The European Emissions Trading System and Extraterritorial Jurisdiction

Jacques Hartmann is Assistant Professor, Department of Law, University of Southern Denmark and Fellow at the European Inter-University Centre for Human Rights and Democratisation, Venice, Italy.

The history of clashes over extraterritorial jurisdiction between the United States and the European Union (and European States) is long. On several occasions, the EU and European States have objected to the enactment and enforcement of US legislation. Good examples are European objections made in connection with the US’ Helms-Burton Act (imposing sanctions on Cuba), the D’Amato Act (dealing with sanctions on Iran) and also the Alien Tort Claims Act. This tradition might however be about to reverse itself.  The EU is itself facing mounting criticism over its decision to include emissions from foreign aviation within the European Emissions Trading System (ETS). Several States and airlines have objected to the inclusion with in the European ETS of aircraft emissions over the high seas and over foreign territory. Some States objected to these additions to the ETS even before they came into force. The most dramatic expression of such opposition came with a Joint Declaration issued in September 2011 by 21 States (including the US, Japan, India, Russia and China). The signatories declared that the EU’s plan to include extraterritorial emissions within the ETS was “inconsistent with applicable international law.” The declaration called upon the International Civil Aviation Organization (ICAO) to continue its efforts to address emissions from aviation. In addition, China and Russia suggested unilateral retaliation, whereas the US declared that it would respond with “appropriate action” if the extension of the ETS scheme went ahead. On 24 October 2011 the US House of Representatives overwhelmingly voted in favour of legislation, which prohibits “an operator of a civil aircraft of the United States from participating in any emissions trading scheme unilateral ly established by the European Union.”Also China has reportedly banned its airlines from participating in the ETS without governmental approval. The latter measures are in line with established State practice, whereby objecting States adopt so-called ‘blocking laws’, prohibiting compliance with the disputed legislation (see e.g. EC Regulation 2271/96).

On 21 December 2011, the European Court of Justice (ECJ) handed down a long awaited judgement (C‑366/10) in a case brought by a group of leading US airlines and trade associations. The claimants argued that the inclusion within the ETS of aircraft emissions over the high seas and foreign territory violated the EU’s treaty obligations and amounted to an impermissible form of extraterritorial legislative jurisdiction. The ECJ found no violation of international law. Several States have however contested the Court’s findings and a trade war may be looming. The matter at issue raises several fundamental questions concerning jurisdiction and sovereignty. The present note reviews the Court’s reasoning, providing a commentary on a matter that is likely to preoccupy international lawyers for some time to come.

Background

Emissions from aviation account for a growing percentage of global greenhouse gasses emissions and are considered to be particularly harmful. For this reason, Article 2(2) of the 1997 Kyoto Protocol provides that Parties included in Annex I (i.e. States that were parties to the OECD in 1992 together with so-called economies in transition) “pursue limitation or reduction of emissions of greenhouse gases… from aviation” working through the International Civil Aviation Organization (ICAO). Negotiations within the ICAO have however made little progress. In 2010 ICAO Resolution A37-19 set out a mere “aspirational goal” on improved fuel efficiency, to be achieved gradually by 2050. The resolution further requested the ICAO Council to develop a framework for a voluntary marked-based approach to emissions limitation.

Disappointed by the limited progress achieved within the framework of the ICAO, the EU entered a reservation to the resolution and eventually decided to act unilaterally. The EU strategy to combat anthropogenic climate change centres on a ‘cap and trade’ system launched with Directive 2003/87 (ETS Directive), which came into force in 2005. This market-based mechanism includes a legal limit (‘cap’) on the emissions of selected greenhouse gases in selected economic sectors. Companies operating in economic sectors covered by the cap must each year surrender enough allowances to cover all their actual emissions, or fines may be imposed. If a company reduces its emissions, it can keep its surplus allowances to cover its future needs or sell them to another company (‘trade’). The ETS Directive was amended in 2008 (Directive 2008/101) to include “aviation” amongst the capped sectors, encompassing “all flights which arrive at or depart from an aerodrome situated in the territory of a [EU] Member State” from 1 January 2012.

