In spite of strong words and threats to retaliate, the dispute between the “coalition of the unwilling” and the European Union regarding emissions trading could still be resolved. But to reach that state, both sides would have to agree to painful compromises.

Representatives of 23 countries, all members of the International Civil Aviation Organization (ICAO), agreed on which countermeasures should be used to stop—or at least impede—the European Union's inclusion of aviation in its emissions trading system. But the group stopped short of endorsing any concrete action. “Today's failure to reach agreement on a coordinated attack indicates cooler heads may have prevailed,” says Annie Petsonk, the international counsel for the Environment Defense Fund.

“Every state will choose the most effective and reliable measures that will help to cancel or postpone the implementation of the EU ETS,” Russia's Deputy Transport Minister Valery Okulov says. Russia intends to “get the EU's carbon-trading measures either canceled or postponed.”

The Moscow declaration cites a range of retaliatory options. These include “reviewing bilateral air service agreements, including open skies with individual EU members; suspending current and future discussions to enhance operating rights for EU airlines and aircraft operators; imposing additional charges on EU airlines; filing an application under Article 84 of the Chicago Convention for resolution of the dispute in accordance with ICAO rules; and any other measures.”

Members of the signing countries emphasize that the EU ETS should not be applied to airlines registered in third countries (non-European entities).

Article 84 allows members to challenge others in the group for violating the principles of agreements. The prospect of invoking Article 84 has been raised before, but because it is a highly controversial step ICAO members try to avoid it. The mechanism has been called on only five times, but the situations have all been resolved in process. According to a discussion paper for the Moscow meeting, the last case in which Article 84 was triggered was the controversy between Europe and the U.S. over hushkits, more than a decade ago. The case was settled before a ruling was passed down, because Europe withdrew its proposal.

The EU stands ready to defend its ETS position. “We are completely sure . . . our legislation does not bridge any principle of international law, including ICAO principles,” an official says. He adds, “We are confident the ICAO dispute procedure will side with us.”

ICAO has stated that a formal protest under Article 84 may distract the organization from forging a global agreement on a system that would include EU ETS.

Russia, like China and the U.S., is preparing legislation that forbids its airlines to participate in the ETS. And although it was forced to ease its limits on Siberian overflights as part of its World Trade Organization accession, Russia is again considering imposing this limit on European airlines. Okulov even hinted that European airlines could be banned from using radio frequencies over Siberia, which would effectively bar the carriers from overflying the country to get to North Asian destinations from Europe.

The increase in flight length and fuel costs that would ensue would ultimately lead to the need for more carbon allowances.

“The situation is totally unacceptable,” says Ulrich Schulte-Strathaus, secretary general of the Association of European Airlines (AEA). “Airlines must not be taken hostage by politicians or be forced to compete within serious market distortions.” In Schulte-Strathaus's opinion, “It is not right to attempt to force the EU to change their law. Nor is it right to impose European standards on the rest of the world.”

An industry source is concerned that “We will see complete chaos in early 2013.” In his view, some third-country airlines will fully pay for their certificates; others will only pay a portion of what they owe; some will not participate at all; and a few will submit certificates that other governments have given them.

Schulte-Strathaus believes “ICAO is, without a doubt, the way forward. Countries must move away from retaliation and counter-retaliation and instead come up with concrete, short-term action toward a resolution.”

He is not referring to possible Article 84 proceedings, but something equivalent to a global emissions trading system, a solution that the International Air Transport Association (IATA)—whose membership extends beyond a regionally limited base—has been pursuing.

But such a compromise could only take shape if both sides are flexible. For the EU, that would probably mean a one-year pause to ETS implementation to allow an ICAO system to be prepared, a senior industry executive notes. For the coalition of the unwilling, it would mean that they would actually have to commit to a global ETS, and it is far from certain that this could happen. Countries like China and India are concerned about their economic growth being curtailed by too many environmental restrictions.

No clear-cut way to transition exists. One executive proposes a high-level intergovernmental conference that would explore: how to move forward; what the much-cited ICAO solution should contain; and which specifics for transitioning from a European to a global ETS system should be stressed. He says a fund would have to be set up for third-country airlines' contributions to the EU ETS in the transition period, and that the money would have to be allocated to a global system once it is firmly established. If there is no global ETS, the funds would go back to the original European contributors. Another alternative would be easier acceptance of equivalent measures—environmental projects that non-EU countries can present in return for additional carbon allowances.

One industry observer notes that in spite of the strong language, the opposing coalition is not as united as they appear to be. There is a hard-liner faction, including Russia and India, that is pushing for immediate retaliation. But some supporting countries such as the United Arab Emirates, did not even participate with their own delegation at the Moscow event. Those countries argue that pressure should continue to be applied to the European Commission, while still aiming for a solution via ICAO.

Such an outcome would also limit the danger of other regions imposing their own EU ETS-like systems. Airlines are concerned that this could lead to being double-charged for emissions.

IATA members and other countries opposing the EU have been calling for a global approach to dealing with aviation's CO2 production via ICAO rather than a unilateral approach. But the EC has not given any indication it is willing to change its mind. Climate Commissioner Connie Hedegaard stated that the EU was willing to accept the so-called equivalent measures. She also stated that “nobody would be happier than the European Union if we could have such a [global] regime.” An EU spokesman adds that: “The EU will review its legislation the day there is a global agreement in force.”

In response to the Moscow meeting, an EC official says that they have not received a full account of the outcome and the possible countermeasures.

Hedegaard challenged the participants and critics to propose a credible alternative. “What are your concrete and constructive alternatives for a global meeting at ICAO?”

The Moscow meeting was the second such gathering. The initial conference was staged in New Delhi last fall, and a third is scheduled to be held in Saudi Arabia this summer. The 26-member group includes the U.S., the UAE, Saudi Arabia, Brazil, India, China and Russia. India has previously said it is considering a bilateral air service agreement with European countries with the aim of limiting EU carriers' access to India. Already, the country has barred Airbus A380 operations, citing a lack of infrastructure. China put a Hong Kong airline's A380 order on hold for some time, although the restriction was recently lifted.

The EU ETS took effect in 2012, but airlines are not due to submit carbon certificates until early 2013. Airlines that cannot provide allowances to cover their CO2 emissions will face financial penalties.