The EU Emissions Trading Scheme (EU ETS) is one of the key measures to reduce emissions of carbon dioxide and other greenhouse gases. In a recent decision, the European Court of Justice found that the inclusion of international aviation in the EU ETS is in conformity with international law.* 

Up to very recently the EU ETS was confined to large ground installations. Directive 2008/101 provided that aviation activities should be included in the EU ETS from 1 January 2012. Accordingly, all airlines (including those of non-EU countries) now have to acquire and surrender emission allowances for flights which depart from and arrive at airports located within the EU.

The inclusion of aviation activities in the EU ETS was opposed by several airlines and airline associations from outside the EU. The measures taken by the UK to implement Directive 2008/101 were challenged by a number of US and Canadian airlines in the High Court in London in an action launched in July 2010. The airlines argued that the inclusion of international and transatlantic aviation in the EU ETS infringed various aspects of international law, in particular the Convention on International Civil Aviation 1944 (“the Chicago Convention”), the Kyoto Protocol and the Air Transport Agreement between the US and the European Community (“the Open Skies Agreement” of 30 April 2007), as well as customary international law regarding sovereignty over airspace. 

The High Court referred to the Court of Justice for preliminary ruling the following questions central to the case:

• Are any or all of the following rules of international law capable of being relied upon in this case to challenge the validity of Directive 2003/87/EC as amended by Directive 2008/101/EC so as to include aviation activities within the EU ETS

1. The principle of customary international law that each State has complete and exclusive sovereignty over its air space
2. The principle of customary international law that no State may validly purport to subject any part of the high seas to its sovereignty
3. The principle of customary international law of freedom to fly over the high seas
4. The principle of customary international law that aircraft overflying the high seas are subject to the exclusive jurisdiction of the country in which they are registered, save as expressly provided for by international treaty
5. The Chicago Convention
6. The Open Skies Agreement
7. The Kyoto Protocol ?

• If any of these can be relied on, is Directive 2008/101 invalid in applying the EU ETS to those parts of flights (either generally or by aircraft registered in third countries) which take place outside the airspace of EU member States?

In response to the above questions, the Court of Justice noted that certain criteria must be in place before it can determine whether the validity of an act of the EU may be affected by the rules of wider international law. First, the EU must be a party to the agreement in question; second, the nature and broad logic of the agreement must not preclude such examination; and third, the provisions being relied on must be unconditional and sufficiently precise.

In applying the above criteria, the Court found that as the EU is not a party to the Chicago Convention, that Convention has no application in determining the validity of Directive 2008/101/EC. While the Court found that certain parts of the Open Skies Agreement were applicable, it also found that extending the EU ETS to international aviation did not breach the Open Skies Agreement because the fundamental purpose of that agreement is to create equality in market conditions between flight operators from its signatory countries. The Court held that the uniform application of the EU ETS was no more disadvantageous in its application to US flight operators than to EU flight operators as the latter are not excluded from the EU ETS in any manner.

In arguing that the EU ETS breached rules of customary international law in respect of sovereignty over airspace or freedom to use airspace over the high seas, the US and Canadian airlines highlighted particularly the fact that it required them to surrender allowances, not just in respect of the portion of flights over EU airspace, but in respect of the full distance travelled into or out of an EU airport, including through non-EU airspace.  The Court rejected this on the basis of the following:

• An aircraft operator only becomes subject to the EU ETS if the airline in question  chooses to operate commercial flights arriving at or departing from an EU airport, thereby subjecting its aircraft to EU jurisdiction
• Aircraft flying over the high seas (or in certain circumstances, EU airspace) without landing at an EU airport do not become subject to the EU ETS
• As an exercise of its own sovereignty, the EU has the right to choose to permit a commercial activity (in this case air transport) to be carried out in its territory (again a flight becomes subject to its territorial jurisdiction once it lands at an EU airport) in compliance with certain criteria and in a way that fulfils certain environmental objectives
• The Court, without referring to a specific principle of customary international law in this regard, adverted to the right of states, or groups of states, again as an aspect of their sovereignty, to pass environmental laws relating to events or environmental resources outside their territory
• In the case of the EU ETS, in legislating for events, activities, or protection of environmental resources located partly outside EU territory, the EU was doing so in a non-discriminatory manner and was not differentiating as between third states.

Finally, in respect of the Kyoto Protocol, the Court of Justice held that while Article 2(2) of the  Protocol provides that the parties thereto are to pursue limitation or reductions of emissions of greenhouse gases from aviation bunker fuels by working through the International Civil Aviation Organisation, that obligation could not be considered to be unconditional and sufficiently precise so as to confer on individuals the right to rely on it in legal proceedings in order to contest the validity of the Directive.

The decision has been criticised by a number of the affected non-EU airlines. Apart from disagreeing with the Court’s legal interpretation regarding conformity with wider international law, the affected airlines are concerned fundamentally with the costs that will attend the extension of the EU ETS to international aviation. In summary, it will result in airlines paying, to begin with, the costs of roughly 15% of the emission allowances they will require based on the historic flight data they have submitted, with the figure rising to 18% in 2013-2020. The US administration, through Secretary of State Hillary Clinton, has written to EU officials to record concern at the decision. Some of China’s biggest airlines have refused to pay the applicable charges and the Beijing government wants talks to resolve the issue. The decision of the European Court is a decision of a regional Court. The ongoing dissatisfaction of certain non-EU States and their airlines suggests though that it is likely the dispute will feature before long at the World Trade Organisation (WTO), and in particular in the WTO dispute resolution process.

* Note: The EU ETS commenced operation in January 2005 and is based on Directive 2003/87/EC. Phase 1 ran from 2005 to 2007, followed by Phase 2 (2008 to 2012) which coincides with the ‘first commitment period’ of the UN’s Kyoto Protocol – the five-year period to 2012 during which developed states/regions, including the EU and its member states, must comply with emission reduction targets under the Protocol.  Phase 3 of the EU ETS will run for eight years, from 2013 to 2020. The EU ETS is based on the principle of “cap and trade”, which permits entities to trade greenhouse gas emission allowances.