Analysis: Legality of EU Emissions Trading Scheme (ETS)

Here’s a short paper I wrote recently on the legality of the European Union’s ETS. Enjoy!

What happens when an airline suddenly finds itself forced to break a law? It has two possible courses of actions—one action violates law in one jurisdiction and the other violates law in another jurisdiction. There is no middle ground or compromise available. This is what the U.S. airline industry may soon face as the European Union and United States Congress squabble over how to best effectuate the shared the goal of reducing greenhouse carbon emissions.

The Emissions Trading Scheme (ETS) is an ambitious plan developed and implemented by the European Union seeking to combat the proliferation of greenhouse carbon emissions by commercial airlines. While airlines only create 3% of carbon emissions, the sustained growth in the worldwide airline industry and inability to formulate a comprehensive global framework for reducing emissions prompted EU policymakers to act.

The program is relatively straightforward: airlines are allotted a certain number carbon credits each year based on the size of their traffic to/from/within the EU. These credits will gradually decrease in future years. As long as airlines do not exceed their limit, they are not responsible for any fee, but the carbon reduction requirements will likely outpace technology, meaning airlines will be asked to shell out millions of dollars starting as early as 2013.

While European carriers like Lufthansa and British Airways have been largely mum about the new tax, American, Indian, and Chinese carriers have cried foul, arguing that the European Union has no right to impose any sort of tax for carbon emissions outside European Union airspace. They argue that the air is like the high seas, a realm that is beyond the arm of government taxation.

That argument does not make much sense to me, nor did it to the European Court of Justice (ECJ). An American trade association representing major airlines in the U.S. sued to block the implementation of the ETS in the United Kingdom. The British High Court of England and Wales (Administrative Court) has original jurisdiction over such matters and referred the issue to the ECJ, asking them to address the legal validity of proponent’s assertions that the EU ETS complied with international law.

The ECJ ruling[1] forcefully upheld the right of the EU to impose its ETS on all carriers flying through European Union Airspace. Systematically rejecting every argument that opponents put forward, the ECJ ruling left no doubt that ETS would begin as planned on 01 January 2012.

The Americans pointed to the Chicago Convention to argue the ETS was unlawful, but the ECJ quickly dispensed of that argument. The court noted “the Convention on International Civil Aviation, signed in Chicago…on 7 December 1944…has been ratified by all the Member States of the European Union, but the European Union is not itself a party to it. “ Although Article I of Convention provided that “the contracting States recognise that every State has complete and exclusive sovereignty over the airspace above its territory,” the ECJ said this was not enough to defeat the ETS because of later treaties that were adopted and because the EU was not bound by a treaty it did not sign.

To expand on that last point, the EU argued that it was it was not bound by the Chicago Convention because “in order for the European Union to be capable of being bound, it must have assumed, and thus had transferred to it, all the powers previously exercised by the Member States that fall within the convention in question.” It added that “the Member States have retained powers falling within the field of the Chicago Convention, such as those relating to the award of traffic rights, to the setting of airport charges and to the determination of prohibited areas in their territory which may not be flown over” and therefore that the ECJ could not use the Chicago Convention to judge the ETS.”

I must admit—I was not convinced by the Advocate General’s argument, which the Court adopted. I think a better argument would have been to concede that the EU is now responsible for many aspects of airline regulation discussed in the Chicago Convention and furthermore that Article 351 TFEU implies a duty on the part of the institutions of the European Union not to impede the performance of the obligations of Member States which stem from an agreement prior to January 1, 1958. Yet in conceding that, the ECJ could still have argued that while “every State has complete and exclusive sovereignty over the airspace above its territory,” they choose to give up some of that sovereignty when they fly into European Union airports. No one is forcing them to fly to the EU and ETS places a proportionate requirement that is equally borne by all airlines.

