10 October 2011
A Blow to Airlines in EU ETS Dispute
European Regulatory
/ UK Regulatory
By Vanessa Edwards, Philip Torbøl, Christopher Tung and Jonathan Blank
Aviation Industry
In an important case pending before the European Court of Justice (ECJ), the Advocate General
Juliane Kokott (AG) delivered her Opinion on Thursday 6 October. The AG considers that the
inclusion of international aviation in the European Union (EU) Emissions Trading Scheme (ETS) is
compatible with international law.
The AG's Opinion is not binding on the judges of the ECJ but in the majority of cases the judgment of
the ECJ comes to the same conclusion. The judgments in this case should be delivered in the course of
next year.
Brief background
In 2008, the EU's ETS Directive was amended by Directive 2008/101 ("the Directive") so as to
include aviation activities in the ETS with effect from 1 January 2012. The Directive requires all
greenhouse gas emissions from aircraft landing or taking off within the EU to be included within the
ETS, which aims to cut greenhouse emissions by creating a market for emission allowances.
The Air Transport Association of America (the trade body for US airlines) and a number of US
airlines challenged the Directive, arguing that the inclusion of international aviation in the ETS is
contrary to international law and to the Chicago Convention, the Kyoto Protocol and the Open Skies
Agreement.
Opinion
The AG rejected all the applicants' numerous arguments, opining in particular that:
 The Directive is consistent with provisions in the Chicago Convention which (i) require the laws of
a party to be complied with by aircraft of other parties on entering or departing from or while
within the territory of that party and (ii) prohibit a fee on entry or exit.
 The Directive is consistent with provisions in the Open Skies Agreement which (i) require the laws
of a party to be complied with by aircraft of other parties on entering or departing from or while
within the territory of that party; (ii) require that, when environmental measures are established,
the aviation environmental standards adopted by the International Civil Aviation Organization
(ICAO) are followed except where differences have been filed; (iii) require that environmental
measures for aviation activities adhere to the principle of fair and equal opportunity for airlines and
the right of airlines to determine the frequency and capacity of their international air transportation,
since it applies without distinction between EU and non-EU carriers; (iv) prohibit an excise duty
on fuel.
 Article 2(2) of the Kyoto Protocol does not prevent the EU from pursuing the limitation or
reduction of greenhouse gases from aviation outside the framework of ICAO. The Kyoto Protocol
does not confer any exclusive competence on ICAO.
 Is consistent with the international law principles of sovereignty of States over their air space and
of freedom to fly over the high seas and the principle that no State can claim sovereignty over the
A Blow to Airlines in EU ETS Dispute
high seas, as it does not contain any extraterritorial provisions or infringe the sovereign rights of
third countries, is concerned solely with aircraft arrivals at and departures from airports in the EU.
Implications
Assuming that the judgment of the ECJ substantially follows the Opinion of the AG, the applicants
would have no further recourse before the ECJ on the same issues but may attempt to lobby the US
and other non-EU governments to take retaliatory measures against the EU carriers flying into and out
of the US and other non-EU countries. Such a course of action would be likely to trigger WTO
proceedings, and would only be definitively resolved by a WTO decision.
It is to be expected that the US and other countries will continue to threaten to pursue other remedies.
It is unlikely that commercial retaliation will solve the issue as the political stakes in the EU are high
and the European Parliament (one arm of the EU legislature) in particular will not readily accept
rolling back environmental legislation such as this for commercial purposes. There have been
extensive lobbying efforts in the EU since the Directive was first proposed; since they have been
ineffective to date, it is inconceivable that they would have any impact at this late stage.
Other potential avenues for carriers would be to bring proceedings under ICAO, where they may have
a chance of succeeding. However, the only power ICAO has would be to suspend EU Member States'
votes in ICAO. Alternatively (or in addition) the US government could bring an arbitration under the
Open Skies Agreement. If the US won and the EU did not abide by the results, then the US would be
entitled to bring proportionate remedies against them. But bringing such an action would clearly
antagonise the EU and the environmental lobby, and it is unlikely that the present administration
would want to risk that. A possible scenario under the Obama administration would be for the US to
enter into some sort of negotiation with the EU in which the EU determines that the US has taken
adequate measures and suspends US carrier obligations -- which of course would also require
suspending them for the EU carriers.
Authors:
Vanessa Edwards
vanessa.edwards@klgates.com
+44.(0)20.7360.8293
Philip Torbøl
philip.torbol@klgates.com
+32.(0)2.336.1903
Christopher Tung
chris.tung@klgates.com
+852.2230.3511
Jonathan Blank
jonathan.blank@klgates.com
+1.202.661.6250
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