UK: The ATA Case against the EU ETS

Introduction

On 16 December 2009 the Air Transport Association of America (ATA) and three US airlines (American, Continental and United) commenced their long-threatened action against the inclusion of aviation in the European Union Emissions Trading Scheme (ETS). The case was commenced in London as the UK is the first EU country to implement the early stages of the ETS, but it is almost certain that the case will be referred in due course to the Court of Justice of the EU (CJEU). Success by the ATA and the US airlines would of course have profound implications for the future of EU climate change policy relating to aviation, certainly as regards US airlines, and possibly more widely.

Overview of the ETS

The EU ETS is seen by the European Commission as an essential measure for the EU to implement in order to fulfil its commitment to reduce anthropogenic emissions of greenhouse gases.

The EU ETS commenced on 1 January 2005 and now covers 13,000 installations representing about 46% of the EU's total carbon dioxide emissions in 2010. The EU ETS is a "cap and trade system" - operators must annually surrender allowances (known as "EU Allowances" or "EUAs") equal to the tonnes of CO2 that they emit, but the EU caps the number of allowances that it issues each year, so operators whose emissions exceed their allowances are required to purchase the extra EUAs that they need from the carbon market.

Aviation in the EU ETS

Airlines' CO2 demand is estimated to be 23mt in 2012, rising to 122mt by 2020. The EU Commission is concerned that this rising demand will negate the impact of emissions reductions elsewhere in the European Union, which is why it has been so keen to incorporate aviation within the ETS.

From 2012 the EU ETS will apply to every operator of an aircraft that lands or takes off from an airport in the EU (for these purposes three other territories will also be covered in addition to the EU, namely Norway, Iceland and Liechtenstein). If an aircraft holds an operating licence from an EU country it will be administered by that country, whereas non-EU carriers have been allocated to an administering member state based on which routes they primarily fly.

The number of allowances issued to the aviation sector (which may be called "Aviation EUAs" or AEUAs", though this is not yet decided) 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 30 September 2011. The number of allowances to be allocated to an airline for the year 2012 will be such airline's share of the total attributed aviation emissions in 2010, and will be allocated by 30 December 2012 – the UK government is investigating to what extent there is flexibility in publishing these allocations earlier in order to help operators in making advance decisions about use of resources, scheduling and slots.

In 2012, 85% of allowances will be issued for free. Unless an aircraft operator is successful in reducing its emissions, it will therefore need to find surplus allowances covering 17.55% of its emissions (being 100 - (0.85 x 0.97)).

Further background information on the inclusion of aviation in the ETS can be found at the UK Department of Energy & Climate Change web-site, click here to view.

Relevant legislation

The EU ETS was established pursuant to Directive 2003/87 . On 19 November 2008, the European Parliament and Council adopted Directive 2008/101 (the "Directive") , which amends Directive 2003/87 so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the EU. Member States are required to implement the Directive. The UK government has chosen to implement the Directive by a two-stage legislative process. First, the Secretary of State for Energy and Climate Change made the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2009 (the "Regulations") which entered into force on 17 September 2009, and implement certain provisions of the Directive. There is a consultation underway with regard to the second stage.

The procedural route

Under EU law, only the Court of Justice of the European Union (CJEU) has power 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 UK courts, which must then make a reference to the CJEU where there is a substantial doubt as to the position under UK law. The ATA's case has therefore brought in the Administrative Court in London and is directed against the Regulations. The UK government opposes the claims made but has no objection to referral to the CJEU. Most airlines which are to be regulated by the UK have to date been complying with the Regulations under protest, pending a legal challenge.

The claimants' case

The primary concerns of the claimants are: first, the obligation to surrender allowances in respect of emissions over flights over third countries' airspace and over the high seas as well as over the airspace of EU Member States; and, secondly, the unilateral application of an emissions trading scheme to aviation outside the framework of the International Civil Aviation Organization (ICAO), which is a specialised agency of the United Nations responsible for codifying the principles and techniques of international air navigation and which fosters the planning and development of international air transport to ensure safe and orderly growth.

