It is now crystal clear that the Directive of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community will have damaging impact on the aviation industry. On the other hand, the aviation industry is likely to pass their costs on to the consumer – therefore airline fares are set to rise.

Under the above-mentioned Directive all flights departing or landing in the EU, including intercontinental flights, have been integrated in the EU's emissions trading system (ETS) from 1 January 2012. The directive applies to all airlines flying in and out of the EU, including airlines from third countries. Hence, from that date all airlines are required to buy permits under the ETS.

The reduction of emissions from aviation calculated on the basis of airlines’ average annual emissions between 2004-2006. In 2012 airline emissions will be cut by 3 percent therefore there will be a cap on emissions from aviation of 97 per cent of average emissions for 2004- 2006 which will be decreased to 95 per cent from 2013 hence airline emissions will be cut by 5 percent from 2013. Airlines can exceed their CO2 allowances but they will have to buy extra permits from other companies. Moreover, 85 per cent of the emissions permits will be allocated for free however 15 per cent of the airlines emission permits will be auctioned.

Obviously, the aviation industry is not pleased with such piece of EU legislation, as they believe that their future business was not taken into account by the EU institutions. It has been estimated that the directive could add €9bn to the costs of the aviation industry by 2020.

Moreover, the US as well as Australia, Canada, China, Japan, India, South Korea (including their airlines), even before the directive has been adopted, have shown their opposition to the EU’s ETS and stressed that such move would violate EU Member State international obligations under the Convention on International Civil Aviation.

In fact, the Air Transport Association of America, American Airlines Inc., Continental Airlines Inc. and United Airlines Inc. (collectively ‘ATA and others’), contested the measures transposing Directive 2008/101 in the UK, and brought proceedings against the Secretary of State for Energy and Climate Change before the High Court of Justice of England and Wales, Queen’s Bench Division (Administrative Court). They argued that the EU infringed several principles of customary international law and various international agreements, namely the Chicago Convention, the Kyoto Protocol and the Open Skies Agreement because it imposes a form of tax on fuel consumption, as well as certain principles of customary international law as it seeks to apply the allowance trading scheme beyond the European Union’s territorial jurisdiction.

The High Court of Justice of England and Wales referred the matter to the ECJ and has asked the Court whether the directive is valid in the light of those rules of international law. On 21 December, the ECJ delivered its ruling in ﷓C-366/10, confirming the validity of the directive that includes aviation activities in the emissions trading scheme.

The Court pointed out that the EU is not a party to the Chicago Convention and it is not bound by it, consequently the Court held that it couldn’t examine the validity of Directive 2008/101 in light of the Chicago Convention.

As regards the Kyoto Protocol, the Court noted that the parties to the protocol are allowed to comply with their obligations in the manner and at the speed upon which they agree and that, particularly, the obligation to pursue limitation or reduction of emissions of certain greenhouse gases from aviation fuels, working through the International Civil Aviation Organisation (ICAO), cannot be considered unconditional and sufficiently precise to be capable of being relied upon it in legal proceedings in order to contest the validity of Directive 2008/101.

Then, the Court examined whether the directive is compatible with the Open Skies Agreement and the principles of customary international law.

The Court accepted that “Article 11(1) and (2)(c) of the Open Skies Agreement, so far as concerns the obligation to exempt the fuel load of aircraft engaged in international air services between the European Union and the United States from taxes, duties, fees and charges, with the exception of charges based on the cost of the service provided, may be relied upon in the context of the present reference for a preliminary ruling for the purpose of assessing the validity of Directive 2008/101 in the light of that provision.” ATA and others contend that Directive 2008/101 infringes the Open Skies Agreement, particularly the obligation to exempt fuel from taxes, duties, fees and charges. However, according to the Court “there is no direct and inseverable link between the quantity of fuel held or consumed by an aircraft and the pecuniary burden on the aircraft’s operator in the context of the allowance trading scheme’s operation”. Moreover, the Court noted that “(…) unlike a duty, tax, fee or charge on fuel consumption, the scheme introduced by Directive 2003/87 as amended by Directive 2008/101, apart from the fact that it is not intended to generate revenue for the public authorities, does not in any way enable the establishment, applying a basis of assessment and a rate defined in advance, of an amount that must be payable per tonne of fuel consumed for all the flights carried out in a calendar year.” Consequently, the Court held that “it cannot be asserted that Directive 2008/101 involves a form of obligatory levy in favour of the public authorities that might be regarded as constituting a customs duty, tax, fee or charge on fuel held or consumed by aircraft operators.” The Court concluded therefore that Directive 2008/101, by providing “for application of the allowance trading scheme in a non-discriminatory manner to aircraft operators established both in the European Union and in third States, is not invalid in the light (…) of the Open Skies Agreement”.

