UK: EU Emissions Trading Scheme - The Legal Challenge

Last Updated: 6 July 2010
Article by Charles Cockrell

On 27 May 2010, the High Court in London agreed to refer to the European Court of Justice (ECJ) a legal challenge on the lawfulness of the extension of the EU Emissions Trading Scheme ("EU ETS") to aviation.

In December 2009, the Air Transport Association of America ("ATA") and three of its airline members (American, Continental and United) filed an application for a judicial review of the UK regulations that implement the ETS. In recognising the importance of the issues and the fact that only the ECJ possesses the authority to make a binding decision on the legality of the scheme as it applies to all concerned, the judge has referred the matter for a preliminary ruling. The timing of the hearing at the ECJ remains uncertain, but is not expected for at least another 12 months.

The EU ETS applied to aviation

As reported in previous editions of this newsletter, the ETS was extended to the aviation industry pursuant to Directive 2008/101/EC, which came into force on 2 February 2009. It should now have been implemented into the national legislation of all Member States. Airlines are required to put procedures in place now to comply with the requirements of the new scheme. From 1 January 2012, all civil aviation flights operating within, arriving into and departing from European Community airports will be included within the ETS. The application of the ETS to aviation will largely replicate the application of emissions trading schemes in other industry sectors. Airlines will be allocated a substantial number of free "allowances" and must surrender at the end of each year allowances equal in number to the carbon dioxide emissions released that year (one allowance being equal to one tonne of emissions). Airlines will be permitted to buy and sell allowances and will be responsible for monitoring and reporting their own emissions, with such reports being verified by an independent body. For 1 January 2012 to 31 December 2012, airlines will receive free allowances equivalent to 97 per cent of their total annual emissions for 2004 to 2006. For 2012 to 2020, this allocation will drop to 95 per cent. An operator short on allowances at the end of the year can expect a stringent financial penalty and, in extreme cases, a Community-wide operating ban.

The European Commission hopes that the ETS will induce in airlines a demand for innovative, energy saving processes that will result in a substantial reduction in aircraft emission levels. However, the scheme has already proved highly contentious and sparked criticism from airlines and industry groups across the world. The airlines argue that the scheme merely imposes a global tax on fuel use and will have a substantial impact on profit margins at a time when the industry is experiencing unprecedented financial hardship. One study suggests that compliance with the ETS will lower airline profits globally by some US$55 billion in the period 2011-2022. Whilst airlines generally recognise that their emissions need to be reduced and regulated, some would rather look at alternative options. Others, whilst not averse to a cap and trade scheme as one measure to combat emissions, have deeply held reservations about the mandatory imposition of the EU scheme and, in particular, its application to carriage outside EU territory. Investment in green technology and streamlining EU air traffic control, thereby freeing up congested airspace and reducing emissions from aircraft delayed in holding patterns, are key strategies that would, it is argued, reduce carbon emissions at a much greater level that the ETS. IATA favours a worldwide solution through ICAO rather than the development of what it perceives to be an ineffective regional scheme.

Legal challenge

In referring the matter to the ECJ, the judge also accepted applications to intervene in support of the legal challenge from both IATA and the National Airlines Council of Canada. A transatlantic coalition of environmental organisations has also been admitted to the proceedings and, together with the Department for Energy and Climate Change, will oppose the challenge and strongly support the introduction of the scheme.

The ATA and the supporting parties argue that the extension of the ETS to aviation is unlawful for the following reasons:

  1. It violates the fundamental principle of international law that each state has complete and exclusive sovereignty over the airspace above its territory. The ETS will regulate air services over the territory of other states in that emissions per flight will be assessed over the entirety of each flight, including that portion entirely within another state's airspace.
  2. It violates a number of provisions contained in the Chicago Convention. The Convention requires all signatory countries (including the EU Member States and the USA) to acquire the approval of ICAO before placing any charges on airlines flying into their airports. The "charge" imposed by the ETS comes in the form of purchasing allowances in excess of permitted emissions or paying a fine for non-compliance. The Convention also expressly recognises the exclusive state sovereignty of airspace and prohibits states imposing duty on fuel.
  3. It violates the terms of a large number of bilateral agreements, including the Open Skies Agreement (1997) between the EU and the US. The Open Skies Agreement expressly recognises that agreement on emissions trading should be pursued "within the framework of the Chicago Convention" and also appears to prohibit the imposition of the charges contemplated by the ETS.

There is much for the ECJ to consider and the legal challenge is still at a relatively early stage. The European Commission is clearly determined to cut emissions at ever increasing rates - a recent plan proposes a 30 per cent cut in greenhouse gas emissions from 1990 levels by 2020. The aviation industry will undoubtedly remain a target regardless of the outcome of the legal challenge.

The ongoing legal challenge places some uncertainty over the future of ETS as applied to aviation but, pending a decision by the ECJ, airlines will need to continue to focus on how best to meet their obligations under the Scheme, prior to its planned commencement in January 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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