BRUSSELS—The European Union's top court backed the inclusion of the airline industry in the bloc's carbon-trading market, in a decision likely to escalate a diplomatic row between the EU and its biggest trading partners.
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Wednesday's widely expected ruling comes as the U.S. and others intensify pressure on the EU to delay the expansion of its emissions trading plan to include airlines on Jan. 1, or scrap it altogether in favor of a new international deal.
The U.S., China and others have threatened action if their airlines are forced to buy permits to account for their emissions of carbon dioxide, a move that trade groups claim could cost €20 billion ($26 billion) to the end of the decade. The European Commission, the executive body of the EU, has estimated that the plan could increase the cost of a single trip ticket by between €2 and €12, depending on the length of the flight.
"The directive including aviation activities in the EU's emissions-trading scheme is valid," according to a statement issued by the Luxembourg-based European Court of Justice shortly after its ruling. The court, whose ruling can't be appealed, was expected after a court advocate-general's opinion supported it earlier this year.
A new EU law includes airlines in the bloc's carbon-dioxide Emissions Trading System, beginning Jan. 1, when all airlines will have to hold permits to cover CO2 emitted by aircraft landing and taking off from EU airports.
The U.S. said 41 countries have registered objections to the ETS as a unilateral action in breach of international law. Lawmakers are pushing bills that would ban U.S. airlines from complying, and China has hinted the plan could affect orders for Airbus jets.
U.S. Secretary of State Hillary Clinton and Secretary of Transportation Ray LaHood wrote to the EU last week urging the bloc to suspend the program and negotiate with other governments on how to limit airlines' CO2 emissions globally. They said that if the EU didn't move that way, the U.S. "will be compelled to take appropriate action."
Critics of the EU favor a global plan to tackle emissions overseen by the International Civil Aviation Organization, a branch of the United Nations. However, the EU grew frustrated at decade-long efforts to establish such a program, and are wary of a pledge by ICAO that it could secure agreement on the framework of a global deal by the end of next year.
The EU court was called to rule on the case after AMR Corp.'s American Airlines, United Continental Holdings Inc. and the Air Transport Association of America, a trade group, challenged the law in a U.K. court in 2009. The U.K. court, in turn, asked the Court of Justice to rule on legality of the EU's plan under international agreements.
"The court did not fully address legal issues raised and has established a damaging and questionable precedent," Airlines for America, as the Air Transport Association is now known, said Wednesday. "Today's decision does not mark the end of this case and A4A is reviewing options to pursue in the English High Court."
Non-EU airlines are particularly hard-hit by the plan, which measures emissions for an entire trip starting or ending at an EU airport.
"We won't get agreement on a global approach if states are throwing rocks at each other because Europe wants to act extra-territorially," said Tony Tyler, chief executive of the International Air Transport Association, the global trade group.
The ETS is the central plank of EU's environmental policy, which is focused on putting a price on carbon-dioxide emissions and capping their number. It aims to encourage companies to invest in clean technologies to reduce emissions in the long term, rather than buying more permits to emit more carbon dioxide.
An allowance traded on the ETS gives the holder the right to emit one metric ton of carbon dioxide.
The EU will distribute up to 85% of the airline industry's allowances free of charge. Above that level, carriers will need to buy carbon credits through the ETS.
According to the EU plan, airlines will have to hold permits to cover emissions for the whole length of a flight taking off or landing in the EU, a much-contested provision that critics say is an imposition of rules outside its borders. But in Wednesday's ruling, the court said it doesn't undermine the "full applicability" of the EU rules.
There also are concerns that the EU's action could disrupt the continuing deregulation of the industry.
The court said the EU isn't a party to the Chicago Convention, the treaty that has governed international aviation since 1944, so it isn't bound by it, even though EU countries, including the U.K. where the legal action was started, are bound by the convention
"It's a slap in the face for the Chicago Convention," said Brian Havel, director of the International Aviation Law Institute at DePaul University in Chicago.
—Doug Cameron and Daniel Michaels contributed to this article.
Write to Alessandro Torello at alessandro.torello@dowjones.com
Air Transport Association, The European Union, carbon dioxide, American Airlines, emissions trading, European Court of Justice, Court of Justice, The European Commission, United Continental Holdings Inc., airline industry, airline industry, International Civil Aviation Organization, International Air Transport Association, Chicago Convention
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