European Court throws out US appeal on ETS

Neelam Mathews
Dec 21, 2011

Even as the Indian government asked its airlines not to submit carbon emissions data to the European Union for the Emissions Trading System (ETS) that becomes applicable from Jan1, the European Court of Justice today, has thrown out a US-led challenge to paying the ETS tax.

''I am of course very satisfied to see that the Court clearly concluded that the EU Directive is fully compatible with international law. 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. We reaffirm our wish to engage constructively with everyone during the implementation of our legislation," Connie Hedegaard EU Commissioner for Climate Action said.

“US airlines challenged EU law in court. After crystal clear ruling today, EU now expects US airlines to respect EU law, as EU respects US law,” says Hedegaard.

This is opening fears of a possible trade war. China, too has protested against the ETS.

US carriers said this amounted to a backdoor tax. But the European Court of Justice ruled that the EU's approach was "valid," and that it "infringes neither the principles of customary international law at issue nor the Open Skies Agreement" covering trans-Atlantic flights.

PRESS RELEASE  Released by the Court of Justice of the European Union

Dec 21, 2011

The directive including aviation activities in the EU’s emissions trading scheme is valid

Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue nor the Open Skies Agreement

In 2003, the EU decided to set up a scheme for greenhouse gas emission allowance trading, as a central element of European policy to combat climate change¹. Initially, the EU emissions trading scheme did not cover greenhouse gas emissions from air transport. Directive 2008/101 provides that aviation activities will be included in that scheme from 1 January 2012². Accordingly, from that date all airlines – including those of third countries – will have to acquire and surrender emission allowances for their flights which depart from and arrive at European airports.

A number of American and Canadian airlines and airline associations contested the measures transposing Directive 2008/101 in the United Kingdom. They contend that, in adopting the directive, the EU infringed a number of principles of customary international law and various international agreements. According to them, the directive infringes, first, the Chicago Convention³ the Kyoto Protocol⁴ and the Open Skies Agreement⁵ in particular because it imposes a form of tax on fuel consumption, and second, certain principles of customary international law in that it seeks to apply the allowance trading scheme beyond the European Union’s territorial jurisdiction.

The High Court of Justice of England and Wales has asked the Court of Justice whether the directive is valid in the light of those rules of international law.

In its judgment delivered today, the Court of Justice confirms the validity of the directive that includes aviation activities in the emissions trading scheme.

First of all, the Court establishes that only certain provisions of the Open Skies Agreement and three principles of customary international law (namely the sovereignty of States over their airspace, the illegitimacy of claims to sovereignty over the high seas and freedom to fly over the high seas) may be relied upon for the purposes of examination of the directive’s validity. Of the principles and provisions mentioned by the High Court, they alone fulfil the criteria laid down by the Court of Justice’s case-law.

In particular, the Court establishes that the EU is not bound by the Chicago Convention because it is not a party to that convention and also has not hitherto assumed all the powers falling within the field of the convention. As regards the Kyoto Protocol, the Court observes that the parties to the protocol may comply with their obligations in the manner and at the speed upon which they agree and that, in particular, the obligation to pursue limitation or reduction of emissions of certain greenhouse gases from aviation fuels, working through the International Civil Aviation Organisation (ICAO), is not unconditional and sufficiently precise to be capable of being relied upon.

Whilst the Court agrees to examine, within the limits of review as to a manifest error of assessment, the validity of the directive in the light of three of the principles of customary international law relied upon, it finds however, in the case of the fourth principle, that there is insufficient evidence to establish that the principle that a vessel on the high seas is governed only by the law of its flag could apply by analogy to aircraft.

Next, the Court examines whether the directive is compatible with the principles of customary international law and the Open Skies Agreement.

It observes that the directive is not intended to apply as such to aircraft flying over the high seas or over the territory of the Member States of the EU or of third States. It is only if the operators of such aircraft choose to operate a commercial air route arriving at or departing from an airport situated in the EU that they are subject to the emissions trading scheme.

In this context, application of the emissions trading scheme to aircraft operators infringes neither the principle of territoriality nor the sovereignty of third States, since the scheme is applicable to the operators only when their aircraft are physically in the territory of one of the Member States of the EU and are thus subject to the unlimited jurisdiction of the EU. Nor can such application of EU law affect the principle of freedom to fly over the high seas since an aircraft flying over the high seas is not subject, in so far as it does so, to the emissions trading scheme.

As for the fact that the operator of an aircraft is required to surrender emission allowances calculated on the basis of the whole of the flight, the Court points out that EU policy on the environment aims at a high level of protection. Thus, the EU legislature may in principle chose to permit a commercial activity, in this instance air transport, to be carried out in its territory only on condition that operators comply with the criteria that have been established by the EU. Furthermore, the fact that certain matters contributing to the pollution of the air, sea or land territory of the Member States originate in an event which occurs partly outside that territory is not such as to call into question, in the light of the principles of customary international law capable of being relied upon, the full applicability of EU law in that territory.

Finally, the Court responds to the assertion that the emissions trading scheme constitutes a tax, fee or charge on fuel in breach of the Open Skies Agreement. It holds that the directive does not infringe the obligation to exempt fuel from taxes, duties, fees and charges. In contrast to the defining feature of obligatory levies on the consumption of fuel, in the case of the scheme in question 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 emissions trading scheme’s operation. The actual cost for the operator depends, inasmuch as a market-based measure is involved, not directly on the number of allowances that must be surrendered, but on the number of allowances initially allocated to the operator and their market price when the purchase of additional allowances proves necessary in order to cover emissions. Nor can it even be ruled out that an aircraft operator, despite having held or consumed fuel, will bear no pecuniary burden resulting from its participation in the emissions trading scheme, or will even make a profit by assigning its surplus allowances for consideration.

The Court concludes by stating that the uniform application of the scheme to all flights which depart from or arrive at a European airport is consistent with the provisions of the Open Skies Agreement designed to prohibit discriminatory treatment between American and European operators.