U.S. airlines lost their fight today to stay out of the European Union's carbon trading market at the E.U.'s highest court.
The Court of Justice of the European Union in Luxembourg ruled in a lawsuit brought by the Air Transport Association of America, American Airlines and United Continental that aviation can be included in the E.U.'s emissions trading system (ETS). The decision cannot be appealed.
"The directive including aviation activities in the E.U.'s emissions trading scheme is valid," the court said in a statement. "Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue nor the open-skies agreement."
U.S. air carriers said they would "comply under protest" when the law takes effect but would also press their argument in British court and in international forums.
"Today's court decision further isolates the E.U. from the rest of the world and will keep in place a unilateral scheme that is counterproductive to concerted global action on aviation and climate change," the industry group Airlines for America said in a statement. The group had filed the original legal action, along with two U.S. airlines, in the U.K. in 2009.
The decision confirms Advocate General Juliane Kokott's preliminary opinion in October, when she wrote that forcing airlines into the ETS did not violate the Chicago Convention, the Kyoto Protocol and the Open Skies Agreement.
"It is only if the operators of such aircraft choose to operate a commercial air route arriving at or departing from an airport situated in the E.U. that they are subject to the emissions trading scheme," the court said today.
It added that the ETS "infringes neither the principle of territoriality nor the sovereignty of third states, since the scheme is applicable to the operators only when their aircraft are physically in the territory of one of the member states of the E.U."
State bristles, while green groups hail ruling
The explanation dissatisfied Airlines for America, which said the European court "did not fully address legal issues raised" and that it has "established a damaging and questionable precedent" in the decision.
"We continue to have strong legal and policy objections to the inclusion of flights by non-E.U. air carriers in the E.U. ETS. We do not view the Court's decision as resolving these objections," said Krishna Urs, the State Department's deputy assistant secretary for transportation affairs, in a statement. "The path the E.U. has chosen is hampering progress towards a multilateral solution that is more likely to bear fruit in terms of concrete progress in limiting greenhouse gas emissions from aviation."
The U.S. airlines have argued that the Chicago Convention gives countries authority over airlines in their own airspace, thus preventing the ETS from regulating the parts of flights that aren't over Europe or the high seas. In turn, the European Commission argued that including only European airlines in the ETS would distort competition.
"I am of course very satisfied to see that the Court clearly concluded that the E.U. Directive is fully compatible with international law," Connie Hedegaard, E.U. commissioner for climate action, said in a statement. "A number of American airlines decided to challenge our legislation in court... so now we expect them to respect European law. We reaffirm our wish to engage constructively with everyone during the implementation of our legislation."
Environmental groups welcomed the ruling as a necessary nudge for the U.S.
"This is an amazing affirmation that we can, as a global community, begin to tackle climate change," said Keya Chatterjee, who heads international climate policy for the World Wildlife Fund's U.S. office. "This law does actually put a price on carbon, something that we have avoided in the United States. ... Voluntary actions are always really difficult if you're working against the economics."
Battle not over -- just moving
The airlines have said they wanted a global agreement, but the International Civil Aviation Organization (ICAO) has been negotiating for more than a decade to create a global carbon market for the industry, with little progress achieved. Nevertheless, Airlines for America said it would continue to pressure the E.U. to participate in a global agreement.
Airlines landing or taking off in Europe will have to join the ETS on Jan. 1, 2012, getting 85 percent of their emissions certificates for free and buying the rest at auction. Even flights conducted by the U.S. Navy will be included.
"We expect the aviation sector's burden in the ETS for 2012 to be close to €500 million, based on our current price forecasts for 2012, when the sector will face a shortfall of around 60 million tons," said Andreas Arvanitakis, associate director at Point Carbon. "The cost rises to €9 billion total by the end of 2020."
The CO2 emissions of aircraft operators will be capped at 97 percent of their average 2004-2006 levels next year and 95 percent from 2013 forward. Airlines that do not use all their allowances can sell the excess, while those that are short will have to buy more.
Carbon permits traded at around €8.7 per metric ton today on the ETS. They soared 21 percent yesterday after a vote in the E.U. parliament's environment committee to curb oversupply in the emissions trading market by setting aside 1.4 billion tons of allowances.
"This ruling doesn't mean the political battle is over," Arvanitakis said. "Rather, it will move to other grounds, possibly with retaliatory trade measures or complaints brought through the ICAO."
Proposed legislation in Congress, if passed, would make it illegal for U.S. airlines to comply with E.U. law. China threatened this year to suspend purchases of new jets made by the European manufacturer Airbus if Chinese airlines were included. A group of Chinese carriers has also threatened to sue the E.U. in Germany.
After the European Union said it was examining emissions-cutting measures China had proposed to see if they qualified Chinese airlines for exemption from the ETS, Airbus sold 88 A320-series jets to Chinese leasing companies in June.
The original lawsuit was filed in 2009 at the High Court in London, which referred the case to the E.U. Court of Justice for a preliminary ruling. After today's decision, the case is sent back to the British court, which is expected to rule in line with the European court.
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