UK: EU Emissions Trading Scheme – An Update

Last Updated: 20 December 2010
Article by Sue Barham and Charles Cockrell

The High Court in London has now formally referred 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.

As reported in the previous edition of this newsletter, the Air Transport Association of America ("ATA") and three of its airline members (American, Continental and United) filed an application for judicial review of the UK regulations that implement the EU ETS at the end of last year.

In May 2010, the National Airlines Council of Canada, IATA and a transatlantic coalition of environmental organisations were granted permission to intervene in the judicial review application. The parties have filed their written submissions prior to an oral hearing at the ECJ, which we expect to take place during the latter half of 2011.

Meanwhile, the debate over the extension of EU ETS to aviation rages on, particularly following the passing, on 15 October 2010, of an ICAO resolution on climate change, negotiated at the 37th Annual Assembly in Montreal. Back in 1997, the Kyoto Protocol effectively mandated ICAO with the task of addressing the reduction of greenhouse gas emissions from international aviation. There has been ongoing debate, inside and outside of the existing legal challenge to the EU ETS, on the one hand as to the effectiveness of steps taken thus far by ICAO in this regard and, on the other hand, as to the lawfulness of the EU ETS – a regionally imposed scheme – in the light of the clear expectation at Kyoto that such matters would be approached on a global basis. The landmark agreement reached on 15 October 2010 between ICAO's 190 contracting states represents the first global governmental deal to commit the aviation sector to a reduction in greenhouse emissions and focuses on the following non-binding "aspirations":

  • improving fuel efficiency by 2 per cent annually up to 2050;
  • a collective capping of aviation carbon emissions from 2020; and
  • a global CO˛ standard for aircraft engines with a target date of 2013.

The resolution also calls for states to submit an "Action Plan" to ICAO setting out the measures they are taking to reach the above targets, although states whose emissions are below 1 per cent of global aviation emissions are exempt from this requirement and from the application of market-based measures (such as the EU ETS).

The ICAO members also agreed on 15 guiding principles to be applied by states in the design and implementation of market-based measures. Despite pressure from the governments of the United States, Canada and Mexico in the weeks leading up to the assembly for the resolution to make the application of emissions trading systems dependent on the "mutual agreement" of other states, this language was not adopted.

The EU Commissioner for Climate Action described the ICAO resolution as "a good basis for proceeding swiftly with inclusion of aviation in the EU's Emissions Trading Scheme from 2012". The EU also released a statement claiming that the EU ETS is consistent with all 15 of the resolution's guiding principles and represents a "real breakthrough" after almost a "decade of deadlock" at ICAO on how to address aviation emissions.

IATA also hailed it an "historic decision" but stressed that the only effective long term solution to the implementation of environmental schemes or taxes remains a "global approach" under ICAO's leadership, whilst the ATA stated that it considers the EU ETS to "run afoul" of the resolution's guiding principles.

The targets set are purely aspirational and as such, it is uncertain how effective the resolution alone will be in achieving its aims. Nevertheless, the resolution is clearly evidence that ICAO's members are committed to working towards a reduction in global carbon emissions from international aviation, as contemplated by the Kyoto Protocol.

It seems unlikely at this stage that the resolution will provide an easy solution to the ongoing legal challenge and, so far, the indication is that disagreement will continue as to which side of the argument it in fact assists. Short of any intervening political compromise, the case before the ECJ will rest on its view of the legal arguments. In the meantime, airlines must continue to prepare for the implementation of the EU ETS whilst awaiting what will clearly be a hugely important decision from the ECJ.

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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