The International Civil Aviation Organization’s Regulation of CO2 Emissions: Amending the EU Aviation Directive to Avoid a Trade War

The International Civil Aviation Organization (ICAO) General Assembly recently made some progress on addressing the contribution of aviation to climate change. This is significant because aviation accounts for about 2.5 percent of global CO2 emissions and 13 percent of all CO2 emissions from the transportation sector.  If aviation were treated like a country it would be the seventh largest source of CO2 emissions globally.

Specifically, on 4^th October ICAO agreed to develop a market-based mechanism (cap and trade scheme) for aviation by 2016 that is capable of being implemented by 2020.[1] This timeline parallels the pace of the U.N. climate change negotiations where the negotiators aim to reach agreement by 2015 and implement in 2020 a climate change agreement with “legal force under the convention applicable to all parties”.

The immediate significance of this ICAO outcome is on the European Union (EU) approach to regulating CO2 emissions from aviation.  Under the EU Aviation Directive, the EU’s cap and trade system applies to all CO2 emissions from aircraft arriving and departing EU airspace and emitted for the duration of the flight. In November 2012, the EU, citing progress in ICAO on reaching a global deal on regulating CO2 emissions from international aviation, decided to delay for one year the inclusion of inter­national aviation in its cap and trade system.[2] The reasoning behind this was to give ICAO more time to address the issue. 

Following this outcome in ICAO, the European Commission has proposed the following changes to the EU Aviation Directive: [3]

• For flights between the EU and third countries, the cap and trade system will cover only that proportion of CO2 emitted within the EU (defined as 12 nautical miles from the furthest point of the EU to the aerodrome of departure or arrival).[4]
• The allocation of free allowances will be reduced in proportion to the distances not covered on flights from third countries into and out of the EU.
• CO2 emissions during 2013 will be exempt from the EU cap and trade system.
• The obligation to submit allowances to cover CO2 emissions during 2014 will not arise until March 2015.

Unchanged will be coverage under the EU cap and trade system of all flights within the EU and the exemption of least developed countries from the scheme.

When the Aviation Directive came into effect in January 2012, many countries considered the EU’s regulation of CO2 emissions from non-EU airlines as a breach of state sovereignty. At the time, then-U.S. Secretary of State Clinton Secretary and then-U.S. Secretary of Transportation Ray LaHood stated that they “strongly objected on legal and policy grounds to the application of the Aviation Directive to U.S. airlines.”[5]China, India and Saudi Arabia prevented their airlines from complying with EU scheme and India claimed that the Aviation Directive is inconsistent with the EU’s World Trade Organization commitments.[6] It remains to be seen whether these proposed amendments to the Aviation Directive will address these countries’ concerns.

As a matter of international law, the claims that the Aviation Directive breaches state sovereignty were rejected by the Court of Justice of the European Union (CJEU).[7] The court held that there was no breach of state sovereignty because ‘‘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 (emphasis added).’’[8] The point being that the EU is not forcing other countries or their airlines to do anything but once their airlines choose to fly into EU airspace they are subject to EU law. The fact that the EU regulates non-EU airlines on the basis of activity that occurred outside the EU does not make this a breach of state sovereignty. In this regard, the CJEU was merely restating the customary international law principle articulated by the Permanent Court of International Justice in the Lotus case that state sovereignty is unlimited except by specific legal constraints.[9]

The EU Aviation Directive did, however, raise international trade law concerns.[10] For instance, because the difference in the cost of the Aviation Directive depends on the distance flown, it leads to less favorable treatment of non-EU airlines compared with EU airlines – a national treatment violation – and of those non-EU airlines located further from the EU than other non-EU airlines – a most-favored-nation violation.  And while the EU would likely be able to demonstrate the directive falls within one of the enumerated exceptions in GATT Article XX or GATS Article XIV (i.e. as a measure relating to the conservation of exhaustible natural resources), the directive might be inconsistent with the introductory paragraph (the chapeau) that requires the Aviation Directive not be applied in a manner that constitutes arbitrary or unjustifiable discrimination or a disguised restriction on international trade.  And there are elements of the directive that could rise to a breach of these commitments. For example, the failure of the directive to take into account that some goods flown into the EU have lower greenhouse gas lifecycles than those of goods produced within the EU could constitute arbitrary and unjustifiable discrimination. Additionally, it creates an incentive for long-haul flights into and out of the EU to transit a third country located close to the EU to avoid being accountable for emissions for the duration of the flight.  However, such behavior could lead to airlines flying longer distances and emitting more CO2 emissions. 

