The EU's Emissions Trading Scheme (ETS), introduced on January 1, has drawn howls of protest from airlines around the world, with China banning its carriers from taking part.

The escalating row comes just ahead of a summit between Chinese and EU leaders in Beijing on Tuesday, with the EU looking to China to dip into its huge foreign exchange reserves to help the euro zone tackle a debt build-up that threatens its economic stability.

Airbus Chief Executive Tom Enders said he was increasingly concerned at the potential fall-out if tensions are not defused.

"I am very worried about the consequences of that. What started out as a solution for the environment has become a source of potential trade conflict and that should be a worry for all of us," he told an aviation conference ahead of the Singapore Airshow on Monday.

China is seen as a vital strategic market for the world's two big planemakers, as it coordinates purchases centrally and regularly places orders with Airbus and Boeing in batches of 100 or more to coincide with high-level political contacts.

Chinese domestic air traffic quadrupled between 2000 and 2010, and is expected to keep growing at more than 7 percent a year up to 2030, according to Airbus research, and Boeing predicts China will be the second-biggest market for new aircraft behind the United States between 2011 and 2030.

China last year delayed the final signing of a deal for 10 A380 superjumbos worth $4 billion for Hong Kong Airlines in a signal of its displeasure over the EU plans, and in the mid-1990s, it refused to buy French products such as wheat and Airbus planes in retaliation for France selling fighters and frigates to Taiwan.

Last week, Beijing banned its airlines from joining the ETS without its permission, and threatened to take unspecified measures to defend itself against the scheme, which levies charges for carbon emissions on flights in and out of Europe.

Foreign governments argue Brussels is exceeding its legal jurisdiction by calculating the carbon cost over the whole flight, not just Europe.

Singapore Airlines CEO Goh Choon Phong said opposition to the scheme was based on the way it is being applied well beyond Europe.

"We object to the principle of how the ETS is applied, that it is applied to air space outside Europe," he said.

"I was quoting the example of us flying non-stop from Singapore all the way to Europe. We get charged the whole journey, when somebody who could fly passengers to an intermediate point, and from there go to Europe, ends up paying much less."

Europe's Transport Commissioner Siim Kallas acknowledged the growing opposition to the scheme, notably from China, the United States and India, and said he was willing to be flexible in finding a solution.

But the 27-nation bloc would not bow to pressure to suspend the scheme, which it says is part of a global fight against climate change. Aviation accounts for around 3 percent of mankind's greenhouse gas pollution.

"If you think Europe will be forced to suspend, this is not the case. We must have a real global solution," he said in an interview in Singapore.

"Europe will implement its system with difficulties, with conflicts, with court cases, whatever, the system will be introduced," he said.

French Transport Minister Thierry Mariani said both Airbus and Air France had expressed their concerns that the dispute should not be allowed to harm French competitiveness.

Some European airlines worry the scheme could backfire on them if foreign governments retaliate by limiting traffic rights or imposing tit-for-tat taxes and charges.

The International Air Transport Association (IATA), the airline industry's trade group, has called for the United Nations to get involved through its International Civil Aviation Organization (ICAO) to avoid a trade war.

"Any policy that Europe has that alienates the U.S., China, Russia, India and 30-40 other countries is simply not going to work," said Andrew Herdman, director general of the Association of Asia Pacific Airlines.

"The risk for the airlines if this generates into a tit-for-tat trade war, is that airlines will be caught in a cross-fire from both sides."

An analysis by Thomson Reuters Point Carbon last week shows airlines face a carbon pollution bill of 505 million euros ($670 million) for 2012 under the ETS.

A potential trade war comes as carriers and plane makers are vulnerable to the economic slowdown, with Boeing predicting global airline passenger growth will slow to 5 percent this year from around 6 percent last year.

"I think all eyes are on Europe in terms of what are they going to do with sovereign debt issues," said Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes.

DEFENCE DEALS

This week's Singapore Airshow is likely to see U.S. and European arms makers Boeing, Lockheed Martin Corp and EADS slugging it out for contracts as there is a growing appetite for military equipment in Asia, and beyond.

India plans to spend about $100 billion over the next decade to upgrade its largely Soviet-era military equipment, which would make it a lucrative market for Boeing and Dassault Aviation SA.

Dassault's Rafale is also set to become Brazil's fighter jet of choice, with government sources saying Brazil is "very likely" to choose the French plane to refurbish its air force.

If confirmed, the deals would enhance France's partnerships with two of the world's biggest up-and-coming economic powers, and provide a boost to President Nicolas Sarkozy, who has cast himself as a champion of French industry and an energetic salesman of the Rafale in particular as he faces a tough re-election fight this year.

European and U.S. defense companies, feeling the impact of budget cuts in their home markets, are also competing for jet contracts in the United Arab Emirates, Qatar and South Korea.

(Additional reporting by Tim Hepher, Mark Tay and David Fogarty in SINGAPORE, Writing by Ian Geoghegan, Editing by Jean Yoon)

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