The system applies to all airlines, regardless of the State of registration. The fact that aviation has been included within the ETS does not, however, mean that each airline will automatically have to pay for their emissions. Airlines will be allocated allowances equal to 97 percent of average levels of emissions in the period from 2004-2006. This cap will become more stringent over time, but a large part of the emissions allowances (85 percent) will initially be allocated cost-free. Only airlines that exceed their quota of free allowances will have to purchase further allowances, and thus pay for their emissions. Airlines that reduce their emissions 15 percent below average levels will not face any charges, and may even profit. A failure to lower emissions or to purchase sufficient ETS allowances may result in a fine of 100 Euro per tonne of emissions. Importantly, emissions are calculated on the basis of the entire length of a flight. They therefore include emission carried out over the high seas or foreign territory.

The Case Before the European Court of Justice

The case before the ECJ was initiated by the main trade associations of the US airline industry, as well as by three leading US airlines. On 16 December 2009 the claimants (collectively referred to as “ATA and others”) brought judicial review proceedings in the United Kingdom, the EU Member State responsible for administering the ETS in respect of these airlines. The claimants asked the High Court for England and Wales to quash the 2009 Aviation Greenhouse Gas Trading Scheme Regulations, which implement the ETS Directive in the United Kingdom. They argued that foreign aircraft engaged in international navigation need only comply with the laws and regulations of the EU when they enter or depart from the territory of the EU or, in the case of laws and regulations relating to the operation and navigation, when their aircraft are within EU territory. The High Court stayed national proceedings and asked the ECJ for a preliminary ruling on whether any or all of the following rules of international law may be relied upon to challenge the validity of the ETS Directive:

“the principle of customary international law that each State has complete and exclusive sovereignty over its airspace;

the principle of customary international law that no State may validly purport to subject any part of the high seas to its sovereignty;

the principle of customary international law of freedom to fly over the high seas;

the principle of customary international law (the existence of which is not accepted by the Defendant [the Secretary of State for Energy and Climate Change]) that aircraft overflying the high seas are subject to the exclusive jurisdiction of the country in which they are registered, save as expressly provided for by international treaty;

the Chicago Convention (in particular Articles 1, 11, 12, 15 and 24);

the Open Skies Agreement (in particular Articles 7, 11(2)(c) and 15(3));

the Kyoto Protocol (in particular, Article 2(2).”

The ECJ established that, with the exception of the Chicago Convention (to which the EU is not party), it had jurisdiction to review the legality of the ETS Directive in the light of the invoked instruments and of customary international law. With reference to custom, the ECJ found that its review could only assess whether the EU had “made manifest errors” while applying the relevant principles (para. 110). The ECJ also had to decide whether the claimants, as non-state actors, could rely on the mentioned instruments to challenge the validity of the ETS. The Court found that they could, although the Kyoto Protocol was not “sufficiently precise” so as to establish individual rights (para. 77). Therefore, the Court went on to review the inclusion of aviation within the ETS in light of the Open Skies Agreement, the Kyoto Protocol, and customary international law.

 I. The Open Skies Agreement

The Open Skies Agreement came into effect on 20 March 2007, thus replacing 21 existing bilateral agreements between the US and EU Member States. The main purpose of the Agreement was to facilitate the removal of market access restrictions for aircraft flying between the EU and US.

ATA and others argued that the inclusion of aviation in the ETS infringed Article 15(3) of the Open Skies Agreement, which refers to environmental standards established by ICAO. They further submitted that in limiting the volume of air traffic and frequency of service, the ETS was in breach of Article 3(4) of the Open Skies Agreement. Both arguments failed. According to the Court, the mentioned provisions did not prevent the parties from “adopting measures that would limit the volume of traffic, frequency or regularity of service… when such measures are linked to protection of the environment.” (para. 152).  In the reading of the Court, the Open Skies Agreement only requires that charges imposed on US airlines are not higher than those payable by their European counter-parts. The Court further emphasised that the fundamental obligation owed by aircraft operators under the ETS is not to limit traffic but to “surrender allowances corresponding to their actual emissions.” (para. 153).

