House Subcommittee Holds Hearing on EU Plan to Add Aviation to Cap-and-Trade System

by Ross Wolfarth
JD Candidate, 2012

On July 27, 2011, the House Transportation Committee Subcommittee on Aviation held a contentious hearing on the European Union’s plan to incorporate aviation into its CO₂ cap-and-trade plan, known as the EU Emissions Trading System (ETS). Beginning in 2012, the EU will require airlines to hold carbon emissions allowances for flights into or out of EU airports. Controversially, the system will not only cover carbon emitted over EU airspace, but also the portions of flights over international waters and within the airspace of non-EU nations.

At the July 27 hearing, subcommittee members and witnesses alike were united in their criticism of the EU’s plan. According to FAA Assistant Secretary Susan Kurland, who testified at the hearing, opposition to the EU’s plan is “shared across the political spectrum and the world.” At the very least, the whole of the U.S. aviation industry seems to be, for the time being, arrayed against the EU plan.

According to EU officials, plans to include aviation emissions in the ETS have arisen by necessity. International aviation, though accounting for a growing proportion of global CO₂ emissions (roughly 3 percent of worldwide emissions in 2010), is not mentioned in the UN Framework Convention on Climate Change (UNFCCC), and is only covered indirectly by the Kyoto Protocol, which calls upon states to work to address the issue through the multilateral International Civil Aviation Organization (ICAO). As of 2011, however, ICAO has failed to take concrete and practical action addressing these emissions. At ICAO’s 37th meeting in October 2010, the parties adopted resolution A37-19 (PDF). The resolution sets a target of improving efficiency by 2 percent annually through 2020 and an “aspirational” goal of continuing that rate of improvement through 2050. It also “Requests the Council, with the support of member States, to undertake work to develop a framework for market-based measures (MBMs) in international aviation.” After more than a decade of work, the EU is clearly unsatisfied with the results: a vague commitment to undertake work to develop a framework for measures.

So the EU has chosen to regulate aviation emissions unilaterally. The EU has planned to add aviation to the ETS program since at least 2005. In 2008, the European Parliament issued Directive 2008/101/EC (PDF). Under the Directive, airlines began monitoring and reporting their carbon emissions and other data. Beginning in January 2012, this data will be used in a cap-and-trade program.

The 2012 cap is set at 97 percent of airlines’ average emissions from 2004-2006, falling in 2013 to 95 percent. In 2012, the EU will give away 85 percent of these allowances to the airlines, auctioning off the remaining 15 percent. Thus, an airline maintaining 2004-2006 emission levels would have to pay market rates to cover just 17.55 percent of the CO₂ emitted during its flights to and from Europe.

Notably, recognizing that its cap-and-trade rules could duplicate action taken by other nations, the EU included a provision in the 2008 Directive acknowledging the need to take into account “equivalent measures” by other nations. Unfortunately, the Directive does not define equivalent measures or lay out a process whereby a non-EU state can formally qualify its airlines for an exemption.

Criticism of the EU plan has come from all directions. In the July hearing, the law was described as a “job killer” by President Lee Moake of the Airline Pilots Association, and an “arbitrary fee” and a “cash grab” by Chairman John Mica (R-Fla). US officials are particularly concerned by the “unilateral” nature of the EU plan, which bypasses ICAO as well as bilateral negotiations.

Moreover, opponents argue that the 2008 Directive violates international law. The 1944 Chicago Convention on Civil Aviation, not to mention customary international law, give states sovereignty over their airspace, and airlines argue that this sovereignty may be violated by the EU’s attempt to regulate emissions outside of its territorial jurisdiction. The Chicago Convention, as well as the bilateral EU-US Open Skies Agreement also prohibit certain taxes and fees. Despite its complex institutional structure, the EU ETS bears many similarities to a tax. These issues are being litigated before the European Court of Justice, in a pending lawsuit by the Air Transport Association of America (ATA) and large US airlines. The ECJ heard arguments on July 5, 2011. A preliminary ruling is expected in early October.[1]

China, India, Russia and other countries have also registered their political opposition. China even threatened to delay a major purchase of aircraft from European manufacturer Airbus in protest of the plan. China has suggested that the EU Directive, by applying equally to airlines regardless of national origin, flaunts the principle of “common but differentiated responsibilities” enshrined in the UNFCCC.[2] While the EU has as of yet stood firm, the threat of a trade war is real and would certainly be felt by the industry. In the words of the chief executive of Airbus, “[i]t is madness to risk retaliation” from China.[3]

So where is this all heading? There are three potential outcomes to keep in mind. First, the EU Directive could be stalled indefinitely. The ATA could win its case before the ECJ, or rising diplomatic pressure, with the promise of economic retaliation, could convince the EU to cave in. But if the EU stands firm, things could get very interesting. The US or other nations could file a complaint alleging a violation of the Chicago Convention in ICAO, although ICAO dispute resolution has settled very few cases in its more than sixty year history. Since aviation falls outside the scope of the WTO, a WTO complaint is not an option (the limited jurisdiction of the WTO runs contrary to the demands of some members of Congress at the July 27 hearing).

Second, there is the possibility of retaliation. Committee leaders in the House of Representatives have made clear that they intend to move forward quickly on a bipartisan bill, introduced on July 20, 2011, that would “prohibit an operator of a civil aircraft of the United States from participating in any emissions trading scheme unilaterally established by the European Union.”[4] In addition to arguably violating the EU-US Open Skies Agreement, however, such a law would force any US airline operating in the EU to violate either US or EU law. Yet despite this apparent danger, the aviation industry strongly supports the bill, perhaps indicating its hope that the EU will relent in the face of this and other threats.

Third, there is some chance that an operational ETS system regulating aviation emissions could actually lead to greater efforts to regulate aviation emissions in the US. The EU Directive’s provision on “equivalent measures” could help garner industry support for a US cap-and-trade regime, or other market based system, to cut aviation emissions. A plan that sets a cap comparable to that imposed by the EU, but that gives away all allowances (rather than just 85 percent, as in Europe) could achieve “equivalent” reductions while saving the airlines money relative to the EU plan’s baseline. This program could be instituted either through new legislation or, potentially, by using the EPA’s authority to regulate aviation emissions under Clean Air Act § 231.

But as of late July 2011, such an outcome seems unlikely. According to the ATA, the notion that “our government should take orders from the EU” by creating equivalent measures is beyond contemplation, and would bring chaos to the aviation world.  All signs point to an aviation industry willing to fight, and to governments willing to back their airlines.

Daniel Firger

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Associate Director and Fellow, Center for Climate Change Law

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