim it violates international law and the Chicago Convention, which dictates that countries have sovereignty over airlines in their own air space.
The advocate-general is due to release a non-binding judgment on October 6, with a final ruling expected early next year.
Tovsak Pleterski is confident the legislation will pass scrutiny.
"Europe has a right to have these policy measures in place when aircraft are operating in our market. It is nothing more than that. We are legislating only on aircraft operators that are landing or taking off from European airports," she said.
Airlines say they don't need to be "coerced" to lower carbon emissions. Their fuel bill is expected to hit $200 billion next year, which they say is enough of an incentive to reduce carbon emissions.
"That will be 32% of the airlines' operating costs. In 2003, that was 14%. So there has been a dramatic difference over time," said ATAG's Paul Steele.
He says a "patchwork" of taxes, emissions trading schemes and other measures is emerging, creating an administrative "nightmare" that will end up costing the industry billions.
"(It) is a nightmare in terms of administration, layering of costs and double counting and double payment of the same emissions. And this is reality, this is what we're staring at right now," he said.
The EU announced Monday that airlines would receive 85% of the carbon emission permits they'll need in 2012 free of charge, although the discount will fall to 82% from 2013 to 2020.
European authorities said the free permits equate to more than 20 billion in euros over the next decade and suggested airlines could use the credit to modernize their fleets, improve fuel efficiency and purchase biofuel.