A senior Indian government official told Reuters that India would soon ask local airlines not to buy carbon credits from or share emissions data with the bloc, which says other countries are not doing enough to tackle this source of greenhouse gases.
China said in February its airlines were barred from participating in the EU Emissions Trading Scheme (ETS) unless they got government approval. Beijing has also suspended the purchase of $14 billion worth of jets from European maker Airbus .
India does not yet plan to ask airlines to cancel Airbus purchases, but that is possible if the dispute escalates, said the Indian official, who has direct knowledge of talks between the EU and other countries on the issue.
If the European Commission then stopped Indian airlines from flying to Europe, India would retaliate with similar moves and consider charging an "unreasonable" amount for flying over India, the official said.
"We have lots of measures to take if the EU does not go back on its demands. We have the power of the economy; we are not bleeding as they are," the government official said, adding that Europe's position would harm its own economy and airlines.
The Indian government is awaiting formal approval from several ministries to implement the order to airlines, which it expects soon, the official said.
"The question is, 'Are you (the EU) provoking the world into a trade war?'," the official said.
The European Commission's climate spokesman Isaac Valero-Ladron said: "We will modify our legislation when there's an ambitious global agreement in force."
SABRE RATTLING
The EU law obliging all airlines to buy carbon permits to offset their emissions took effect from Jan. 1, but no-one will receive a bill until April next year, after the amount of emissions has been calculated.
That leaves plenty of time for sabre rattling.
China, Russia and the United States have already issued a series of threats.
The United States said last year that it would take "appropriate action" unless the EU reconsidered, though its proposed blocking legislation stops short of making it illegal to comply with the EU legislation.
The U.N.'s International Civil Aviation Organization (ICAO) has accelerated efforts to find a solution, but is still not expected to deliver anything before the end of this year.
It held talks in Canada last week and only agreed to keep studying the options.
Outside the official ICAO forum, a so-called coalition of the unwilling has held a series of meetings to debate ways of opposing the ETS, but have not come to firm decisions on implementing them.
The financial cost of the EU's scheme is small - around 2 euros per passenger for a flight from Beijing to Frankfurt, for instance - and those who support it see it as a valuable catalyst to action elsewhere.
"Aviation's entry into the ETS has prompted ICAO to set itself a deadline to come forward with a global scheme by the year's end," said Jos Dings, director at T&E, a non-government campaign group focused on transport and the environment.
"Almost 15 years after the Kyoto protocol assigned responsibility for dealing with aviation's climate impact to ICAO, there is finally a sense of urgency."
The Intergovernmental Panel on Climate Change estimated that aviation accounted for about 2 percent of greenhouse gas emissions in 1999, and that had been rising about 9 percent a year since 1960.
The European Commission has said it will modify its law if the ICAO can deliver a convincing alternative and is working towards a global agreement.
Tony Tyler, head of the International Air Travel Association, said the last thing the industry wanted was a trade war, but Europe needed to give some ground.
"They're going to have to show some willingness to make concessions, otherwise it's not
