UK: Is The EU’s Application Of Its Emissions Trading Scheme To Aviation Illegal?

Previously published in ABA Air and Space Journal

The European Union (EU) is proceeding with its plan to include non-member state airlines in its Emissions Trading Scheme (ETS), notwithstanding the agreement reached in October 2010 among the 190 contracting states of the International Civil Aviation Organization (ICAO) to reduce greenhouse gas emissions from aviation on the basis of 15 agreed principles.

Predictably, the inclusion of aviation within the ETS has been both legally controversial and politically significant.  John Byerly, until recently U.S. Deputy Assistant Secretary for Transportation Affairs, recently stated that the U.S. government recognizes "the efficacy [and] the potential utility of market based measures[,]" but seeks a global agreement through ICAO that would persuade the EU to exclude aviation from the ETS.  "If we don't get there at ICAO, the consequences are going to be serious," he warned.

At the 37th assembly of ICAO in Montreal in October 2010, International Air Transport Association (IATA) Director General and CEO Giovanni Bisignani insisted that "the only effective long-term solution remains a global approach".  EU Commissioner for Climate Action Connie Hedegaard stated that the EU is committed to "fighting for the inclusion of aviation in the ETS."  She noted that, in Montreal, ICAO refrained from adopting language that would make the application of the ETS to airlines dependent on the mutual agreement of other states.

The EU, however, agreed to engage in constructive dialogue with third countries during the implementation of the ETS, most notably regarding how to address emissions from incoming flights from outside the EU.

On December 16, 2009, the Air Transport Association of America (ATA) and three U.S. airlines (American, Continental and United) commenced their long-threatened legal action in the U.K. against the inclusion of aviation in the ETS. The English court permitted various entities to intervene in the case, including IATA, which represents about 230 airlines comprising 93% of scheduled international air traffic; the National Airlines Council of Canada (NACC); and five environmental, non-governmental organizations (the Aviation Environment Federation, WWF-UK, the European Fund for Transport and Environment, the Environmental Defense Fund and Earthjustice).  The U.S. carrier claimants brought the case in London because the U.K. is the first EU member state to implement the ETS.  As expected, however, the case was referred to the Court of Justice of the EU (CJEU).  

This article first provides an overview of the ETS and its application to aviation, then summarizes the EU legislation establishing the ETS; next, the article assesses the claimants' main legal arguments and the U.K. government's response thereto; finally, the article concludes that, even if the claimants only prevail on some but not all of their arguments, such an outcome could have profound implications for the future of EU climate change policy relating to aviation.

Overview of the ETS

The European Commission views the ETS as essential to its commitment to reduce anthropogenic emissions of greenhouse gases.  The ETS, which was established on January 1, 2005, covers 13,000 installations representing about 46% of the EU's total carbon dioxide (CO2) emissions in 2010.  The ETS is a "cap and trade system": operators must annually surrender allowances equal to the tons of CO2 they emit, but the EU caps the number of allowances that it issues each year, so operators whose emissions exceed their allowances must purchase extra allowances from the carbon market.

Aviation in the ETS

Airlines' CO2 demand is estimated to be 23 million metric tonnes (mt) of CO2 in 2012, rising to 122mt by 2020.  The Commission is concerned that this increasing demand will negate the impact of emissions reductions elsewhere in the EU, which is why it included aviation within the ETS.  Effective 2012, the ETS will apply to every operator of an aircraft that lands or takes off from an airport in the EU, Norway, Iceland and Liechtenstein.  If an aircraft holds an operating license from an EU country it will be administered by that country, whereas non-EU carriers have been assigned to an administering member state based on their primary EU routes. 

The number of allowances issued to the aviation sector will be expressed as a percentage of the sector's mean average annual emissions from 2004 to 2006.  In 2012, this percentage will be 97%.  (The actual amount of the cap for 2012 will be determined by September 30, 2011.)  The number of allowances to be allocated to an airline for the year 2012 will be the airline's share of the total attributed aviation emissions in 2010, and will be allocated by December 30, 2012.  In 2012, 85% of allowances will be issued for free.  Unless an aircraft operator is successful in reducing its emissions, it will need to secure surplus allowances covering 17.55% of its emissions (or, 100 - (0.85 x 0.97)). 

