Bridges Weekly Trade News DigestVolume 16Number 1 • 11th January 2012

EU Aviation Emissions Levy Ruled Lawful by European Court as Measure Enters into Force

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The ongoing battle over aviation emissions reached new heights over the past few weeks, with the European Court of Justice (ECJ) ruling on 21 December that the inclusion of aviation in the EU Emissions Trading System (ETS) is indeed valid. In response, China’s four major airlines threatened last week not to pay the charge under the EU scheme, while the US airline industry group that helped launch the legal challenge has pledged to consider other options to fight the plan.

The inclusion of aviation in the scheme went into effect on 1 January. Under the EU scheme, all airlines - regardless of nationality - will be required to surrender emission permits for intra-EU flights, as well as flights to and from the EU bloc. For inter-regional flights, emissions are calculated for the entire last ‘leg’, which naturally results in higher costs for transatlantic and other long-distance flights.

Brussels has insisted that including all airlines is key for the scheme’s success, specifically by reducing possibilities of carbon leakage. Otherwise, the reduction of emissions by EU airlines could end up being offset by an increase in emissions by non-EU airlines.

The court’s December decision received a warm welcome from EU Climate Commissioner Connie Hedegaard. “I am of course very satisfied to see that the Court clearly concluded that the EU Directive is fully compatible with international law,” she said.

“A number of American airlines decided to challenge our legislation in court and thus abide by the rule of law. So now we expect them to respect European law,” Hedegaard continued.

Airlines that do not comply with the EU ETS could potentially be banned from EU airports, the European Commission said last week. However, the Commission is “confident” that companies will comply, Isaac Valero-Ladrón, the commission’s spokesman for climate action, told reporters in Brussels on Thursday 5 January.

Any ban against noncompliant airlines would only be measures of last resort, he added. The initial penalty for non-compliance would be a fine of €100 per tonne of carbon dioxide that has not been accounted for under the EU system. “The penalties for noncompliance are much higher than compliance,” Valero-Ladrón explained, according to the New York Times.

Court agrees with Advocate General: measure fully compatible with international law

The ruling follows the October release of an official opinion by ECJ Advocate General Juliane Kokott, which similarly suggested that the EU plan was indeed compatible with international law (see Bridges Weekly, 12 October 2011). Advocate General opinions are non-binding but are meant to inform the court, which usually follows the recommendations.

The lawsuit was brought in front of the court by the Air Transport Association of America - now known as Airlines for America - along with American Airlines, Continental Airlines, and United Airlines.

After dismissing the Chicago Convention - of which the EU itself is not a member (despite all EU member states being signatories) - and the Kyoto Protocol as a basis for claims, the court examined the legality of the inclusion of aviation in the ETS scheme in the light of customary rules relating to the sovereignty over airspace and the freedom of the high seas, as well as the 2007 Open Skies Agreement between the US and the EU.

ETS not in violation of state sovereignty, court finds

Two claims took centre stage in the case: the questions of whether the inclusion of flight passages outside of European airspace had an extraterritorial effect and of whether the emission charges constitute a charge on fuel or a limitation to the frequency of traffic.

Regarding the extraterritorial effect, Airlines for America had argued that the inclusion of flights taking place in the airspace of third countries was a violation of the state’s sovereignty over their airspace and in violation both of the freedom to fly over the high seas and the prohibition for states to claim sovereignty over any part of the high seas.

However, the judges clearly rejected this view: “It is only if the operator of an aircraft has chosen to operate a commercial air route arriving at or departing from an aerodrome situated in the territory of a member state that the operator, because its aircraft is in the territory of that member state, will be subject to the allowance trading scheme.”

Once within the EU’s jurisdiction, it is up to EU legislators to decide which commercial activity they permit and on what condition, particularly when these activities are designed to fulfil the EU’s environmental objectives, the thirteen judges further ruled.

Emissions levy not a tax on fuel nor discriminatory

The Grand Chamber equally disagreed with Airlines for America that the levies constituted a tax, duty, fee, or charge on fuel, despite fuel consumption being the basis of the formula that enables the calculation of emissions.

“There is no direct and inseverable link between the quantity of fuel held or consumed by an aircraft and the pecuniary burden on the aircraft’s operator in the context of the allowance trading scheme’s operation,” the judges found.

In the view of the ECJ, it cannot be ruled out that an operator, despite having held or consumed fuel, experiences no burden through the ETS or even makes a profit.

Regarding the potentially air traffic-limiting character of the measure and its non-discriminatory nature, the judges finally noted that the ETS did not set a limit for aircraft emissions, thereby not restricting air traffic. Even if it did, however, this would be justified on the basis of being a non-discriminatory environmental measure.

