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1 AIR AND SPACE LAW

2 Published by: Kluwer Law International PO Box AH Alphen aan den Rijn The Netherlands Website: Sold and distributed in North, Central and South America by: Aspen Publishers, Inc McKinney Circle Frederick, MD United States of America Sold and distributed in all other countries by: Turpin Distribution Services Ltd. Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Air and Space Law 6 issues per year. Print subscription prices, including postage (2012): EUR 533/USD 711/GBP 392. Online subscription prices (2012): EUR 494/USD 658/GBP 363 (covers two concurrent users). This journal is also available online at Sample copies and other information are available at For further information please contact our sales department on +31 (0) or sales@kluwerlaw.com. For Marketing Opportunities contact marketing@kluwerlaw.com<mailto:marketing@kluwerlaw.com> Air and Space Law is indexed/abstracted in the European Legal Journals Index. Printed on acid-free paper. ISSN Kluwer Law International BV,The Netherlands All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY , USA. permissions@kluwerlaw.com Printed and Bound by CPI Group (UK) Ltd, Croydon, CR0 4YY.

3 Board of Editors Berend J.H. Crans, Barrister and Solicitor, partner DeBrauw Blackstone Westbroek, Amsterdam, The Netherlands Peter van Fenema, Adjunct Professor of Air and Space Law, McGill University, Montreal, Canada Mark Franklin, Partner at DLA Piper UK LLP, solicitors, London, United Kingdom Wybo P. Heere, Emeritus Lecturer of Air and Space Law and of Public International Law, Utrecht, The Netherlands P ablo Mendes de Leon, Professor of Air and Space Law, Leiden University, The Netherlands Onno Rijsdijk, Director Legal of CAE Group (Europe and Middle East), Hoofddorp, The Netherlands George N. Tompkins, Jr., Counsel, Wilson Elser Moskowitz Edelman & Dicker LLP, New York, N.Y., US Niels van Antwerpen, Vice-President Legal, AerCap Group Service, Schiphol Airport, The Netherlands John Balfour, Consultant, Clyde & Co. LLP, London, United Kingdom Brian F. Havel, Professor of Law and Director of the International Aviation Law Institute, DePaul University College of Law, Chicago,US Honorary Members Isa H.Ph. Diederiks-Verschoor, Emeritus Professor of Air and Space Law, Utrecht, of the Board of Editors The Netherlands Henri A. Wassenbergh, Emeritus Professor of Air and Space Law, Leiden, The Netherlands International Panel Deborah Elsasser, Senior Counsel, Clyde & Co US LLP, New York, US Fredrik Kämpfe, Deputy Chief Legal Adviser, European Aviation Safety Agency (EASA), Cologne, Germany John Peter F. Kelly, General Attorney, Delta Airlines Inc., Atlanta,US Maria Regina Lynch, Senior Partner Motta, Fernandes Rocha Advocados, Rio de Janeiro/São Paulo, Brazil Anna Masutti, Partner LS LexJus, Milan Office, Italy, Professor of Air Law, Bologna University, Italy Ulrich Steppler, Partner Arnecke Siebold, Frankfurt Office, Germany Alan Khee-Jin Tan, Professor of Aviation Law, National University of Singapore

