On January 1, 2013, a new law will take effect in Europe that subjects airlines to limits on carbon emissions. The EU law will affect all flights that either originate or terminate within the European Union. This will affect airlines around the world, not just European ones. Intended to help mitigate greenhouse gases from the aviation sector in order to slow climate change, the law has sparked an uproar from airlines and national governments from around the world.

The German Marshall Fund recently published a great Policy Brief summarizing the key sticking points over the dispute.

The U.S. filed a complaint to the European Court, saying that the law wasn’t legal since it covers emissions from an entire flight, even when airplanes are not in European airspace. The court struck down the American claim.

Often in international climate negotiations, the United States is at odds with “developing countries” like China and India, demanding stronger commitments from one another. In this instance, however, the EU airline emissions law has succeeded in uniting the U.S., China, India and 23 other nations into a “coalition of the unwilling.”

The U.S. House and Senate passed bills that would prohibit American-based airlines from complying with the European law. The bills passed with overwhelming bipartisan support, but the two chambers need to reconcile their differences before it can be sent to the President for his signature. Congress won’t take the issue up until after the election though. Other nations have passed or are considering similar legislation.

It will be interesting to see how the European Union responds. According to the law, beginning in April, the EU can exact fines on airlines for not complying, which total €100 per ton of CO₂. In reality, however, American airliners won’t be put at a competitive disadvantage for two reasons, according to the German Marshall Fund. One, all other airlines flying in and out of the EU will also be subjected to the rules. And two, if anything, European airliners will be hurt more because 100% of their flights would be subjected to the rules (since all of their flights would either come in or go out of the EU), whereas foreign operators would only be affected for flights to and from Europe – their non-European flights would not be affected.

Regardless, the EU insists it will make the transition easier by giving away 85% of the pollution permits until 2020.

To settle the dispute, the United States is calling for an international agreement with the International Civil Aviation Organization (ICAO), an international body that sets global aviation standards. The EU said it is willing to consider a global agreement if such an accord takes steps that are comparably aggressive in mitigating greenhouse gases. After all, the goal of the law is reduce emissions in the aviation sector, which are expected to grow anywhere from 300% to 700% between now and 2050.

However, the German Marshall Fund thinks an agreement is unlikely in the next few years. Instead, it recommends that the U.S. either come to a bilateral agreement with the EU, or set emissions standards domestically to comply with the EU law. Reaching a bilateral consensus and avoiding further conflict is in both their interests. Otherwise, the two risk sparking a trade spat in the World Trade Organization (WTO), in which both sides could lose, harming credibility, trade relations, and/or creating a setback in international climate cooperation.

To read the full Policy Brief, click here.

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