Flying too high? Extraterritoriality and the EU Emissions Trading Scheme: the Air Transport Association of America judgment

Brian F. Havel* and John Q. Mulligan**.

On Dec. 22, 2011, the Court of Justice of the European Union (CJEU) handed down its highly anticipated judgment in a lawsuit by U.S. carriers challenging EU Directive 2008/101 insofar as it sweeps all non-EU air carriers into the controversial EU Emissions Trading Scheme (ETS). The challenge was originally filed in the English High Court, which made a preliminary reference to the CJEU on certain international law issues raised by the plaintiffs.  The judgment (C-366/10 Air Transport Association of America v Secretary of State for Energy and Climate Change) upheld the validity of Directive 2008/101, finding its provisions to be consistent with applicable international law.

While EU environmental officials appear to have been emboldened by the ruling, foreign nations have mostly assailed the Court’s decision.  The Court has now lent its approval to and supplied legal justification for aggressive unilateral regulation to combat climate change, a development that should be heartening to environmental activists everywhere. We take issue, however, with many of the Court’s interpretations of international aviation law treaties and principles and are concerned about the disregard the judgment shows for comity and cooperation as necessary components of international aviation relations. This blog examines certain sections of the judgment that we feel are open to legitimate attack on that basis.  We have developed these and other arguments in much greater detail in a new article that will appear in the Spring 2012 issue of Air & Space Law, a Kluwer publication. Another related article, co-authored by Brian F. Havel and Gabriel S. Sanchez (Senior Fellow at the International Aviation Law Institute), will appear in the next issue of the Harvard Environmental Law Review and advocates a sector-specific global aviation emissions agreement.

The EU is not bound by the Chicago Convention

The CJEU begins its judgment by determining what sources of international law are proper for evaluating the legality of extending Directive 2008/10’s coverage to non-EU airlines. The Court concludes that the 1944 Convention on International Civil Aviation (the Chicago Convention), the key multi-State treaty regulating international air transport, is not a valid instrument against which an EU directive could be judicially assessed.  The reasoning is rather simple: the EU (as opposed to the 27 Member States) is not itself a party to the Convention.  Further, the Court concludes that neither the Lisbon Treaty (the Treaty on the Functioning of the European Union (TFEU)), nor the Court’s previous rulings on “functional succession” to treaties, would require that the EU be considered bound by a treaty simply because all of its Member States are parties.

While the Court’s doctrinal analysis is legally sound as far as it goes, the judgment fails to discuss many disturbing consequences of that analysis. The judgment implicitly recognizes and sanctions a gaping loophole in international law, namely, that States can use supranational institutions to operate outside the constraints of binding bilateral and multilateral agreements. The ramifications of that loophole for the enforceability of existing international agreements suggest perhaps a need to reconsider the requirements under which functional succession applies. At the least, it is a cause for concern that the Court never acknowledges this problem. Further, even if the Court is correct in holding that an EU directive cannot be declared invalid by reference to the Chicago Convention, the Member States enforcing the directive are unquestionably bound by the Convention.  One can only presume that the UK court that sent the question to the CJEU would have appreciated some guidance as to whether UK officials who administer and enforce the provisions of Directive 2008/10 will be in violation of the Chicago Convention. Instead, the Luxembourg Court, having determined that the Convention cannot invalidate EU directives, fails to evaluate the compatibility of Directive 2008/10 with the Convention and thus leaves the matter unsettled.

Application of the ETs to non-EU Carriers

The second major legal issue before the Court, the one that has received the most attention in the press and appears to be most vexing for foreign governments, concerns the EU’s authority as a matter of international law to apply this type of regulation to non-EU airlines. The CJEU evaluates that aspect of the Directive against customary international law principles affording States exclusive sovereignty over their own airspace and freedom to fly over the high seas.  Additionally, the CJEU looks at Article 7 of the U.S./EU Open Skies Agreement, which requires aircraft to comply with local (EU) regulations when in EU territory.  Directive 2008/101 applies to the emissions by foreign carriers on routes that require aircraft to land at or depart from airports within EU territory.  On that basis, the CJEU concludes that Directive 2008/101 is perfectly consistent with Article 7, as well as with the relevant international law principles in question.  Nevertheless, much of the objection by the U.S. airlines litigating the case rests on the fact that non-EU carriers will be charged for emissions occurring outside EU territory (i.e., outside the combined airspaces of the 27 Member States).  The Directive requires calculation of emissions charges based on the entirety of each airline’s route, not just the portion of the route that touches EU territory.  The CJEU dismisses that argument without fully responding to it. The Court essentially holds that by choosing to utilize EU airports, foreign carriers choose also to subject themselves to the EU regulation, whatever the reach of its application. Additionally, the Court states that the EU can apply its regulation to activity that contributes to the pollution of EU territory but originates outside that territory.

The CJEU’s conclusion rests on its contention, which it seems to find logical, that non-EU carriers are not subject to the ETS when their aircraft do not land at or depart from an EU airport.  But the intention of the Directive is clearly to reduce emissions over the course of the entire flight, including those portions above the high seas and within the airspace of non-EU States.  It is inconceivable that a foreign airline could comply simply by reducing emissions from or purchasing extra allowances for only those portions of its flights to and from EU States that takes place within the airspaces of EU Member States. Inevitably, the EU rules will affect the behavior of foreign airlines during their operation over the high seas and within the sovereign airspace of the carrier’s home State and of other non-EU States. The CJEU insists that none of that infringes upon the sovereignty of foreign States, as those States are free to apply their own emissions regulations to aircraft operating within their airspace, and possibly even to qualify for an exemption for their airlines from the EU ETS for doing so.  The Court fails to consider that complete and exclusive airspace sovereignty (as declared in Article 1 of the Chicago Convention) might include the right to declare that portions of flights occurring within that airspace shall not be subject to regulation by a foreign State (here, the EU).