4 The Application of the EU ETS System to the Aviation Sector: From Legal Disputes to International Retaliations? Pietro MANZINI & Anna MASUTTI * In December 2011 the European Court of Justice has affirmed the legitimacy of Directive 2008/101/EC which include the air transport in the Emissions Trading Scheme (ETS) system.the ruling of the Court raised strong reactions especially by non-eu air carriers affected by the extension of the European trading system to the part of the flight taking place outside the European airspace, including the high seas. The opposition of the non-eu air carriers is expressed in a common statement of 21 February 2012 in Moscow, containing the overview of possible actions to be taken as a consequence of the Court s decision. The proposed actions include the opening of a proceeding for dispute settlement according to Article 84 of the Chicago Convention, the adoption by the non-eu countries of national provisions intended to hinder the application of the EU Directive to their air carriers, the reconsideration of the implementation of the existing agreements and the suspension of the negotiations on the others.the article analyses the legal viability of these actions and it argues that none of those can be easily put into practice. By contrast, it is suggested that a mutual acceptable solution must be sought in the framework of the International Civil Aviation Organization (ICAO). 1 INTRODUCTION Last December, the European Court of Justice, following a request for a preliminary ruling submitted by the High Court of Justice (England & Wales), Queen s Bench Division Administrative Court (United Kingdom), passed a long-awaited judgment concerning the legitimacy of the inclusion, as provided by Directive 2008/101/CE, of air transport in the greenhouse emission allowance trading system (ETS) introduced by Directive 2003/87/EC. 1 Directive 2008/101/CE, in order to include air transport activities in the European greenhouse emission allowance trading system, establishes a structured * 1 Professor of International Law University of Bologna, of Counsel Lexjus Sinacta. Professor of Air Law University of Bologna, Partner Lexjus Sinacta. The article benefits of the critical remarks made by John R. Byerly. However, the opinion expressed are to be attributed only to the authors. Directive 2003/87/EC, O.J. L 275, , page 32. Manzini, Pietro & Masutti, Anna. The Application of the EU ETS System to the Aviation Sector: From Legal Disputes to International Retaliations?. Air & Space Law 37, no. 4 & 5 (2012): Kluwer Law International BV, The Netherlands

5 308 AIR AND SPACE LAW regime based on three pillars: first, it fixes for air transport operators a limited number of greenhouse emission allowances, calculated as a percentage of total emissions of the previous year; 2 second, 85% of such allowances are attributed for free, while the remaining 15% are assigned by auction; finally, in case the air operator needs a lower or higher number of allowances in respect of the assigned ones, it must buy or may sell them in the market.the Directive further establishes that such a system, starting from January 2012, is applied in relation to the emissions produced on the occasion of flights entering or departing from aerodromes situated in the territory of the EU Member States. It is the territorial applicability element of the Directive on the emission trading system that has triggered a number of legal cases which have been brought to the ruling of the Court. Some American carriers, assisted by their association (Air Transport Association of America ATA) have contested the validity of the measures of the Directive adopted by the United Kingdom, 3 considering such measures incompatible with the Chicago Convention. In particular, they judged the European discipline as unilateral and illegitimate where it establishes the emission allowances pertaining to each operator on the basis of the entire flight, including those parts of the flight which take place over third countries territory or the high seas. The decision of the Court is based on the legitimacy of the provisions contained in Directive 2008/101/EC. First of all it affirmed that the validity of Directive 2008/101/EC could not be evaluated on the basis of the Chicago Convention, as the Convention does not bind the European Union. Second, the Court stated that, considering the customary international law recalled by the referring court, the European Union had the competence to adopt the provisions of Directive 2008/101/EC, extending the applicability of the emission trading systems to all flights entering or departing from aerodromes situated in the territory of EU Member States. Finally, the Court ruled that Directive 2008/101/EC does not conflict with the Open Sky Agreement, particularly with the provisions of Article 7(1),Article 11(1) and (2),Article 15(3). 2 3 According to Article 1 of Directive Nr 2008/101/EC, Directive Nr 2003/87/EC is amended in such a way that the total number of portions assigned to the air transport for the period between 1 January 2012 and 31st December 2012 is equivalent to 97% of the historical emissions. For the period starting the 1st January 2013, and for any further period, the total number of portions to be assigned to the air transport operators will be equal to 95% of the historical emissions of air transport multiplied by the number of years forming the period. Directive of the European Parliament and of the Council of Nov. 19, 2008, 2008/101/EC, amending Directive 2003/87/EC in order to include the air transport activities in the EU green house emission trading system, O.J. 2009, L8, page 3.