Relevant EU Legislation

The ETS was established pursuant to Directive 2003/87.  On November 19, 2008, the European Parliament and Council adopted Directive 2008/101 (the "Directive"), which amends Directive 2003/87 to include aviation in the scheme for greenhouse gas emission allowance trading within the EU.  Member states are required to implement the Directive.  The U.K. government elected to implement the Directive by a two-stage legislative process.  First, the Secretary of State for Energy and Climate Change issued the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2009 (the "Regulations"), which entered into force on September 17, 2009, and implement certain provisions of the Directive.  Following a lengthy consultation process with regard to the second stage, the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2010 came into force in August 2010, many months after the ATA case had commenced.

The Procedural Route

Under EU law, only the CJEU has authority to declare EU legislation invalid.  While the claimants lack standing to bring a direct challenge against the Directive before the CJEU, they may challenge it in proceedings before the U.K. courts, which must then make a reference to the CJEU where there is substantial doubt as to the position under U.K. law.  The claimants therefore brought their case in the Administrative Court in London against the Regulations.  The U.K. government opposes the claims, but has no objection to referral to the CJEU.  A preliminary ruling has therefore been sought from the CJEU on a number of questions concerning the validity of Directive 2003/87, as amended by Directive 2008/101.  Only the CJEU may render a ruling on these issues that will be binding on all member states.  The CJEU has been asked to prioritize this case in view of its global importance and the requirement under the ETS that carriers surrender allowances effective January 1, 2012. 

The Claimants' Case

In principle, the claimants object to the EU's unilateral application of an emissions trading scheme to aviation outside the framework of ICAO.  ATA Vice President for Environmental Affairs, Nancy Young, stated:  "we will not get a global approach [through ICAO] if we don't have this lawsuit... Because the Europeans would have no incentive to come to the table and negotiate about a solution that works for all of international aviation..." As a legal matter, the claimants contend that the 2008 Directive is unlawful under EU law because it violates:

1. customary international law; 
2. the Chicago Convention 1944;
3. the Kyoto Protocol; and
4. the EU-U.S. Open Skies Agreement 2007.

Article 1 of the Chicago Convention - Sovereignty

The claimants argue that the obligation to surrender allowances in respect of emissions from flights over third countries' airspace and over the high seas as well as over the airspace of EU member states is illegal.  They contend that the ETS is contrary to the customary international law principle, memorialized in Article 1 of the Chicago Convention, that each state "has complete and exclusive sovereignty over the airspace above its territory."

In addition, the claimants argue that customary international law principles prohibit any state from subjecting any part of the high seas (including airspace over the high seas) to its sovereignty, and that aircraft over the high seas are subject to the exclusive jurisdiction of their state of registration, save as expressly provided for by international treaty.  Specifically, the claimants argue that the ETS regulates U.S. airlines in U.S. airspace from their point of departure in the U.S., over U.S. airspace, and across the Atlantic (with in many cases only a small proportion of their journey taking place over EU airspace), by requiring them to give up allowances in respect of such flights, and thus infringes on the principle of sovereignty by "impacting upon aviation activity" in those areas. 

The Treasury Solicitor, defending the claim on behalf of the U.K. government, countered that the EU is not bound by the Chicago Convention because it is not a signatory to the Convention.  The claimants accept this, but contend that they may rely on the Chicago Convention because all EU member states are parties to the Convention.   The Treasury Solicitor also argued that the requirement that operators forfeit allowances for emissions caused by flights passing over the territory of third countries (or the high seas) does not amount to regulation over the territory of a third country state.  The ETS's requirements have no impact whatsoever on the sovereignty of other states, which remain free to impose emissions schemes and other rules on aviation over or into or from their territory.  Although the claimants point out that there is a clear risk of multiple regulation, Article 25a of the Directive may operate to exempt flights from a particular country from the ETS where that country has adopted emission reducing measures.

Article 11 of the Chicago Convention – Air Regulations

The claimants also rely on Article 11 of the Convention to demonstrate that regulations made by each state may only apply within the territory of that state.  Article 11 states:

The claimants argue that the ETS is contrary to Article 11 insofar as its application is not limited to flights within the airspace of the EU member state.