The claimants further contended that the EU had infringed Articles 11(1) and (2)(c) of the Open Skies Agreement, which require parties to exempt fuel load from taxes, duties, fees and charges. In particular, they contended that the EU could only impose charges based on the cost of the service provided (Article 11(1)(b)). The Court, however, refused to endorse such arguments, and essentially viewed the matter as one of non-discrimination (para. 99). It additionally refused to regard the ETS allowances as a “levy,” stating that the allowance trading scheme constitutes “a market-based measure and not a duty, tax, fee or charge” (para. 148). Finally, the Court emphasised the voluntary nature of the ETS, as only airlines that “choose” to operate commercial air routes arriving or departing from the EU will be covered by the scheme (para. 133). Therefore, the Court found no violation of the Open Skies Agreement.

 II. The Kyoto Protocol

In response to the claimant’s argument that Article 2(2) of the Kyoto Protocol prohibits the EU from unilaterally pursuing limitation or reduction of greenhouse gases from aviation, outside the ICAO framework, the ECJ noted that “the parties to the protocol may comply with their obligations in the manner and at the speed upon which they agree.” (para. 76). With reference to ICAO, the Court found that Article 2(2) “cannot in any event be considered to be unconditional and sufficiently precise so as to confer on individuals the right to rely on it in legal proceedings in order to contest the validity of Directive 2008/101.” The Court thus aligned itself with the opinion expressed by the Advocate General, according to whom there where “no reference of any kind of exclusivity in the actual wording of Article 2(2) of the Kyoto Protocol.” (para. 177)

III. Customary International Law

With regard to custom, the Court noted that Article 3(5) TEU obliges the EU to observe international law in its “entirety” (para. 101). On this basis, the Court concluded that it had the power to review the validity of the ETS Directive in light of customary international law. The Court’s analysis was however brief (para. 104)

The Court found that application of the ETS to foreign aircraft arriving or departing from the EU:

“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 EU and are thus subject on that basis to the unlimited jurisdiction of the European Union.” (para. 125, emphasis added)

The Court has thus found that the ETS is based upon the most basic principle of jurisdiction, that of territoriality. Such finding is in line with the opinion of the Advocate General, who suggested that the EU was exercising territorial legislative jurisdiction that merely took into account “events that take place over the high seas or on the territory of third countries.”She further emphasised that “there is no concrete rule” regarding foreign aircraft’s conduct outside EU territory. (para. 147. emphasis original). Therefore, in the view of the Court, the inclusion of emissions from aviation does not violate customary international law.

 Subsequent Reactions

The decision of the ECJ has not ended controversies. On 21-22 February 2012, representatives from 23 States adopted the Moscow Declaration, which states that the EU “must cease application” of the ETS Directive to “airlines/aircraft operators registered in foreign States”. The declaration outlines eight potential retaliatory measures against the EU, including the imposition of levies on European airlines, the adoption of blocking laws forbidding non-EU based airlines to pay for their emissions, as well as ending talks with the EU on new routes. There seems, however, to have been little agreement on the choice of appropriate retaliatory action. A Russian minister reportedly asserted: “Every state will choose the most effective and reliable measures which will help to cancel or postpone the implementation of the EU ETS.” Russia itself has threatened to cap EU airlines flights over Siberia.

Unlike the Joint Declaration from 2011, the Moscow Declaration does not explicitly say that the extraterritorial application of the ETS is contrary to international law. Instead, the list of retaliatory measures mentions “assessing whether the EU ETS is consistent with the WTO Agreements” and “filing an application under Article 84 of the Chicago Convention…” (on the latter, see The Economist).