6 THE APPLICATION OF THE EU ETS SYSTEM 309 The ruling of the Court raised strong reactions by air carriers, especially by non-eu air carriers 4 affected by the extension of the European trading system to that part of the flight taking place outside the European airspace, including the high seas.the opposition of the non-eu air carriers is expressed by a number of non-eu countries in a common statement of 21 February 2012 in Moscow, containing the overview of possible actions to be taken as a consequence of the Court s decision. The proposed actions may be grouped into three categories. First, the triggering of a dispute settlement procedure has been prefigured. In such a perspective, the most probable action is the opening of a proceeding for dispute settlement according to Article 84 of the Chicago Convention. In addition, an action before the Dispute Settlement Body of the World Trade Organization (WTO) system has been suggested. A second category of action is the adoption by the non-eu countries of national provisions intended to hinder the application of Directive 2008/101/EC to their air carriers. Such measures could prevent these air carriers to comply with the EU Directive or could impose burdens on the European air carriers. Finally, the consequences of the Court s decision could negatively affect the existing agreements or those agreements under negotiation, including the open sky agreements, by reconsidering the implementation of the existing agreements and suspending the negotiations on the others. Our analysis will address two main questions: first the feasibility of the measures contained in the Moscow declaration and, second, the existence of a real contrast between the ETS system and the principles of the 1944 Chicago Convention. As a matter of fact, the efficacy, if not the legitimacy, of the announced measures primarily relies upon the incompatibility between the regime established by Directive 2008/101/EC and the Chicago Convention. 2 THE OPENING OF SETTLEMENT OF DISPUTE PROCEDURE IN ACCORDANCE WITH ARTICLE 84 OF THE CHICAGO CONVENTION AGAINST THE EUROPEAN UNION As mentioned above, the first envisaged action is the launch of the dispute settlement procedure offered by Article 84 of the Chicago Convention. This Article states that, in case of disagreement between two or more contracting States relating to the interpretation or application of the Convention, which cannot be settled by negotiations, the International Civil Aviation Organization (ICAO) Council will decide at the instance of one or more States concerned. 4 However, on March 2012, even some important European carriers have raised doubts on the ETS systems and have asked the intervention of Chancellor Merkel, of Prime Minister Cameron and of the President of the European Commission, Mr Barroso.

7 310 AIR AND SPACE LAW The feasibility of such action implies a preliminary investigation to establish which entity, the European Union or the EU Member States, should be responsible for the claimed violation of the Chicago Convention. This question cannot be easily resolved. On the one hand the discipline on the emission allowance trading system has been adopted by the European Union which is not itself a party to the Chicago Convention. On the other hand, all EU Member States are contracting parties to the Convention, but the above measures are not attributable to them, according to both European law and International law. This matter has been examined by the Court of Justice in the same ETS ruling, in the section where the Court has expressed its opinion on the effect of the Chicago Convention on the European Union. The Court stated that the European Union is not bound by the Convention for two reasons: the first reason refers to the limit of application of the safeguard clause set up in Article 351 of TFEU; the second to the non applicability in the case of the succession to treaties doctrine among the EU Member States and the European Union. 5 Regarding the scope of Article 351 TFEU by which the provisions of the European Treaties do not affect rights and obligations arising from conventions concluded by Member States before their adhesion to the European Union the Court stated that this provision implies a duty on the part of the institutions of the European Union not to impede the performance of the obligations of Member States which stem from an agreement in force prior to their adhesion to the Union Treaty, such as the Chicago Convention, but it does not bind the European Union as regards the third States party to that agreement. 6 The remark of the Court is well founded. However, the question is whether this provision implies an obligation of caution and self-restraint for the EU institutions when adopting regulations which may lead the Member States to the unpleasant alternative of choosing between the compliance with the European law or the violation of their international obligations. We deem that this obligation arises also from the principle of loyal cooperation that, while imposing upon the Member States a cooperative behaviour, it invites the European institutions to an analogous behaviour. However, such obligation does not bind the European Union to respect the international obligations undertaken by the Member States; in any 5 6 Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, paras 57 72, not yet reported. Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, para. 61, not yet reported.

