Is a WTO challenge to the EU ETS feasible?

The extension of the EU ETS to the aviation sector has been a subject matter of intense debate and criticism over the past few months. I have blogged extensively about it here, here, here, here and here. Legal analysis of the measure was discussed in detail here.

Joshua Meltzer recently discusses the issue threadbare in an ASIL Insight. Tracing the rationale and background of the measure he opines that the EU ETS extension to the aviation sector may be incompatible with WTO law.

"Requiring non-EU airlines to purchase emission allowances affects services trade and could therefore also be challenged under the WTO General Agreement on Trade in Services (“GATS”). Requiring non-EU airlines to purchase emissions allowances could also indirectly affect trade in goods, where airlines pass through the cost of the Aviation Directive in their cargo rates. Indeed, approximately 50% of air cargo is still carried on passenger flights.This could raise questions about the consistency of the Directive with the General Agreement on Tariffs and Trade 1994 (“GATT”). That the same regulatory scheme can affect trade in goods and services has been confirmed by the Appellate Body in for example EC—Bananas.

A threshold question regarding GATS is whether the Aviation Directive falls within the GATS Annex on Air Transport Services (“AATS”), which excludes “traffic rights” from GATS. The AATS definition of “traffic rights” may be affected by the scope of traffic rights regulated under the Chicago Convention and more recent bilateral air services agreements such as the U.S.-EU Open Skies Agreement. The European Court of Justice 2011 decision that the Aviation Directive is not a tax or charge on fuel indicates that the Aviation Directive does not regulate matters subject to the Open Skies Agreement. Accordingly, the Aviation Directive does not deal with traffic rights as defined in the AATS and is subject to GATS.

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The EU Aviation Directive is a cost to airlines based on their CO₂emissions, and the cost varies directly with the distance flown. Although the Directive applies equally to all airlines arriving in and departing EU airspace, it imposes a higher cost on goods and services coming from countries that are further away from the EU than on like goods and services from within the EU or countries closer to the EU. This is a form of de facto discrimination, which could violate the EU’s MFN and national treatment commitments under the GATS and the GATT."

Does the general exception of Article XX GATT save the measure? Joshua doesn't seem to think so.

"However, the key challenge for the EU would be demonstrating that the Aviation Directive complies with the chapeau to GATS Article XIV and GATT Article XX. The chapeau ensures that trade measures are not exempt from compliance with GATT/GATS obligations if they are applied in ways that constitute arbitrary or unjustifiable discrimination or a disguised restriction on trade, raising the following issues:  

• Is the price signal from the Aviation Directive consistent with the policy justification of reducing CO₂ emissions? Arbitrary and unjustifiable discrimination could arise by applying the Aviation Directive to goods from outside the EU that have a lower CO₂lifecycle than like domestic goods.

• The Aviation Directive could create an incentive for long-haul flights to land in countries close to the EU to limit their liability under the Directive to the final flight into the EU. Arbitrary and unjustifiable discrimination could arise if using these transit points leads to longer flights and increased CO₂ emissions.

• The EU cannot condition application of the Directive to non-EU airlines based on whether the other country has adopted the same policies to reduce emissions from aviation.The EU will instead need to demonstrate that it takes into account the different situations that exist in different countries."

The initial euphoria of a joint declaration against the measure and the Chinese challenge seems to have short-lived. Are we going to see a WTO challenge to this EU measure? This could perhaps happen when a tit for tat situation arises. And that is happening quite often these days in international trade relations.