More specifically, the claimants seek to challenge the legality of the ETS on the grounds that it is contrary to certain provisions of the 1944 Chicago Convention , the 1997 Kyoto Protocol and the 2007 EU/US Open Skies Agreement . The Chicago Convention established rules relating to airspace, aircraft registration and safety, and details the rights of the signatories in relation to air travel – almost all countries engaged in international air transport are now signatories to it, though air transport between states is also governed by a large number of bilateral arrangements between particular countries. The EU/US Open Skies Agreement was an important step in liberalising air transport between the US and the EU.

Article 1 of the Chicago Convention - sovereignty

The claimants argue that the ETS is contrary to the customary international law principle that each state has complete and exclusive sovereignty over the airspace above its territory, which is restated by Article 1 of the Chicago Convention, as follows:

"The contracting States recognize that every State has complete and exclusive sovereignty over the airspace above its territory".

The claimants argue that the ETS regulates US airlines in US airspace from their point of departure in the US, over US airspace from their point of departure in the US, 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 the principle of sovereignty.

One of the key points made by the Treasury Solicitor, defending the claim on behalf of the Secretary of State, is that the EU is not bound by the Chicago Convention because it is not a signatory to it. If this argument is upheld by the CJEU then that would dispose completely of all of the claimants' arguments related to the Chicago Convention.

In any event, the Treasury Solicitor also argues that the fact that operators are required to give up allowances to cover emissions caused by flights which pass over the territory of third countries does not amount to regulation over the territory of a third country state. The claimants do not explain how the sovereignty of the states flown over is infringed, and it is difficult to see how they could. The ETS's requirements have no impact whatsoever on the sovereignty of other states, which remain free to impose emissions schemes and other rules so far as concerns aviation over or into or from their territory.

Article 11 of the Chicago Convention – air regulations

Article 11 of the Chicago Convention reads as follows:

"...the laws and regulations of a contracting State relating to the admission to or departure from its territory of aircraft engaged in international air navigation, or to the operation and navigation of such aircraft while within its territory, shall be applied to the aircraft of all contracting States without distinction as to nationality, and shall be complied with by such aircraft upon entering or departing from or while within the territory of that State."

Article 11 is relied on by the claimants to demonstrate that regulations made by each state may only apply within the territory of that state.

Article 11, however, has a specific purpose and is evidently a non-discrimination provision. It requires that rules which are applied by a contracting state within its airspace shall be applied to aircraft of all nationalities without discrimination, and that the aircraft within that state's airspace shall comply with those rules. As all flights to/from EU Member States would be treated similarly under the ETS, there would be no question of any discrimination.

Further, Article 11 relates to 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 it state that the only regulations which 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

Article 12 of the Chicago Convention reads as follows:

"Each contracting State undertakes to adopt measures to insure that every aircraft flying over or manoeuvring within its territory and that every aircraft carrying its nationality mark, wherever such aircraft may be, shall comply with the rules and regulations relating to the flight and manoeuvre of aircraft there in force. Each contracting State undertakes to keep its own regulations in these respects uniform, to the greatest possible extent, with those established from time to time under this Convention. Over the high seas, the rules in force shall be those established under this convention. Each contracting State undertakes to insure the prosecution of all persons violating the regulations applicable."

Article 12 therefore provides that regulations relating to "flight and manoeuvre" shall be uniform across contracting states. According to the ICAO Legal Bureau this extends to rules for the regulation of greenhouse gas emissions. The argument here may be that the emissions charges are levied by reference to fuel burn, and that 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 rules in respect of flights over the high seas are solely for ICAO, and that rules which states make regarding flight and manoeuvre of aircraft in their own airspace must be consistent with ICAO rules and regulations.

Like Article 11, Article 12 also has a specific and evident purpose. It requires contracting states to adopt measures to ensure that rules on flight and manoeuvre in their airspace are complied with and are kept uniform with those established from time to time under the Chicago Convention. It also states that the rules in force over the high seas on flight and manoeuvre shall be those established under the Chicago Convention. Article 12 relates to regulations concerning the flight and manoeuvre of aircraft, and it seems unlikely that it also applies to environmental legislation regarding emissions trading.

Article 15 of the Chicago Convention – fees, duties and other charges

Article 15 is headed "Airport and similar charges". The first part of it is concerned with 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. In the context of emissions trading attention has focussed on the last sentence, which reads as follows:

"No fees, duties or other charges shall be imposed by any contracting State in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting state or persons or property thereon."