8 THE APPLICATION OF THE EU ETS SYSTEM 311 case the lack of fulfilment of such obligation cannot be invoked by third countries, but by Member States only. 7 Moreover, as previously mentioned, the Court denied that in this case a possible transfer of the obligations of the Chicago Convention from the Member States to the Union had occurred. As it is well known, according to the succession doctrine contained in the judgment International Fruit, the provisions of an international agreement concluded by Member States become binding upon the Union if by force of the treaty the Union had assumed the powers previously exercised by Member States in the area governed by such agreement. 8 As pointed out by the ruling Intertanko, 9 such atypical form of succession in the treaties occurs only in case all competencies previously exercised by the Member States under the Convention had been transferred to the Union. The Court observed that, in this case, the Union had acquired certain exclusive powers on the matter of international air transport under the application of the Chicago Convention, but that does not mean that it has exclusive competence in the entire field of international civil aviation as covered by that convention. 10 Therefore, there should have been excluded that the Union had taken over from the States the obligations established by the Convention as had occurred for the General Agreement on Tariffs and Trade (GATT). Basically, these considerations of the Court can be shared. However, in light of the previous case law, they appear to be incomplete. Compared to the ETS judgment in the aforementioned Intertanko ruling, the inapplicability of the succession doctrine of the European Union to the treaties concluded by the Member States had been affirmed by the Court, showing a full awareness of its implications. In the Intertanko case it had to be decided whether the validity of a community directive could have been judged in the light of a Marpol Convention of which the Community was not a party. Giving a negative opinion, the Court had underlined that the fact that all Member States were parties of the Convention in question could produce consequences on the interpretation of the secondary community law This consideration answer to the question posed by B. F. HAVEL and J. Q. MULLIGAN, The Triumph of Politics: Reflections of the Judgment of the Court of Justice of the European Union Validation the Inclusion of Non-EU Airlines in the Emission Trading System, 3 Air and Space Law 3 (12) (2012). Judgment of the Court, Dec. 12, 1972, International Fruit Company NV, j.c /72, para. 18. ECR Judgment of the Court (Grand Chamber) June 3, 2008, C-308/06, Intertanko ECR I Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, para. 69, not jet reported. Judgment of the Court (Grand Chamber) June 3, 2008, C-308/06, Intertanko, para. 52: In those circumstances, it is clear that the validity of Directive 2005/35 cannot be assessed in the light of Marpol 73/78, even though it binds the Member States.The latter fact is, however, liable to have consequences for the interpretation

9 312 AIR AND SPACE LAW In particular, it pointed out that the customary principle of good faith and the loyal cooperation principle (see Article 10 EC, now Article 4, paragraph 3 TFEU) enjoin an interpretation of the derived community law which had to take into consideration the provisions of the international convention. Consequently, it is rather surprising that the Court in the ETS judgment abstained from making a similar reasoning by noting that, although the Chicago Convention is not binding for the European Union, its provisions should be taken into consideration for the interpretation of the community secondary law. This kind of remark appears necessary considering the Chicago Convention represents an international regime of great importance for air transport and it is universally applied. Hence, it can be argued that entities, like the European Union, which are not formally parties of the Convention, shall endeavour to adopt a behaviour as far as possible consistent with its principles. 12 Although the above considerations show some unsatisfactory elements of the Court s decision, we assume that the conclusion the Court reached, according to which the Union is not bound by the obligations assumed by its Member States with the ratification of the Chicago Convention, cannot be easily contested. Consequently, the possibility to involve the Union in the procedure of Article 84 of the Convention appears somewhat unrealistic. 3 THE OPENING OF SETTLEMENT OF DISPUTE PROCEDURE IN ACCORDANCE WITH ARTICLE 84 OF THE CHICAGO CONVENTION AGAINST THE EU MEMBER STATES Alternatively, would it be possible to promote the procedure provided by Article 84 of the Chicago Convention against the EU Member States? Such action is certainly well founded as far as the receivability of the action is concerned, but it can be argued whether the claimed violation of the Convention can be attributed to EU Member States. Indeed, the action is receivable as all Member States of the Union are parties of the Convention and consequently they can be subject to the dispute settlement mechanism offered by Article 84 of the Convention; however, the Member States are not the authors of the disputed directive as the Directive 12 of, first, UNCLOS and, second, the provisions of secondary law which fall within the field of application of Marpol 73/78. In view of the customary principle of good faith, which forms part of general international law, and of Article 10 EC, it is incumbent upon the Court to interpret those provisions taking account of Marpol 73/78. It could be argued that the fundamental elements of the Chicago Convention have been so universally accepted as to make those elements binding as a matter of customary international law. If such would be the case the European Union would be bound to the principles of the Chicago Convention since the European law, as interpreted by the Court of Justice, recognizes the customary international law as source of law.