Hinging the application of the regulation on the use of EU airports is a superficially clever way to portray the regulation as one that is exclusively applied within EU territory.  By permitting EU officials to exploit this territorial link to regulate activity that originates outside EU territory, however, the CJEU begs the question of whether there exists a limiting principle that applies to the EU’s emissions regulating powers.  Following the Court’s logic, it would seem possible that were the Directive drafted differently, it could be valid even if it applied to all routes flown by a foreign-registered aircraft that, on just one of its routes, lands at an airport within EU territory.  Even more preposterously,  one might conclude that the ETS could apply to all routes flown by all aircraft owned by a foreign airline that, on just one of its routes, lands a single aircraft at an EU airport.  In each of those hypotheticals, it is arguable that (as with the Directive in question) the operator of the aircraft has chosen to subject itself to the EU regulation by having contact with EU territory at some point during the operation of one of its aircraft.  Similarly, both scenarios involve activity that originates outside EU territory but contributes as much to the pollution of EU territory as the activity regulated under the Directive.  That the European Parliament did not go as far in regulating the emissions of non-EU airlines as the Court’s judgment would appear to allow does not constitute a robust defense of the legal reasoning underpinning that judgment.  As with the consideration of the Chicago Convention, the CJEU, in its keenness to grant the EU the latitude necessary to reduce aviation emissions and by only narrowly considering the precise facts before it, ignores the much larger ramifications that its judgment poses for adherence to international agreements and limits on unilateral action.

Does the ETS Include a Fuel Charge?

The final contentious issue raised by the CJEU judgment is its determination that the ETS does not violate Article 11 of the U.S./EU Open Skies Agreement which, modelled on a similar provision in the Chicago Convention, exempts the fuel load carried on board an aircraft providing  international service from taxes, duties, or other charges.  Under Directive 2008/101, aviation emissions are to be calculated with reference to fuel consumption by an aircraft during the course of the entire route being regulated.  The CJEU insists that this formula does not make compliance with the ETS analogous to a fuel tax or charge because the ETS is an environmental regulatory scheme of which allowances happen to be a part. The Court runs into trouble when it makes comparisons with one of its previous rulings, Case C‑346/97 Braathens [1999] ECR I‑3419, where it held that a Swedish environmental protection tax calculated according to fuel consumption amounted to a tax on fuel. The Court considers the ETS distinguishable because the market mechanism by which emissions allowances are purchased and priced destroys any “direct and inseverable link between the quantity of fuel held or consumed by an aircraft and the pecuniary burden on the aircraft’s operator.”  The Court goes on to suggest that, because some allowances are given away free by the Member States, an airline may not face any pecuniary burden at all.  The Court also contends that the emissions allowances are distinct from a tax because their cost is not fixed in advance and they are not intended to generate revenue for public authorities.

These distinctions all ignore the reality that participating airlines are required to surrender something of value (allowances) based directly on the amount of fuel the aircraft has consumed. The fact that the monetary value of these allowances fluctuates according to market conditions, or that some of these allowances may have been given free to the airlines, does not alter the reality that the airlines are being asked to surrender an asset with monetary value, which is tantamount to a charge.  Were foreign carriers required to surrender actual euro or some other recognized currency (or “specie,” to use a fancier word) the Court would not consider questions of how the carrier obtained that currency, whether the value of that currency fluctuated according to market conditions, or whether the amount of currency to be surrendered was fixed in advance, as capable of negating the obvious conclusion that the forced transfer of that currency constituted a tax.

To conclude: the judgment does a fine job of finessing existing doctrine to provide legal support for its conclusions. On some of the more controversial legal questions within the judgment we feel that there is ample room to argue in favor of a different interpretation than that reached by the Court.  To really understand the stakes here, however, requires stepping back from the details of the clauses and textual provisions with which the CJEU constructs its support for Directive 2008/101 and considering instead the systemic consequences of the semantic dodges in which the judgment often indulges.   On the one hand, there are the consequences associated with climate change, which we have no doubt weighed on the Court’s mind as it searched for arguments to legitimize the EU’s actions. On the other hand, however, we must recognize the consequences to the international aviation system, which depends on comity and cooperation between nations, and relies on the enforceability of bilateral and multilateral agreements for success. The CJEU judgment allows supranational institutions to act free from accountability to preexisting treaties, sanctions unilateral regulation of activity outside the airspaces of the EU Member States on the basis of a rather arbitrary territorial link, and determines that elaborate market-based schemes permit States to impose charges on foreign airlines without being constrained by prior agreements that spare international air services from the whims of individual State duties and tariffs.  It is our contention that the Court, determined at all costs to validate EU emissions regulations, has adopted a number of legal theories that could prove seriously detrimental to the equipoise of international aviation relations.

* Brian F. Havel is currently Keeley Visiting Fellow at Wadham College, Oxford and is Distinguished Research Professor of Law and Director of the International Aviation Law Institute at DePaul University College of Law, Chicago.

** John Mulligan is Fed Ex/United Resident Research Fellow at the International Aviation Law Institute.

One thought on “Flying too high? Extraterritoriality and the EU Emissions Trading Scheme: the Air Transport Association of America judgment

  1. Pingback: EUtopia law is 1! | eutopialaw

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