The claimants argue that the imposition of a requirement on foreign aircraft to give up emission allowances would contravene Article 15.

The Treasury Solicitor argues, on the contrary, that the ETS is not a "fee, due or other charge", but rather an administrative scheme which obliges air operators to monitor and report their emissions and gives them the option of whether to operate within their allocated allowances or to exceed those allowances by buying additional allowances. Even if an air operator decides to exercise the latter option, the amount which it pays cannot (it is argued) be characterised as a fee, due or charge, particularly when one looks at 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 cites in support of his defence the 2007 case of R (Federation of Tour Operators) v HM Treasury , in which the judge found that UK 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 UK, and was essentially an anti-discrimination provision precluding a state from favouring its national airline or airlines when imposing charges. It is argued that this is also the case with the ETS.

Though not referred to in the UK government's case, there is also Dutch authority to the effect that a departure tax levied by the Government of The Netherlands was not contrary to Article 15, for a variety of reasons but 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 UK case and the Dutch case have been criticised. It has been pointed out that the words "due" and "charge" are, by their ordinary meaning, capable of including a tax such as the Dutch tax – indeed, the Spanish, French and Russian texts of the Chicago Convention refer to "taxes". It has also been pointed out that the reference to overflight, in respect of which no airport charges are required, 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 Convention on International Civil Aviation. Hence it is most unlikely that the parties to it intended by the word "solely" to mean that states could impose fees, dues and charges in respect of international air transport provided they also did so in respect of domestic air transport: the parties would not have been interested in what states did as regards air transport within their own territory. Given that the Chicago Convention is concerned only with international air transport, could it really have been intended that the prohibition contained in Article 15 could be by-passed simply by applying the same tax to domestic legislation as well?

Article 24 of the Chicago Convention – customs duty

Article 24 prohibits the imposition of "customs duty, inspection fees or similar national or local duties or charges" in respect of fuel, as follows:

"Fuel, lubricating oils, spare parts, regular equipment and aircraft stores on board an aircraft of a contracting State, on arrival in the territory of another contracting State and retained on board on leaving the territory of that State shall be exempt from customs duty, inspection fees or similar national or local duties and charges."

Although the UK government argues that the ETS is not a duty or charge within the scope of Article 24, it is not apparent how Article 24 would assist the claimants' case even if it were, as it only relates to fuel on board an aircraft while on the ground.

The Open Skies Agreement

The Open Skies Agreement was entered into between the EU and the USA 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), 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 UK government argues that the ETS does not fall within the categories of taxes, levies, duties, fees and charges from which fuel is to be exempt.

Whilst 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 which could be argued to constitute a tax, levy, duty, fee or charge: first, the allowances which would be purchased through the public auction, secondly the excess or surplus emissions which would need to be covered by the purchase of additional allowances on the open market and, thirdly, 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 possibly be applied to the ETS.

Unlike most of the issues raised by ATA, the argument in relation to the Open Skies Agreement will, of course, only assist the US airlines; however, other bilateral agreements may contain equivalent restrictions on the taxation of fuel which might be capable of being similarly extended so as to restrict 'taxation of emissions'.

The Kyoto Protocol

The claimants' final argument is that the Kyoto Protocol provides that the parties shall pursue reduction of greenhouse gas emissions from international aviation "working through the ICAO".
The UK government points out that the Kyoto Protocol does not require states to work exclusively through ICAO. This is also a curious argument for US companies to raise as the USA has famously not ratified the Kyoto Protocol.

Conclusion

As mentioned previously, success by the ATA and the US airlines would have profound implications for the future of EU climate change policy relating to aviation. A very interesting aspect of the case is that if their arguments made in relation to the Chicago Convention fail but their arguments in relation to the Open Skies Agreement succeed then the US airlines could lose their battle to have the ETS as a whole declared invalid, whilst winning their personal fight to prevent the ETS being applied to US airlines. This could then leave the door open for other non-EU airlines to investigate their countries' bilateral aviation arrangements with EU member states and perhaps launch similar actions.

First published in Environmental Law & Management

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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