10 THE APPLICATION OF THE EU ETS SYSTEM /101/EC has been adopted by the Union. Hence, the directive is not imputable to the Member States. In such a situation, the ICAO Council, acting as a decision body, could be tempted to conclude that Member States are not responsible for the ETS provisions, being deprived of any competence in this matter, and reject on such basis the claim of the third States.We think that this solution, though theoretically possible, is not the only available alternative nor is it the most balanced when considering rights and obligations of the convention. 13 What is puzzling is the fact that the EU Member States may be exempted from any responsibility regarding the Chicago Convention in conferring their competence to the Union, which is not a party to such Convention. It should be recalled that a similar situation occurred in the past for the application of the Human Rights Convention. Even for the obligations deriving from such a Convention, a Member State invoked the absence of its locus standi before the human rights Court, on the basis that the fundamental rights of the Convention had been violated by a Union act and not by a national provision. The European Court of Human Rights, 14 on the one hand, has recognized that the Convention does not prevent the contracting parties from transferring sovereign power to an international organization, confirming that such organization cannot be held responsible under the convention until it has become a party of it; on the other hand, the Court affirmed that the contracting States are responsible, under Article 1 of the Convention, for all acts and omissions of its organs regardless of whether the act or omission in question is a consequence of domestic law or of the necessity to comply with international legal obligations. The Court also affirmed that absolving contracting parties completely from their convention responsibility in the areas covered by the transfer of competences would be incompatible with the purpose and the object of the Convention. The Court pointed out that the fulfilment of the obligations deriving from the membership to the European Union may be justified only inasmuch as the latter offers a respect of fundamental rights equivalent to that provided by the Convention A similar issue could have been raised in the so-called hush-kits case, in which the United States started a procedure pursuant Article 84 against the EC Member States for the adoption of the Regulation 925/1999. This Regulation, that provided for a ban on new registrations of particularly noisy aircraft, was felt by the US incompatible with the Chicago Convention provisions. However, in that case, the Member States did not raise the question of admissibility on the basis of lack of locus standi. For this reason the hush-kits case even if can be considered an interesting precedent, does not clear all the doubts on admissibility. For the outcome of the procedure, see Resolution adopted at the 33rd Session of the ICAO Assembly, appendix 7. Case of Bosphorus HavaYollari Turizm ve Ticaret Anonim Sirketi v. Ireland (Application Nr 45036/98). Case of Bosphorus Hava Yollari Turizm ve Ticaret Anonim Sirketi v. Ireland (Application Nr 45036/98), paras

11 314 AIR AND SPACE LAW Drawing on this case law, the Council could consider that getting rid of the obligations deriving from the Convention simply by transferring the competence to the European Union, is contrary to the scope and the object of the Convention itself. Such transfer could be admissible only if the Union would guarantee compliance with the Chicago Convention equivalent to that offered by the contracting States. There is no doubt that such decision requires an innovative interpretative effort as the decision must be worked out by analogy, taking into account the case law of a totally different conventional system from that of the Chicago Convention. In addition, such innovative interpretation has to be made by a body delegated to settle disputes (the ICAO Council) and not a fully jurisdictional body operating in a conventional regime aiming to protect the human rights. However, such interpretative effort does not appear useless or groundless. The questions relating to the possible exemption from international responsibility and consequent possible abuses, may affect the application of the Chicago Convention in the same terms as the Human Rights Convention. Accordingly, a process against individual EU States under Article 84 would not fail on grounds of such lack of responsibility. In fact it could be argued that the EU Member States cannot avoid state responsibility for breaches of the Chicago Convention on grounds that it is the European Union, not the Member States that bear such responsibility. Finally, it should be recognized that the alleged violation by the EU Member States of the obligations, as contained in the Chicago Convention, could be invoked by third States before the International Court of Justice, as an infringement of the customary principle as codified by the Vienna Convention and according to which a treaty does not create either obligations or rights for a third State without its consent. This could be the case of the EU Member States deciding to apply the European regime of the emission allowance trading system and compromising the international obligations assumed toward third States on the basis of the Chicago Convention. However, we should consider that the violation of the treaty law (pacta sunt servanda, and the principle according to which treaties bind the parties only) would not lead to declaring the emission trading system as null and void but to ascertain the international responsibility of the EU Member States. 4 UNILATERAL MEASURES ADOPTED BY THIRD STATES TO HINDER THE EUROPEAN EMISSION TRADING SYSTEM National measures adopted by third States could be another instrument capable to hinder the application of Directive 2008/101/EC to their domestic air carriers. Such measures could forbid domestic air carriers to comply with the obligations of