The EU has so far delivered a stoic response. Writing on Twitter the EU Climate Commissioner, Connie Hedegaard, said: “what’s your concrete, constructive alternative?”

Legitimate or Egregious Assertion of Jurisdiction?

The controversy relating the expanded scope of the ETS is the last in a long series of clashes over extraterritorial jurisdiction. In earlier instances, the roles were reversed, as the EU objected to the exercise of extraterritorial jurisdiction by the US. Such disputes ultimately concern the question of how far a State may exercise its legislative jurisdiction without encroaching upon the sovereignty of other States. Although in theory the matter is fairly clear, the application of the territorial principle is not always as straightforward as it may seem. Similarly, the concept of sovereignty is of limited utility in settling such disputes. As already noted in Oppenheim’s International Law (9^th ed. Jennings & Watts, eds): “What one State may see as the exercise of its sovereign right of jurisdiction another state may see as an infringement of its own sovereign rights of territorial or personal authority” [456.]

In the present case, the EU has essentially argued that the inclusion of aviation in the ETS does not affect sovereignty. Indeed, the fact that the ETS has an impact on third country nationals (or airlines) does not ipso facto mean that the EU is usurping the power of other States. If that was the case, then several existing rules concerning extraterritorial conduct (e.g. antitrust or competition rules) should be regarded as a violation of sovereignty. In addition, the ETS Directive explicitly provides that:

“Where a third country adopts measures for reducing the climate change impact of flights departing from that country which land in the Community, the Commission, after consulting with that third country… shall consider options available in order to provide for optimal interaction between the Community scheme and that country’s measures.

Where necessary, the Commission may adopt amendments to provide for flights arriving from the third country concerned to be excluded from the aviation activities listed in Annex I or to provide for any other amendments to the aviation activities listed in Annex …” (Article 25a)

To bolster their position, the EU might also have invoked other jurisdictional bases, such as the effects doctrine or the protective principle. In 1970, for example, the Arctic Water Pollution Prevention Act extended Canada’s jurisdiction 100 nautical miles into the Beaufort Sea. After some controversy, the principle that coastal States are entitled to exercise jurisdiction in adjacent waters outside their territorial limits to protect the environment was included in the 1982 Convention of the Law of the Sea. Treaty provisions such as these reflect the perception that extraterritorial jurisdiction is not only legitimate, but also necessary in some cases. The question of when and how a State may legitimately take unilateral action to protect the environment has long been debated. Established principles on jurisdiction predominantly seek to delimit States’ competence, rather than to expand it, to avoid the risk of conflicts. As stated by Judge Higgins:

“…there is no more important way to avoid conflict than by providing clear norms as to which States can exercise authority over whom, and in what circumstances. Without such rules it is all rancour and chaos.” [R Higgins, Problems and Process (1994) 56]

Rules on jurisdiction therefore only rarely allow States to take action in the interest of all – the main exception being the principle of universal jurisdiction. In this context, it may be questioned whether unilateral measures to protect global public good should the regarded more favourably than measures taken purely in the pursuit of national interest. This is especially so when the relevant measures are taken in absence of collective international action

Conclusion

Unsurprisingly, the decision of the ECJ did not convince third States that the extension of the ETS is in accordance with international law. The ECJ only briefly addressed the legal issue at the heart of the matter, i.e. sovereignty and territorial jurisdiction. The EU’s position concerning the inclusion of emissions from international aviation in the ETS may be considered at variance with the Union’s previous stance on extraterritorial jurisdiction. Politically, it will be difficult to distinguish its earlier reactions from that which might be expected in the present case. While the EU has maintained that the inclusion of emissions from aviation in the ETS is in accordance with established principles of jurisdiction, it remains up to other States to accept or reject the EU’s assertion of jurisdiction. The reaction of third States is therefore of great consequence, especially when – as in this case – the law is uncertain. So far only a relative modest number of States have opposed to the extension. But numbers will not necessarily prevent a trade war.