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The inclusion of international airlines into the EU ETS is largely compatible with world trade rules, finds study

The inclusion of international airlines into the EU ETS is largely compatible with world trade rules, finds study | Lorand Bartels,World Trade Organization,WTO,ECJ,Robert Howse

Thu 3 May 2012 – The legal case against the inclusion of international aviation into the EU Emissions Trading Scheme (EU ETS) has centred on whether the EU has the power to regulate emissions produced outside the EU. Another question is whether the EU’s scheme is consistent with its obligations under applicable bilateral and multilateral agreements governing air transport services. A third question, which has been raised by India, amongst others, is whether it is compatible with the EU’s World Trade Organization (WTO) obligations. This latter challenge is the subject of a paper by Dr Lorand Bartels of the Faculty of Law at the University of Cambridge. Bartels concludes that despite the complexities of WTO law, the EU scheme in the main is justifiable on environmental grounds and, insofar as the scheme affects services such as tourism, it is likely a WTO panel would lack jurisdiction to determine on a violation until ICAO remedies had been exhausted.


The WTO deals with the rules of trade between nations and at its heart are the WTO agreements negotiated and signed by the bulk of the world’s trading nations, with the aim of helping producers of goods and services, and exporters and importers conduct their business.


Important as the regulation of carbon emissions is, Bartels’ analysis shows it is challenging to design an international carbon scheme that is both administratively feasible and justifiable under WTO law, specifically under the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS).


One of the basic distinctions made by the GATT is between fiscal measures – duties, taxes and other charges – and other regulatory measures affecting trade in goods. Bartels agrees with the judgement of the European Court of Justice (ECJ) that ruled last December in the case brought by the Air Transport Association of America (now A4A) and US airlines that the scheme is not a tax or other type of fiscal measure.


While there are some differences of opinion concerning the importance of the fact that auctioned allowances generate revenue accruing to the state, the central point made by both the ECJ’s Advocate General in her Opinion and the Court itself is that the EU’s scheme does not constitute a duty, charge or tax in violation of Article 24 of the Chicago Convention and Article 11 of the US-EU Open Skies Agreement because the ‘price’ paid for an allowance is not fixed by the state in advance but depends on free market forces.


This argumentation has direct application to the present case. If a measure cannot be a duty, charge or tax for this reason, then it makes no difference whether the measure is applied to fuel consumption, products or to some other activity or subject matter. It would follow, therefore, that the measure should not be considered a fiscal measure for the purposes of the General Agreement on Tariffs and Trade (GATT Article III:2).


However, a provision applying to non-fiscal measures affecting products before or on importation, and prohibits measures with the effect of restricting imports and exports of products, could provide grounds for a challenge under the GATT’s Article XI:1. The study also looks at the two main non-discrimination obligations contained in the GATT, namely the most favoured nation obligation, which prohibits measures discriminating in favour of products from any given origins, and the national treatment obligation, which prohibits measures discriminating in favour of domestic products.


The study finds the former problematic, because of differing costs based on the distance travelled and its proposed granting of selective exemptions where ‘equivalent measures’ agreements are made. However, the study finds that the EU’s scheme does not discriminate against already-imported products in favour of domestic products.


Article V:6, which requires that WTO members may not give preference to one journey over another in relation to products from the same origin, and in respect of products transiting via another WTO member, presents a problem for the ‘last leg’ aspect of the EU scheme. For example, a direct flight from Hong Kong to Frankfurt would need to be covered by emission permits for the full 9,130km, while an indirect flight via Dubai would need permits for just over half that distance. “This may prove legally problematic,” says Bartels.


The analysis therefore indicates that the EU’s scheme may be inconsistent with some of its obligations under the GATT, principally Article XI:1 insofar as the EU’s scheme applies outside of EU airspace, Article I:1 if the EU grants a selective exemption to certain airlines and, to some extent, Article V:6 depending on the journey. Whether it is non-discriminatory in other ways depends on the facts.


But regardless of any such violations, it is possible that the scheme might be justified under Article XX of the GATT. This is a general exceptions clause that permits WTO Members to adopt measures for a variety of policy reasons, subject to various conditions.


There are two exceptions that need to be considered, say the study. The first is Article XX(g), which permits WTO members to take measures ‘in relation to the conservation of exhaustible natural resources’, provided that such measures are ‘made effective in conjunction with restrictions on domestic production or consumption’. The second is Article XX(b), which permits WTO members to adopt measures necessary for the protection of human or animal or plant life or health.


The EU ETS measure has been adopted to reduce aviation emissions and thereby to mitigate climate change. The WTO Appellate Body has thus far not been confronted with the question whether climate change mitigation measures could be justified as measures related to the conservation of natural resources. It is, however, noteworthy that in US – Gasoline the Appellate Body had no difficulty with the initial panel’s finding that ‘clean air’ was an exhaustible natural resource. The atmosphere is not synonymous with air, but it would seem consistent with this to consider the atmosphere also as an exhaustible natural resource. In addition, the EU’s aviation scheme also seeks to protect the living and non-living resources that would be affected by climate change, and in this respect is also concerned with the conservation of exhaustible natural resources.


The other conditions of Article XX(g) are also easily satisfied, reasons Bartels. The EU’s measure is clearly ‘in relation to’ the conservation of the respective resources, in the sense that there is ‘a close and genuine relationship between ends and means’.