12 THE APPLICATION OF THE EU ETS SYSTEM 315 the EU Directive or impose charges on EU air carriers servicing routes toward third States. Some important countries, like China and India, have seriously considered the application of the first kind of measures and their air carriers have been invited not to comply with greenhouse emissions allowance trading system. Such an action is not without precedent in the international community and has been implemented also by the European Union. For instance, when the EU wanted to react to the American laws providing for sanctions for any person trading with Iran and Libya (the US s Iran and Libya Sanctions Act of 1996) it adopted a regulation aiming to block the effects of such legislation in its territory. 16 According to this regulation, if a court or tribunal or an administrative authority located outside the Union handed down a decision giving effect, directly or indirectly, to the above mentioned laws, it would not have been recognized or enforceable in any manner. Furthermore, the persons referred to in the Regulation should have not comply with any requirement or prohibition based on the mentioned laws. These measures envisaged by China and India could trigger the sanction system of Directive 2008/101/EC. The Directive, reforming the previous discipline, sets up a new regime aiming at making sure that air carrier, not complying with the obligation to return the emission allowances, is subject by the relevant Member States 17 to a fine equal to EUR 100 per ton of carbon dioxide emission for which the operator has not returned the emission allowances. The payment of such sanction does not exempt the air carrier concerned from the obligation to return a number of allowances equal to the exceeding emissions. Moreover, in case an air carrier does not comply with the obligations of the directive in spite of a fine, the relevant Member State may ask the Commission to provide for an operating ban. Should the Commission adopt such ban, all EU Member States are compelled to comply with it and the air carrier loses the right to operate in the European Union. Probably, the fine will be the only consequence deriving from the non-compliance with the directive s discipline; this is because if a State fails to impose the fine, the Commission could open against it an infringement procedure. On the contrary, the second step of the sanction system, the operating ban within the European Union, appears difficult to apply. First, the sanction is not automatically enforced, being subject to an evaluation of the Member State (which may ask the Commission to decide) and of the Commission (which may adopt the See Council Regulation (EC) No 2271/96 of Nov. 22, 1996 protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, O. J. L 309, , page 1 6. See Art. 18bis inserted by Directive 2008/101/EC into the Directive 2003/87/EC.

13 316 AIR AND SPACE LAW decision). Second, the ban would be in conflict with the international obligations assumed through bilateral air service agreements. Regarding the adoption of additional charges on the European air carriers as countermeasures to the European provisions, international implications should be considered. It can be recalled that Article 15 of the Chicago Convention establishes the principle of non-discrimination between domestic aircraft and aircraft registered in third countries.therefore, this kind of measure risks violating such obligation. According to international law the violation of a contractual obligation is admissible only if it were a consequence of a suffered violation and if it were necessary and proportioned to respond to such violation; but as seen above, the emission trading system does not appear to be in contrast either with the Chicago Convention or with any other applicable norm. 5 INITIATIVES OF THIRD STATES IN THE FRAMEWORK OF THE RENEGOTIATION OF BILATERAL AIR SERVICES AGREEMENTS Finally, in the Moscow Declaration there are envisaged certain negotiation initiatives and, in particular: (a) the revision of bilateral air services agreements, including open skies agreements, with Member States and the reconsideration of the negotiation or application of horizontal agreements with the European Union; (b) the suspension of current or future discussions and/or negotiations aimed at increasing operating rights for EU airlines. Whatever the objectives pursued by such initiatives, they seem unlikely to lead to the non-application of the allowances trading system to companies from third countries. It is quite evident that, if the EU is involved in negotiations with third countries, the Commission, as the institution competent to conduct the negotiations, cannot accept any clause that is in conflict with the Directive on the allowances exchange system, mainly because the legitimacy of the extension of such system to air transport has been confirmed by the Court of Justice. In order to change the Union s position, legislative institutions, namely the Council and the European Parliament, should adopt an amendment to the Directive 2008/101. Therefore, these measures of the Moscow Declaration have a political profile, rather than a legal one, given the limited room of manoeuvre left for legal initiatives. Moreover, it should be noted that the political solution cannot be easily foreseen. In fact, the directive that should be modified has a politically sensitive objective, that is to say the protection of the environment in the framework of the Kyoto Protocol, and it helps reducing the emissions of greenhouse gases in the air transport industry.