Article 11, however, is an anti-discrimination provision with a specific purpose.  It requires that rules applied by a contracting state within its airspace be applied to aircraft of all nationalities without discrimination, and that the aircraft within that state's airspace comply with those rules.  In this respect, the ETS is non-discriminatory because it treats similarly all flights to/from EU member states. Further, Article 11 concerns laws and regulations relating to the admission and departure of aircraft and their operation and navigation within a contracting state's territory, and does not apply to environmental legislation regarding emissions trading.   Nor does Article 11 state that the only regulations that can apply in relation to a contracting state's airspace are those made by the state in question. 

Article 12 of the Chicago Convention – Rules of the Air

The claimants argue that the ETS violates Article 12 of the Convention, which provides that regulations relating to "flight and maneuver" shall be uniform across contracting states:

According to the ICAO Legal Bureau, Article 12 extends to a wide range of activities, including rules for the regulation of greenhouse gas emissions. This may be because the emissions charges are levied by reference to fuel burn, and arguably there is an inherent conflict between the free "operational and navigational activities" of airlines and the need to conserve fuel to avoid higher emissions charges.

Further, the claimants allege that only ICAO has authority to make rules in respect of flights over the high seas and individual states' rules regarding flight and maneuver of aircraft in their own airspace must be consistent with ICAO rules and regulations.  ICAO has regulated "similar" activities, such as dropping and spraying from aircraft.

Like Article 11, Article 12 has a specific purpose.  It requires contracting states to adopt measures to ensure compliance with rules on flight and maneuver in their airspace and uniformity of such rules with those established by ICAO.  It also states that the rules in force over the high seas on flight and maneuver shall be those established under the Chicago Convention.  Because Article 12 relates to regulations concerning the flight and maneuver of aircraft, it seems unlikely that it also would apply to environmental legislation regarding emissions trading.  The ETS does not affect the flight and maneuver of aircraft, but only the terms for admission to and/or departure from EU territory.

Article 15 of the Chicago Convention – Fees, Duties and Other Charges

The claimants argue that the imposition of a requirement on foreign aircraft to surrender emission allowances would contravene Article 15 of the Convention, which is entitled "Airport and similar charges."  Its first part focuses on the principle of public use airports being open under uniform conditions to all aircraft, and with principles as to charges for the use of airports and air navigation facilities. The claimants argue that the ETS violates the last sentence of Article 15:

The Treasury Solicitor counters that the ETS is not a "fee, due or other charge," but rather an administrative scheme that obliges air operators to monitor and report their emissions and gives them the option of whether to operate within their allocated allowances or exceed those allowances by buying additional allowances.  Even if an air operator decides to exercise the latter option, the amount that it pays cannot (it is argued) be characterized as a fee, due or charge, particularly given the overall context in which the provision appears.  ICAO's Council Resolution on Taxation of International Air Transport states: "Charges are levies to defray the costs of providing facilities and services for civil aviation," whereas the ETS is not "designed and applied specifically to recover the costs of providing facilities and services for civil aviation."

A further counter-argument is that, even if the ETS could be described as a charge, it is not imposed in respect "solely" of the right of transit over or entry into or exit from territory.  The Treasury Solicitor cited the 2007 case of R (Federation of Tour Operators) v HM Treasury, in which the judge found that U.K. Air Passenger Duty was not a due imposed solely in respect of transit, entry or exit because it was equally payable if the flight did not leave the U.K., and was "essentially an anti-discrimination provision" precluding a state from favoring its national airlines when imposing charges. 

Although not cited in the U.K. government's case, a Dutch court has ruled that a departure tax levied by the Government of The Netherlands was not contrary to Article 15 primarily because:  (i) there is no indication that the term "charges" should be interpreted to cover taxes, in addition to "fees" and "dues;" (ii) the heading of Article 15 refers to "airport and similar charges;" and (iii) if contracting states had wanted to restrict their sovereign rights to levy taxes, the treaty would have contained clear language to that effect.

