Airlines Lose Challenge to EU Expansion of Carbon Cap-and-Trade System

International airlines must comply with the European Union’s carbon-emission limits, the region’s highest court said in a final ruling that may inflame trade tensions between Europe and the U.S.

The EU Court of Justice today confirmed the validity of EU rules that include aviation in the emissions-trading system, known as the ETS. U.S. airlines said the judgment would “isolate” the region from the rest of the world.

United Continental Holdings Inc. (UAL), AMR Corp. (AMR)’s American Airlines and the Air Transport Association of America challenged the EU’s attempt to extend the world’s largest carbon cap-and- trade program beyond its borders. The Luxembourg-based court’s ruling, which can’t be appealed, means the rules will be imposed on any flights to and from EU airports starting next year.

While the U.S. is not a party to the case, the government has been monitoring it closely, Krishna R. Urs, Deputy Assistant Secretary for Transportation Affairs at the U.S. Department of State, said in an e-mailed statement today.

“We continue to have strong legal and policy objections to the inclusion of flights by non-EU air carriers in the EU ETS,” he said. “We do not view the Court’s decision as resolving these objections.”

Airlines for America, the industry group representing the interests of U.S. airlines, said the decision “further isolates the EU from the rest of the world” and maintains “a unilateral scheme that is counterproductive to concerted global action on aviation and climate change.”

‘Crystal Clear’

EU carbon permits for December 2012 delivery briefly pared losses after the ruling. The contract fell 6.3 percent to 8.36 euros a metric ton at closing on ICE Futures Europe in London.

“The EU now expects U.S. airlines to respect EU law” after a “crystal-clear ruling,” Climate Commissioner Connie Hedegaard said in a post on Twitter.

At a court hearing in July, the airlines said the plan to extend the EU carbon market to flights to and from EU airports was unlawful. They argued the rules violate several principles of customary international law and international agreements, including the Chicago Convention, which governs international civil aviation. The EU decided in 2008 that aviation should become a part of its carbon cap-and-trade program.

EU Arrivals

The EU law “is not intended to apply as such to aircraft flying over the high seas or over the territory” of EU nations, the court said. “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 EU that they are subject to the emissions trading scheme.”

The EU rules don’t violate the principle of territoriality or the sovereignty of third states, said the court.

The decision “is unlikely to significantly boost the EU carbon allowances price,” Bloomberg New Energy Finance analysts said in an e-mail. “The issue is likely to remain in the headlines as opposing countries may increase political pressure on the EU.”

International airlines should be exempt from the EU curbs, the International Civil Aviation Organization said last month in a declaration that drew together China, Russia, and the U.S. The non-binding statement was adopted at the urging of 26 countries, which also included Brazil, Japan and India.

“We urge the EU to work with its international partners in the International Civil Aviation Organization to address the valid concerns that have been raised by the international community,” the State Department’s Urs said.

China Court Case

The ICAO plans to strike a deal next year creating a global carbon market for the industry, said Raymond Benjamin, its secretary general. The World Bank may help manage the proposed greenhouse-gas market for the world’s 50 biggest nations, which would supersede the EU program in 2014 or 2015, he has said.

Chinese airlines aim to take the EU to court in Germany by the end of the year, the China Air Transport Association said. Members of the group include Air China Ltd., China Southern Airlines Co. and China Eastern Airlines Corp.

“The U.S. government and dozens of others around the world are increasing pressure on the EU to come back to the table to consider” a global approach, Airlines for America, formerly known as the Air Transport Association, said in an e-mailed statement. A4A members “will comply under protest” with the EU carbon-emissions curbs in the meantime, the group said.

The EU law offers the possibility of exempting incoming flights from a particular country if that nation implements equivalent measures to cut aviation-related pollution. The commission includes that option in bilateral meetings with various countries.

U.S. House Bill

The U.S. House of Representatives passed a bill earlier this year prohibiting the country’s airlines from participating in the EU program after the industry estimated the cap-and-trade system would cost U.S. airlines $3.1 billion from 2012 to 2020. That measure needs backing from the Senate and President Barack Obama to become law.

The case will now return to the U.K. court that referred it and which will now have to rule in line with today’s decision.

The case is: C-366/10, The Air Transport Association of America, American Airlines, Inc., Continental Airlines, Inc., United Airlines, Inc. v. The Secretary of State for Energy and Climate Change.

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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