The EU decision to amend its scheme to only apply to emissions within the EU should address the trade law concerns raised above as the costs of the directive will not vary according to where the airlines are located. Moreover, applying the EU scheme to CO2 emitted only within the EU avoids any question of this being a violation of state sovereignty and should make the approach easier to defend diplomatically.

In the event that ICAO fails to implement a cap and trade system by 2020 the EU proposal appears to envision the possibility of extending the EU cap and trade system to once again cover CO2 emissions for the duration of the flight for all airlines arriving and departing EU airspace.  A continued willingness of the EU to take such action should be clearly stated in any final amendment to the directive as the history of ICAO on addressing climate change suggests that reaching agreement on an effective mechanism for reducing CO2 from aviation will not be easy. ICAO has been slow in acting to address CO2 emissions from aviation. The Kyoto Protocol requires countries to work through ICAO to address aviation emissions and until this recent meeting one of ICAO’s main achievements was an aspirational goal of zero carbon growth by 2020. But with annual growth in aviation emissions of 4-5 percent, this would not reduce the impact of growing global CO2 emissions from the aviation industry. Moreover, at the recent ICAO meeting this aspirational goal was retained and contrasts with the target under the EU Aviation Directive of reducing CO2 emission by 5 percent below their 2004-06 level. For ICAO to develop a cap and trade system for aviation that effectively reduces the contribution of aviation to global CO2 emissions will require a binding target that is significantly more ambitious.

That ICAO has agreed to implement a cap and trade system is progress, but this was achieved with the threat of application of the Aviation Directive to international airlines. This suggest that extension of the EU cap and trade scheme to all CO2 emissions emitted for the duration of flights to and from the EU will remain an important incentive for turning this progress in ICAO into an effective outcome.   

[1] http://www.icao.int/Newsroom/Pages/mbm-agreement-solid-global-plan-endoresements.aspx (visited 21 October 2013)

[2] Decision No. 377/2013/EU; see also Connie Hedegaard, “EU willing to ‘stop the clock’ on aviation in the EU ETS for flights into and out of Europe until after the IACO General Assembly next Autumn” European Commission (December 11, 2012)

[3] European Commission Memo, “Commission proposal for European Regional Airspace Approach for the EU Emission Trading for Aviation-Frequently asked questions”, Brussels, 16 October 2013

[4] European Commission Memo, “Commission proposal for European Regional Airspace Approach for the EU Emission Trading for Aviation-Frequently asked questions”, Brussels, 16 October 2013

[5] Letter dated 16 December 2011 from U.S. Secretary of State Hilary Clinton and U.S.  Secretary of Transportation Ray LaHood

[6] http://articles.economictimes.indiatimes.com/2012-07-12/news/32648585_1_global-trade-global-economy-aviation

[7] Air Transport Association of America and others v. Secretary of State for Energy and Climate Change, Judgment of the Court of Justice of the European Union, Case C-366/10, 21 December 2011

[8] Air Transport Association of America and others v. Secretary of State for Energy and Climate Change, Judgment of the Court of Justice of the European Union, Case C-366/10, 21 December 2011, at para 127.

[9] S.S. Lotus (Fr. v. Turk.), 1927 P.C.I.J. (ser. A) No. 10 (Sept. 7), p. 19

[10] Joshua Meltzer, Climate Change and Trade-The EU Aviation Directive and the WTO”, 1 Journal of International Economic Law 2012, pp 1-46; Lorand Bartels, “The Inclusion of Aviation in the EU ETS – WTO Law Considerations”, ICTSD April 2012.