Both the U.K. and Dutch cases have been criticized on the basis that the terms "due" and "charge" may, by their ordinary meaning, include a tax such as the Dutch tax – indeed, the Spanish, French and Russian texts of the Chicago Convention refer to "taxes."  In addition, the reference to overflight, in respect of which no airport charges are required, arguably suggests that Article 15 is intended to be an absolute, rather than non-discriminatory, rule.  The Convention is concerned with international air transport:  indeed, its title is the "Convention on International Civil Aviation."  Hence it is unlikely that the drafters intended the word "solely" to mean that states could impose fees, dues and charges on international air transport provided they also did so on domestic air transport.  On the contrary, the drafters would not have been interested in how states choose to regulate air transport within their own territory.  Given that the Chicago Convention is concerned only with international air transport, it is implausible that a state could bypass the Article 15 prohibition simply by applying the same tax to domestic air transport.

The Open Skies Agreement

The EU and the U.S. entered into the Open Skies Agreement in April 2007.  The claimants argue that taxing the consumption of aircraft fuel, including by reference to emissions, is prohibited by Article 11(2)(c) of the Agreement, which exempts from taxes "fuel... introduced into or supplied in the territory of a Party for use in an aircraft of an airline of the other Party engaged in international air transportation, even when those supplies are to be used on a part of the journey performed over the territory of the Party in which they are taken on board."

The Treasury Solicitor responds that the ETS does not fall within the categories of taxes, levies, duties, fees and charges from which fuel is exempt.  The intervening environmental organizations, meanwhile, contend that ICAO distinguishes between tax and charges, on the one hand, and emissions trading schemes, on the other, and argue that there is no basis for conflating them.

While a large number of ETS allowances will be issued to airlines for free (at least in the initial trading period commencing in 2012), there will be at least three elements of the ETS scheme that arguably constitute a tax, levy, duty, fee or charge: first, the allowances purchased through the public auction; second, the excess or surplus emissions that would need to be covered by the purchase of additional allowances on the open market; and, third, any fines imposed for failure to surrender sufficient allowances at the end of each reporting period.   

In 1999, in Case C-346/97 Braathens, the CJEU held that a Swedish tax on emissions, calculated on fuel consumption, amounted to a tax on fuel, on the grounds that, as there was a direct and inseverable link between fuel consumption and the polluting substances emitted in the course of consumption, the tax at issue "must be regarded as levied on consumption of the fuel itself."  While the judgment is not directly relevant, the same reasoning could be applied to the ETS.

The claimants' argument relating to the Open Skies Agreement differs from its other arguments because if they prevail on this argument, that would only assist U.S. airlines.  Nonetheless, other bilateral agreements may contain equivalent restrictions on the taxation of fuel.  These could be similarly interpreted to restrict "taxation of emissions," thereby providing a similar basis for other non-EU airlines to challenge the ETS.   IATA has cited such provisions in numerous bilateral agreements between the EU and/or member states and countries other than the U.S., such as Singapore and Australia.  The NACC raises similar issues with regard to Canada.

Many commentators on the ATA case have taken the viewbelieve that the claimants' arguments outlined above in relationrelating to international law and the Chicago Convention are largely without merit, but that there is some forcemerit to the claimant's arguments with regard to the Open Skies Agreement, and also in relation to certain bilateral agreements, not least because of the precedent of the Braathens case. Having invested so much political capital in the emissions trading scheme ETS, it would be a political disaster for the EU were it to be selectively applied in the aviation context, with certain airlines being exempt dependent on their nationality.   

The Kyoto Protocol

The claimants' final argument is that the Kyoto Protocol requires the parties to pursue reduction of greenhouse gas emissions from international aviation "working through the ICAO."  The Treasury Solicitor responds that the Kyoto Protocol does not require states to work exclusively through ICAO.  A similar argument is made (and refuted) with regard to the Open Skies Agreement, which recognizes the need to pursue agreement on the issue of emissions trading "within the framework of ICAO."

Conclusion

If the ATA and the U.S. airline claimants prevail in their legal action, it would have profound implications for the future of EU climate change policy relating to aviation.  Significantly, if their arguments relating to the Chicago Convention fail but their Open Skies Agreement-related arguments succeed, the claimants could lose their battle to have the ETS as a whole declared invalid, yet attain their narrower objective to prevent the ETS being applied to U.S. airlines.  This could leave the door open for other non-EU airlines to review their countries' bilateral aviation arrangements with EU member states and perhaps initiate similar legal actions.  

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