China has threatened a damaging trade war with the European Union if Brussels pushes ahead with plans to include foreign airlines in its emissions trading scheme, as the boss of British Airways's parent company warned that passengers could be caught up in a tit-for-tat conflict.

Willie Walsh, chief executive of International Airlines Group, said China and other non-EU countries could impose punitive taxes on European carriers or block access to routes if the EU does not tweak plans to include all carriers in the emissions trading scheme (ETS) from the new year.

There are also fears of retaliation against the Chinese manufacturing operations of Airbus, the European aerospace company, if the EU imposes the scheme on China-registered carriers that operate to and from Europe.

But Europe's climate chief, Connie Hedegaard, told the Guardian she was "standing firm" on the plans, passed by member states two years ago.

"This is our legislation, adopted unanimously," she said. "This is the first time China has mentioned a trade war and retaliation – if Europe immediately back-tracks, what would that look like? If someone says boo, we do not change our laws – that would not be serious."

She played down the prospect of a trade war, saying China had already come forward with informal suggestions on bringing in "equivalent measures" to reduce emissions from its airlines, as an alternative to participating in the scheme. Such measures have always been allowed under the EU directive, as a get-out clause for companies reluctant to trade emissions that nevertheless ensures carbon is cut overall.

"The whole purpose of this is not to punish anyone but to get ways of handling the growing challenge of emissions from aviation," said Hedegaard. "There is still time for that dialogue [on whether China's alternative measures would be enough]."

China's main aviation body backed airlines taking legal action against the ETS, following in the footsteps of US carriers taking a case to the European court of justice next month.

"I believe we have to take legal action," said Wei Zhenzhong, general secretary of the China Air Transport Association. Speaking at the annual general meeting of the International Air Transport Association in Singapore, Wei told Reuters that China remained open to negotiations – but the situation could escalate into a trade war.

Walsh echoed those fears as he urged Brussels to delay plans to charge non-European airlines under the ETS, which will require airlines flying into, out of and within the EU to pay for any emissions that exceed a set cap. According to the Standard & Poor's rating agency, passengers on European airlines face price increases of up to €40 (£35) for a return trip by the end of the decade under the scheme, with extra costs of €1bn for the industry next year alone.

Speaking at the Iata conference, Walsh said that if major powers such as China, the US and Russia are forced to pay for carbon dioxide emitted by services to and from the continent, they could block flights by EU carriers in retribution or impose aviation taxes that will have to be passed on to passengers. "It is clear that the countries are going to retaliate, whether in the form of imposing additional taxes on European airlines or restricting access to markets," said Walsh, whose group owns BA and Spain's Iberia.

"The uncertainty will add more cost," said Walsh. "It will add more concern in the mind of travellers that they will face disruption to services and I think there is a real risk this could happen."

Walsh has called for a global emissions trading scheme for airlines and urged the EU to implement a compromise in the meantime. Walsh said Brussels should resort to a "plan B" that will charge carriers for regional and domestic flights within Europe only. "There needs to be a plan B. It is unacceptable that airlines face the prospect of retaliation because of the actions of the EU. Plan B for me would be to restrict the scheme to intra-Europe."