Wednesday, December 28, 2011

Another airline collision - European Union's Emission Trading Scheme?

The EU and US are headed for another airline collision - this one related to the European Union's Emission Trading Scheme (EU ETS) that covers airline emissions also. As if the Airbus-Boeing dispute was not enough, a recent decision of the European Court of Justice (ECJ) with respect to applicability of the EU ETS Regulation to airline emissions has aggravated the dispute between the traditional trading partners.

The EU ETS Directive essentially provides for "allowance of greenhouse gas emissions trading in order to promote reductions in emission of greenhouse gases in a cost-effective and economically efficient manner". The Directive applies to activities mentioned in the Annex I to the Directive which includes "Aviation -Flights which depart from or arrive in an aerodrome situated in the territory of a Member State to which the Treaty applies." 

Chapter II  of the Directive specifically deal with Aviation. Article 3 A of the Directive mandates :

"The provisions of this Chapter shall apply to the allocation and issue of allowances in respect of aviation activities listed in Annex I."

Detailed provisions related to the total quantity of allowances for aviation, allocation and issue of allowances to aircraft operators, special reserve for certain aircraft operators, monitoring and reporting plans for each airline operator are laid down in the Directive. The method of allocation of allowances to aircraft operators is dependent amongst other things on fuel consumption on the international flights to the European Union destination.

The EU ETS works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so.

It is reported that in actual commercial terms the cost per flight that is originating or landing at any European union destination would increase by about 12 Euros.

The EU ETS applicability to Aviation was challenged by many Airline Associations as being violative of international treaty obligations of the EU. The European Court of Justice has upheld the directive as not violative of international treaty obligations. Come January 2012 all airline operators operating into and out of Europe (and also operators operating domestically within Europe) will have to buy permits under the EU’s emissions trading scheme.

The ECJ while analysing the Directive of the European Union in the light of international obligations opined that the ETS was not violative of customary international law or territorial sovereignty of countries,

"125   In laying down a criterion for Directive 2008/101 to be applicable to operators of aircraft    registered in a Member State or in a third State that is founded on the fact that those aircraft perform a flight which departs from or arrives at an aerodrome situated in the territory of one of the Member States, Directive 2008/101, inasmuch as it extends application of the scheme laid down by Directive 2003/87 to aviation, 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, since 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.

126   Nor can such application of European Union law affect the principle of freedom to fly over the high seas since an aircraft flying over the high seas is not subject, in so far as it does so, to the allowance trading scheme. Moreover, such an aircraft can, in certain circumstances, cross the airspace of one of the Member States without its operator thereby being subject to that scheme.

127     It is only if the operator of such an aircraft has chosen to operate a commercial air route arriving at or departing from an aerodrome situated in the territory of a Member State that the operator, because its aircraft is in the territory of that Member State, will be subject to the allowance trading scheme

128      As for the fact that the operator of an aircraft in such a situation is required to surrender allowances calculated in the light of the whole of the international flight that its aircraft has performed or is going to perform from or to such an aerodrome, it must be pointed out that, as European Union policy on the environment seeks to ensure a high level of protection in accordance with Article 191(2) TFEU, the European Union legislature may in principle choose to permit a commercial activity, in this instance air transport, to be carried out in the territory of the European Union only on condition that operators comply with the criteria that have been established by the European Union and are designed to fulfil the environmental protection objectives which it has set for itself, in particular where those objectives follow on from an international agreement to which the European Union is a signatory, such as the Framework Convention and the Kyoto Protocol."

Thus all international flights entering or departing the European Union as well as domestic flights operating within the European Union are subject to the allowance system. The issue of a brewing "trade war" between the United States (supported by China, India ) against the European Union has been foreseen in 2012 by many reports here, here, here, here, here and here. It is clear that the obligations of an airline operator on allowances pertains to the "entire length of the international flight" and not proportionally to the extent of travel on European airspace. This is disadvantageous to international airline operators via vis domestic airline operators since the former have longer destinations and hence larger allowances to bear. However, this does not discriminate between a European airliner operating internationally and a third party airline operator operating internationally.

The issue that arises is whether EU ETS is violative of European Union's obligations under the WTO? It raises the following issues:

1. Does the EU ETS violate the principle of "national treatment" that is enshrined in WTO Agreements? As per the GATS Agreement, "national treatment" is a mandate. As per Article XVII of the GATS,

"1.       In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.
2.       A Member may meet the requirement of paragraph 1 by according to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers.
3.       Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other  Member."

"Air Transport Services" is included in the European Union's schedule of commitments under GATS. Is the application of the allowance based on fuel consumption (including the entire distance of the international flight) favour domestic airline operators? Is it a disguised restriction on international trade in services? Does the method of calculation of allowances based on fuel consumption irrespective of the extent of fuel consumption outside the European Union violate the principle of "national treatment" since two dissimilar situations are being treated similarly?

2. Is the EU ETS an unjustified technical barrier to trade? As per Article 2.2 of the TBT, 

" Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade.  For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create."

Is the EU ETS an unnecessary obstacle to international trade. Is it "more trade restrictive" than necessary? Only time will tell if this dispute will come to the doorsteps of the WTO with the US and China as complainants and the European Union as the respondent. Interesting, turbulent times for the Aviation industry.

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