The Court accepted that the principles customary international law namely that each State has complete and exclusive sovereignty over its airspace, that no State may validly purport to subject any part of the high seas to its sovereignty and the principle of freedom to fly over the high seas, “(…) may be relied upon by an individual for the purpose of the Court’s examination of the validity of an act of the European Union in so far as, first, those principles are capable of calling into question the competence of the European Union to adopt that act (…) and, second, the act in question is liable to affect rights which the individual derives from European Union law or to create obligations under European Union law in his regard.” Nevertheless, the Court held that Directive 2008/101 “does not infringe the principle of territoriality or the sovereignty which the third States from or to which such flights are performed have over the airspace above their territory,” because “those aircraft are physically in the territory of one of the Member States of the European Union and are thus subject on that basis to the unlimited jurisdiction of the European Union.” In the same way, the Court held that the directive does not affect the principle of freedom to fly over the high seas.

Hence, unsurprisingly, the Court ruled that “the European Union had competence, in the light of the principles of customary international law capable of being relied upon in the context of the main proceedings, to adopt Directive 2008/101, in so far as the latter extends the allowance trading scheme laid down by Directive 2003/87 to all flights which arrive at or depart from an aerodrome situated in the territory of a Member State.”

Obviously, the US airline industry is very disappointed with such ruling. According to Airlines for America "The court did not fully address legal issues raised and has established a damaging and questionable precedent by ruling that the EU can ignore the Chicago Convention,".  Moreover, they said that they are reviewing the legal options but "in the meantime, A4A members will comply under protest" with the ETS.

Connie Hedegaard, the European Commissioner for Climate Action, said that “A number of American airlines decided to challenge our legislation in court and thus abide by the rule of law. So now we expect them to respect European law.” However, the US Department of State continues to have “strong legal and policy objections to the inclusion of flights by non-EU carriers in the EU emissions trading scheme.” It added, “We do not view the [ECJ’s] decision as resolving these objections.”

The US as well other countries such as China and India are not willing to give up their fight to exclude their airlines from the EU's ETS, despite the ECJ’s ruling. They are already talking about retaliatory measures against the EU, as they cannot appeal against the ECJ decision. China has already announced that it would not cooperate with the ETS. Chai Haibo of the China Air Transport Association (CATA) said "The CATA, on behalf of Chinese airlines, is strongly against the EU's improper practice of unilaterally forcing international airlines into its ETS,". In fact, CATA’s Secretary-General, Wei Zhenzhong, said “Chinese airlines will not participate in the ETS, will not provide a carbon surveillance plan for EU countries, and will not negotiate preferential policies with the EU”.

However, as above-mentioned, all airlines are required to comply with the EU Directive since 1 January 2012. Under the Directive, all airlines flying in and out of the EU are required to report on their verified CO 2 emissions (2009-2013) by April 2013. Consequently, if airlines refuse to apply Community law they would be subject to sanctions including fines or, as a last resort, a EU flight ban, “in the case of a permanent and constant infringement”.

In the meantime, Lufthansa, Brussels Airlines and Delta AirLines have already included the ETS charge in the price of tickets. Obviously, other airlines will raise ticket prices to compensate for the costs of ETS.