Nor do the extraterritorial aspects of the measure present any problem. In US – Shrimp, the Appellate Body held that turtles, as a species, were an essentially migratory species, and therefore sufficiently within US territory to provide a ‘jurisdictional nexus’ for the regulation. The ‘atmosphere’ that the EU seeks to protect has, if anything, an even closer ‘jurisdictional nexus’ to the EU. The ECJ’s Advocate General said in her Opinion in the US airline case, “[i]t is well known that air pollution knows no boundaries and that greenhouse gases contribute towards climate change worldwide irrespective of where they are emitted; they can have effects on the environment and climate in every State and association of States, including the European Union.”  


It seems safe to conclude that the core of the EU’s aviation scheme can be provisionally justified under the GATT’s Article XX(g) but that its justification under Article XX(b) is more complicated, finds Bartels.


The study also explores the application of the General Agreement on Trade in Services (GATS) to the EU’s scheme, particularly in light of its potential effects on services delivered outside the EU, such as tourism. However, it says, measures affecting air transport services are to varying degrees exempted from the scope of the GATS by virtue of the GATS Annex on Air Transport Services (ATS). Paragraph 4 of the Annex also prohibits WTO dispute settlement prior to the exhaustion of remedies under relevant air transport agreements. It is therefore possible, argues Bartels, that a WTO Panel would lack jurisdiction to determine whether there is a GATS violation until ICAO remedies have been exhausted.


The study also looks at the application of relevant GATS obligations and exceptions. Under the GATS Article II:1 concerning ‘the most favoured nation obligation’, it concludes there would most likely be a violation. “It seems ... relatively clear that the EU’s scheme has a proportionate effect on services and service suppliers in certain countries: tourism in Barbados will be proportionately more affected than tourism in Israel,” says the study.


Furthermore, it adds, if the EU granted an ‘equivalent measures’ exception to some countries only, there would also be a violation of the requirement to grant such an advantage ‘immediately’ and ‘unconditionally’ to all WTO members.


The study also concludes that the EU scheme does not violate Article XVI of the GATS concerning market access, but finds it is likely to violate Article XVII concerning national treatment.


However, even if the scheme encountered these legal difficulties, there is a possibility that the illegal aspects may be justified under the GATS Article XIV, which deals with exceptions for environmental reasons, similar to the GATT Article XX. While this provision does not include an equivalent to Article XX(g), the GATS’s Article XIV(b) is exactly the same as the GATT’s Article XX(b). An exception though for this scenario could be where services and service providers are located in a country which, compared to a country equidistant from the EU, is more easily accessible by direct flights than indirect flights.


In summary, says Bartels: “The EU’s aviation scheme imposes regulatory costs on airlines which affect imports of goods and services, especially tourism services supplied outside the EU. This is not necessarily a problem. But the costs differ according to the distance of the affected country from the EU. This is likely to be discriminatory, contrary to GATT and GATS obligations.


“Nonetheless, the EU’s scheme is justified under the environmental exceptions to these obligations except for one outstanding problem: airlines are only charged for the last leg of the flight. This means that direct flights pay more than indirect flights. There is no environmental justification for this discrimination, which means that this aspect of the scheme could be illegal.”


Accompanying the Bartels’ study is a commentary article entitled ‘The Political and Legal Underpinnings of Including Aviation in the EU ETS’ by Professor Robert Howse of the New York University School of Law.


Howse confronts the charges of unilateralism and extraterritoriality levelled by international opponents of the EU scheme. “By applying its ETS to emissions at least partly generated by activity outside the territorial boundaries of the EU, the EU has engaged in a frontal assault on the line in the sand concerning unilateralism that the climate hold-out countries – and not all of them are developing countries – have sought to draw,” he says. “These countries have an enormous interest in attempting to get the EU to step back, for the fundamental principle that facilitates their hold-out strategy is in jeopardy.


“They have already moved to threaten and undertake retaliatory action against the EU. But even if the EU were to compromise under such threats, this would not re-establish the legitimacy of the principle on which the hold-outs rely.


“The basic difficulty that the hold-outs face is that now the EU has shaken the status quo in a highly visible way, legal justifications are required. Relying simply on rhetoric about sovereignty, extraterritoriality and equity is no longer sufficient.”


He says the WTO is so far the only international regime that has addressed the legality of unilateral measures to protect the ‘environmental commons’ in the aforementioned turtles landmark ruling by its Appellate Body. As long as they are applied in a non-arbitrary, non-discriminatory and non-protectionist manner, such measures are compatible with the legal framework of the WTO, maintains Howse, adding: “The EU approach is compatible with the spirit, as well as the letter, of WTO law.”


Countries opposing the EU scheme thus face few options with respect to the WTO, he says, as a likely loss at the WTO would be seen as an explicit rejection of the line in the sand that they are trying to preserve concerning unilateralism.


“I doubt retaliation will succeed for several reasons,” says Howse. “First of all, WTO law itself limits the kind of retaliatory measures that can be taken without provoking a challenge in dispute settlement to the retaliatory actions themselves. Second, access to Europe’s airports is a very significant matter for the countries in question. Third, Europe is a significant enough economic power to play credibly tit-for-tat. Fourth, Europe has much to lose through acquiring a reputation for early surrender in trade warfare.”


While standing firm, however, the EU should not yield to a temptation to make the issue a contest of wills, he says, and the focus had to remain on climate mitigation and how best to achieve that in the aviation sector. “Despite the rising tensions, the EU should remain openly and constructively engaged with the industry and ICAO to the extent possible.”





‘The Inclusion of Aviation in the EU ETS - WTO Law Considerations’ – Dr Lorand Bartels (download paper here)

World Trade Organization

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