Referring to Kokott’s discussion, the court agreed that there was no discriminatory treatment of EU and non-EU aircraft operators, as every operator was subject to the ETS in the same way.

The court did not examine WTO law, as the WTO’s own adjudicative system has exclusive jurisdiction in this area. Airlines for America had also not made any claims in this regard. With the ECJ’s rejection of the claims, however, a WTO case could become more likely as foreign aircraft and potentially their home states look for other legal remedies.

The ruling marks the last step in the road for the lawsuit under the ECJ’s jurisdiction; the case will now return to the UK High Court, which had requested the ECJ to rule on the legality of the EU Directive after Airlines for America had challenged the UK’s implementation thereof. EU Member States may not determine the legality of EU law themselves, but respective questions are referred to the ECJ.

Airline groups consider alternate legal options; environmental groups laud ruling

The ECJ decision was promptly lambasted by Airlines for America, a claimant in the dispute. The industry group’s members and affiliates represent more than 90 percent of US airline passenger and cargo traffic.

In a statement following the ruling, Airlines for America underscored its frustrations with the decision. “Today’s court decision further isolates the EU from the rest of the world and will keep in place a unilateral scheme that is counterproductive to concerted global action on aviation and climate change.”

The group also argued that the European court “did not fully address legal issues raised,” adding that the decision sets “a damaging and questionable precedent by ruling that the European Union can ignore the Chicago Convention and other longstanding international provisions that have enabled governments around the world to work cooperatively to make flying safer and more secure, and to reduce aviation’s environmental footprint.”

Meanwhile, environmental groups have been quick to rally behind the decision. Annie Petsonk, International Counsel for the US-based Environmental Defense Fund, stressed that it was “high time [that] airlines actually live up to their green claims, and comply with the EU law, which will cut pollution and spark low-carbon innovation. Americans invented the airplane, now it’s time for us to create climate-friendly skies.”
Bill Hemmings, Programme Manager at Transport & Environment, echoed that sentiment. “The news for airlines? The European Court has written your New Year’s Resolution for you: ‘We agree to join other responsible industries and start polluting less’.”

China, US response

The inclusion of airlines into the EU plan has also come under heavy fire from various non-EU countries: at a 2 November meeting in Montreal, the International Civil Aviation Organization (ICAO) adopted by a majority vote a paper asking that foreign carriers not be subject to the EU scheme.

The UN group’s working paper was backed by 26 of the ICAO’s member states - including China, Japan, Russia, and the US. The paper called the inclusion of aviation in the EU scheme a violation of “the cardinal principle of state sovereignty” outlined in the Convention on International Civil Aviation (also known as the Chicago Convention). (See Bridges Weekly, 9 November 2011).

After the ECJ ruling, the US made clear that it continues to oppose Brussels’ plan. “We continue to have strong legal and policy objections to the inclusion of flights by non-EU air carriers in the EU ETS,” Krishna Urs, deputy assistant secretary for transportation affairs at the US Department of State, said in a statement.

US officials are also reportedly considering taking retaliatory measures or pursuing legal action against the EU, according to Reuters.

Meanwhile, Chinese airlines are threatening not to pay the charges under the EU scheme.

“China will not cooperate with the European Union on the ETS, so Chinese airlines will not impose surcharges on customers relating to the emissions tax,” Cai Haibo, deputy secretary-general of the China Air Transport Association (CATA), told Reuters last week.

The industry group represents China’s four major airlines: Air China Ltd, China Southern Airlines, China Eastern Airlines, and Hainan Airlines. CATA has also hinted at the possibility of initiating legal action of its own.

Meanwhile, Chinese foreign ministry spokesman Hong Lei has called upon Brussels to hold talks with Beijing and other nations that oppose the inclusion of aviation into the EU ETS.

India, which led the 26-nation push at the ICAO against the EU plan, may respond to the ECJ ruling by asking airlines to withhold emissions data, a civil aviation ministry official told Bloomberg.

ICTSD reporting; “China calls on Europe for talks over carbon charge,” BLOOMBERG BUSINESSWEEK, 5 January 2012; “China warns EU of carbon tax ‘trade war’,” FINANCIAL TIMES, 22 December 2012; “Foreign carriers must pay EU carbon fees,” FINANCIAL TIMES, 22 December 2011; “Top EU court rules against N. American carriers in fee dispute,” GLOBE AND MAIL, 21 December 2011; “Europe Stands Firm on Airline Emissions, Raising Fears of a Trade Conflict,” NEW YORK TIMES, 5 January 2012; “U.S. weighs retaliation over Europe aviation law,” REUTERS, 6 January 2012.

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