10 OCTOBER 2011
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In this second of the series Gates and Company discuss the EU Emissions Trading Scheme in Aviation
EU ADVOCATE GENERAL UPHOLDS ITS LEGALITY BUT IT'S NOT OVER YET!
“Glad that the Advocate General's opinion concludes that our law to include aviation into ETS is fully compatible with international law”, (Connie Hedegaard, EU Climate Commissioner, on Twitter, 6 October 2011)
It looks likely that the great Aviation Emissions Trade War can be resolved only through political agreement or the passage of time, but not legal action. Time has now almost run out before the aviation sector is included in the EU Emissions Trading Scheme (EU ETS), so barring any last-minute political agreement, we expect it now to come into effect, as planned, on 1 January 2012. The arguments about aviation and the EU ETS will continue, and we advise those who oppose it to monitor, closely and rigorously, its effects on their businesses: by 1 December 2014, the European Commission must report on the operation of the EU ETS in relation to aviation, and may make recommendations for change. Looking further ahead, there is no international agreement on the future of the EU ETS beyond the expiry of phase III in 2020, so there is still all to play for.
The Advocate General found that the inclusion of international aviation in the EU emissions trading scheme was compatible with the provisions and principles of international law.
In particular the UK referring court asked whether the claimant airlines could rely on various rules of international law (including customary international law, the Chicago Convention, the Kyoto Protocol and the EU-US Open Skies Agreement) to challenge the validity of the EU ETS in relation to aviation. The Advocate General found that they could not. In particular, the rules of customary international law at issue determined the scope of sovereignty of States and limited their jurisdiction, but did not have an effect on the legal status of individuals. Further, since the EU was not bound by the Chicago Convention, such Convention could not be relied upon as a benchmark against which the EU ETS Directive can be reviewed. The Advocate General found that only Article 7 (applicability of laws and regulations of the parties) and the second sentence of Article 15(3) (application of environmental measures affecting air services) of the Open Skies Agreement could be a valid benchmark.
The UK referring court asked whether the EU ETS was invalid if and insofar as it applied the scheme to those parts of flights which took place outside the EU Member States’ airspace. The Advocate General found that this was not contrary to international law. The EU ETS Directive was concerned solely with aircraft arrivals at and departures from airports in the European Union, and it was only with regard to such arrivals and departures that the airlines had to surrender emission allowances in various amounts, depending on the flight. The fear of “extra-territoriality” was, according to the Advocate General, “untenable…based on an erroneous and highly superficial reading of the provisions of Directive 2008/101” (the aviation ETS Directive).
The Advocate General argued that the international agreements (Chicago, Kyoto, Open Skies) did not affect the validity of the EU ETS. There was no impermissible unilateral action by the European Union outside the ICAO framework since under the Kyoto protocol, the limitation and reduction of greenhouse gases was not the exclusive competence of the ICAO. The Open Skies Agreement did not rule out the application of market-based measures regarding aviation emissions.
Further, the inclusion of aviation in the EU ETS was compatible with the principle of fair and equal opportunity in the Open Skies Agreement. If the EU ETS Directive had excluded third country airlines from the application of the EU ETS then this would have given third country airlines an unjustified competitive advantage over their European competitors.
Finally, airlines were not charged fees, dues or other charges within the meaning of international-law agreements. The EU ETS was instead a market-based measure, the purpose of which was environmental and climate protection. Thus, the emission allowances that had to be surrendered were levied in respect of the emission of greenhouse gases, not merely fuel consumption or based on the persons or property on board.
Scheme will come into effect: legal process almost complete.
In the circumstances, it is not surprising that the Advocate General of the EU Court of Justice has found in favour of the EU’s Emissions Trading Scheme (“EU ETS”) as it applies to aviation. EU law on challenging legislation is still under-developed. We should expect that the full Court, when it rules in 2012, will follow the overall view of the Advocate General. There is no further Court in the EU to which appeal can then be made. Once the Court of Justice rules, the case reverts to the UK for conclusion of the litigation based on the Court’s ruling. The result will be that the UK’s implementing regulations will be found to be lawful, and the EU ETS will apply to aviation from 1 January 2012.
Political and economic battle remains.
No side wishes to back down. The EU’s stance has received a strong boost by this ruling. This will only intensify the political opposition, including from countries that played no part in this particular case. Consider the escalation of retaliatory threats:
• China forced the cancellation by one of its airlines of an order of European-manufactured Airbus, worth $ 3.8 billion. The Hong Kong airline was blocked prior to an announcement that was due at the Paris Air Show earlier this year.
• The US Congress is currently debating H.R. 2594, a bill that would empower the U.S. Secretary of Transportation to forbid U.S. carriers from participating in the EU ETS. The proponents have labelled EU ETS unlawful and unjust.
• Russia has equally threatened retaliation; the transport minister has been quoted as stating “Europe needs to understand that imposing EU ETS on sovereign states like Russia, China and the US could lead to consequences, not just for its airlines, but for the weak European economy.”
• The future debate and scope for influencing the EU ETS now resides at the political level. At this level, there is still a battle of predictions. These predictions concern: (1) the economics of (a) how airlines will be affected and (b) how economies will be affected; (2) the effect on emissions in the EU and the rest of the world; and (3) the future of global negotiations on climate change. Each positive prediction or optimistic forecast is contentious. For example:
• The grant of free allowances to operators between 2012 and 2020 will allow operators to invest in new aircraft, fuel-efficiency and alternative fuels (Connie Hedegaard). This remark was denounced as economically unrealistic.
• The airlines will be able to pass on the cost of additional allowances to their customers. This is hotly disputed: the argument against this is that airlines operate in a highly price-sensitive environment and therefore cannot pass through the additional costs.
• The Commission listed in its “Questions & Answers on the benchmark for free allocation to airlines and on the inclusion of aviation in the EU’s Emission Trading Scheme (EU ETS)” 98 States with no commercial carriers covered by the EU ETS. The purpose of this list was unexplained, but to the extent that it was designed to give the impression that the likely territorial effect of the EU ETS was apparently smaller, it was flawed. About one quarter of those States are in Latin America or the Caribbean, an area which has yet to see major growth in international aviation. Another quarter are blacklisted in the EU, wholly or partly; and various other States are small in relation to their aviation significance – the Marshall and Solomon Islands, for example.
• Over time, the battle of predictions will give way to a battle of experience under the ETS. There will be arguments about the economic effects (and the distribution of those effects) on aviation: are non-EU airlines better off compared to EU airlines, because at least non-EU airlines can avoid flying in the EU? Will short-haul high-frequency carriers suffer disproportionately to long-haul? To what extent and to what effect can the increased costs be passed to consumers? Which routes will become economically marginal as a result of EU ETS-related costs? Will there be route exits, a raising of barriers to entry and a reduction of route-specific competition, lowering economic efficiency? And perhaps the most serious question: will the unilateral approach of the EU lead to the marginalisation of the EU economy, as the major economic superpowers including the US, China, Russia and India find other routes through which to trade? In other words, to what extent will the inclusion of aviation in the EU ETS encourage the creation of new international hubs outside the EU? The experience of the EU ETS, and how such experience is interpreted, will be as contested as the earlier predictions. This will be the backdrop to the political debate of the future.
For the airline industry, the EU Court’s preliminary ruling will have been unwelcome, even if unsurprising. Despite the Advocate General’s clear dismissal of the questions put to the Court, the legal ground remains contentious amongst experts and will not go away. Practically, however, the immediate concern will be compliance, and making the best of the situation, whilst storing up evidence for the future. Meanwhile, the international trade battles at a political level will continue. www.gatesandpartners.com
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