European high court upholds carbon fees on airlines

Updated On: Dec 22, 2011

The European Court of Justice (ECJ) has upheld the inclusion of the airline industry in the EU's carbon-trading scheme on Wednesday amid opposition by the US and others, a decision likely to intensify a diplomatic row between the EU and its largest trading partners.

"The directive including aviation activities in the EU's emissions trading scheme is valid," according to a statement issued by the ECJ shortly after its ruling, the final European-level judgment on the plan. The court, whose ruling cannot be appealed, was expected to back the plan after a court advocate general's opinion supporting it earlier this year.

A new EU law includes all airlines in the ETS, starting January 1 when carriers will have to hold permits to cover all CO2 emitted by aircraft landing and taking off from EU airports. Non-EU airlines are particularly hard-hit by the scheme.

US, China and others oppose EU plan

The EU court was called to rule on the case after American Airlines, United Continental and the Air Transport Association of America, a trade group, challenged the law in a British court in 2009. The British court in turn asked the ECJ to rule on legitimacy of the EU plan under international agreements.

The US, China and others have threatened action if their airlines are forced to obtain permits to account for their carbon dioxide emissions. The US warned that the ruling had not resolved Washington’s “strong objections” to the EU plan.

US Secretary of State Hillary Clinton told her European counterparts last week that Washington will be “compelled to take appropriate action” if the EU did not reconsider its plan. The US said 41 countries have registered objections to the EU's carbon Emissions Trading System (ETS) as a unilateral action in violation of international law. Lawmakers are pushing bills that would ban US airlines from complying, and Airlines for America, the US aviation industry association, said it was reviewing its options for a further legal challenge before London’s High Court.

The EU’s plan triggered protests last month by 26 countries including Japan, India, Russia and the US. Separately, China said it could to take Brussels to court and hinted that the scheme could adversely impact Airbus jet orders.

Critics of the scheme prefer a worldwide scheme to tackle emissions overseen by the International Civil Aviation Organization, but the EU grew frustrated at longstanding efforts to establish such a programme and are suspicious of a pledge by ICAO that it could obtain agreement on the framework of a worldwide deal by the end of 2012.

There are also worries that the EU's action could hamper the on-going deregulation of the industry.

Fitch ratings agency warned of a global trade dispute. “We believe threats of trade retaliation over the EU’s cap-and-trade system will pose growing threats to aviation market access in both developed and emerging markets next year,” Fitch said, adding that counter-measures could include changes in slot allocations at airports and authorising routes, particularly in developing countries.

EU affirm legality and feasibility of plan

The ECJ insisted that the EU’s ETS did not infringe upon the sovereignty of other nations and was compatible with international law.

The EU emphasised that the added costs would only be a few dollars per ticket and would enable efficient airlines to make money rather than lose it, in response to US accusations that the regulation was “an exorbitant tax.”

The ETS puts a price on carbon dioxide emissions and caps their number. It aims to encourage companies to invest in clean technologies to reduce emissions in the long term, rather than buying more permits to emit more carbon dioxide. An allowance traded on the ETS gives the holder the right to emit one metric ton of carbon dioxide.

The EU will distribute up to 85% of the airline industry's allowances free of charge. Above that level, airlines are required to buy carbon credits through the ETS. The European Commission estimated that the ETS could increase the cost of a single trip ticket by between €2 and €12 (US$2.60 and US$15.70) depending on flight length. Thomson Reuters forecasted a €9 billion (US$11.8 billion) addition to airlines’ costs by 2020.

Report: EU Court Backs Rules To Include Airlines In Carbon Market (Wall Street Journal, 21 Dec 2011)

Report: Foreign carriers must pay EU carbon fees (Financial Times, 21 Dec 2011)

Report: Europe’s high court rejects US appeal, upholds cap-and-trade carbon plan for airlines (Washington Post, 21 Dec 2011)

Analysts express dim views of EU ETS airline inclusion

Criticism has already been levelled against the final ruling on the EU ETS plan to include airlines. Bloomberg in an editorial backed the view that the ETS “represents an inappropriate extraterritorial application of national law.” The editorial claims that emissions produced by a flight between San Francisco and London would produce only 8.7 per cent of total inflight emission in EU airspace, but the airline would be accountable for all emissions during the flight.

The editorial backed a global mechanism for carbon emissions regulation being fleshed out by the UN, and cautioned that the EU measure would throw the UN plan into disarray.

A Reuters analysis said the airlines will most certainly pass the cost to consumers and cited industry observers’ projection that airfares between the US and Europe could rise between US$50 to US$90, much higher than the European Commission estimates. 
The article also cited industry experts as saying that the higher costs to airlines would reduce investment in new and more efficient engine parts that would decrease carbon emissions, and suggest that the EU plan is thus counterproductive.

Analysis: Europe’s Overreach on Plane Emissions Won’t Clean the Sky: View (Bloomberg, 22 Dec 2011)

Analysis: EU carbon law likely to raise air fares to Europe (Reuters, 22 Dec 2011)

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