On the other side, proponents of the bill attempted to use the Kyoto Treaty to justify the ETS, but the Court did not accept that either.  Although the Kyoto Protocols, of which the United States, India, and China were not party, spoke of a broad agreement to reduce greenhouse gasses, any measures taken were conditioned on parties pursuing “limitation or reduction of emissions of certain greenhouse gases from aviation bunker fuels, working through the ICAO.” Here, the International Civil Aviation Organization (ICAO) joined the U.S. airlines in arguing that a global solution, however slow it might take to agree to, is much better than individual nations or Unions imposing their own framework.

The Court found its hook, at least for the U.S. airlines who brought the action, in the Open Skies Agreement, a pact between the U.S. and EU to eliminate some barriers of trade in the aviation markets. Ratified by the U.S. Congress and signed by the President, the ECJ noted, “Under Article 7, when these aircraft engaged in international air navigation enter, depart from or are within the territory of one of the contracting parties, they are to be subject to and must observe the laws and regulations of that party, be they provisions relating to the admission or departure of aircraft on that party’s territory or those relating to the operation and navigation of aircraft.” This, argued the ECJ, was the hook needed—the justification for the imposition of the ETS on the U.S. airlines bringing forth the action. But there was more.

The ECJ noted “the first sentence of Article 15(3) of the Open Skies Agreement is intended to impose upon the contracting parties the obligation to follow the aviation environmental standards set out in annexes to the Chicago Convention, except where differences have been filed. This last point is not an element defining the obligation on the European Union to follow those standards, but constitutes a possibility of derogating from that obligation.” The fact that the Open Skies Agreement allows countries to pursue impliedly more stringent environmental standards is alone enough to uphold the Act the ECJ went on to argue. But the ECJ still was not done—it went on to argue that

…whilst the European Union may, in the context of application of its environmental measures, adopt certain measures which have the effect of unilaterally limiting the volume of traffic or frequency or regularity of service within the meaning of Article 3(4) of the Open Skies Agreement, it must, however, apply such measures under uniform conditions that are consistent with Article 15 of the Chicago Convention, which provides, in essence, that airport charges which are or may be imposed on aircraft engaged in scheduled international air services are not to be higher than those that would be paid by national aircraft engaged in similar international air services.

Simply put, because the ETS applies equally to EU and non-EU carriers, the scheme is valid.

And with that, after dispensing with a second claim that ETS was simply a revenue-generating scheme disguised as environmental protection, the ECJ sent the case back to the English High Court, which is expected to respond with a ruling soon mimicking the ECJ’s preliminary ruling.

While I was a bit skeptical about the validity of the ETS before reading the ECJ’s opinion, I think the court and the Advocate General did a wonderful job overall of articulating why the ETS is legal. But to go back to my opening paragraph, that does not mean that others agree.

China has already retaliated against the EU by denying Lufthansa A380 landing rights in Shanghai. India and China has threatened to boycott Europe all together, which is a hollow threat, but also to make it much harder for European airlines to secure landing slots at its airports, a much more realistic threat that could very negatively effect EU travelers. Secretary of State Hillary Clinton condemned the ECJ’s ruling and hinted at unspecified U.S. retaliatory action. The U.S. Congress responded by introducing a bill that would make it illegal for U.S. airlines to pay any fees associated with the ETS, which puts the U.S. airlines on a collision course for the International Court of Justice. If the bill is signed into law, U.S. airlines will be forced to break either EU or U.S. law. The consequences will be messy.

The talk of retaliatory action by the U.S. and other governments is encouraging in a way—if such retaliation is carbon reducing programs of their own, the EU will have accomplished its mission by taking the bold first step to combat greenhouse gases. Yet no matter how well-intentioned the EU’s ETS is or how aggravating it must be to wait years and even decades for international consensus on an issue, I have to think some sort of international agreement will be necessary going forward and the ramifications of the ETS will simply be immediate harm for the European consumer with only an immaterial reduction in greenhouse gasses, since airlines are not required to reduce their carbon emission, only pay for them.

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