14 THE APPLICATION OF THE EU ETS SYSTEM 317 Similar conclusions are reached if EU Member States, and not the Union, are involved in the negotiation, as in the case of the revision of bilateral services agreements with third countries. This is due to the fact that the negotiating power of Member States is strongly influenced by the Union s competence in this field. It should be noted that, in another important judgment, 18 the Court of Justice recognized that the EU has acquired an exclusive power to enter into agreements with third countries in different sectors of air transport. The Court recalled that the Union s competence to conclude international agreements arises, not only from an express provision of the Treaty, but also from other provisions thereof and from secondary law. This happens, in particular, when the Union adopts internal rules relating to the implementation of a common policy. Moreover, this competence is exclusive: Member States can neither individually nor collectively contract international obligations that affect those European standards or alter their scope. With specific regard to the air transport sector, the Court held that this principle also applies in relation to an internal competence such as that of Article 84(2) EC Treaty which gives the Council the power to decide whether, to what extent and by what procedure appropriate provisions may be laid down for air transportation, thus including external traffic. The Court noted that, if Member States were free to enter into international commitments capable of affecting common rules, the Union would not be able to achieve the goals those rules aim to. Subsequently to this judgment, the legislative institutions of the European Union adopted Regulation 847/2004 on the negotiation and implementation of agreements on air services stipulated by Member States and third countries. Under this Regulation, Member States, without prejudice to the respective competences, are authorized to renegotiate bilateral air services agreements. However, they are subject to stringent conditions, since they have to inform the Commission as to their intention to start such negotiations, their purpose and the provisions to be negotiated. The Commission, where appropriate, shall be invited to participate in the negotiations as an observer. In any case, the Commission has the power to inform the Member State that the negotiations may lead to an agreement that is incompatible with EU law. Such power of the Commission obviously limits the margin of manoeuvre of the State, since the latter is aware that, if its conduct were not compliant with EU law, it would risk the opening of an infringement procedure. There can be no doubt as to the Commission s desire to open an infringement procedure in the case of a violation of Regulation 847/2004. For 18 Judgment of the Court of Justice,AETR, Mar. 31, 1971, Case 22/70.

15 318 AIR AND SPACE LAW example, the Commission recently initiated a procedure against Poland for breach of Article 5 of the said Regulation. 19 In this framework, we believe that the threat to revise or suspend current negotiations is not likely to produce an effective pressure, not even at political level, to review the law relating to the allowances trading system. 6 COMPATIBILITY OF THE EUROPEAN ETS WITH ARTICLE 1 AND ARTICLE 15 OF THE CHICAGO CONVENTION It was noted above that, although the Union is not a party to the Chicago Convention, this Convention should be taken into account, since EU law should be interpreted and implemented in accordance with the principles of the Convention. However, this hermeneutic operation makes sense only if there is a real conflict between the Chicago Convention and EU law. Consistently with the approach whereby it affirmed that the Chicago Convention does not apply to the Union, the Court considered it unnecessary to express an opinion on this subject. Nevertheless, one of the fundamental principles enshrined in the Convention, namely the full and exclusive sovereignty of each state over its airspace embodied in Article 1 -, was examined by Union judges as a principle of customary international law. During the procedure it had been argued that the calculation of allowances on the basis of the entire route, since the departure from, or until the arriving at, a European airport, violated the principle of territorial sovereignty, because this calculation also refers to the airspace above the territory of the state of registration. In this regard, the Court noted that the Directive 2008/101, in so far as its applicability is founded on the fact that those aircrafts perform a flight which departs from or arrives at an aerodrome situated in the territory of one of the Member States, 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 European Union and are thus subject on that basis to the unlimited jurisdiction of the European Union. 20 This argument has been challenged, by pointing out its alleged arbitrariness, on the grounds that the principle of sovereignty includes the right of carriers belonging to third states to fly above the national airspace without being subject to the European allowance system V. Press release of the Commission, of 24 November 2011, Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, para. 125, not jet reported.

16 THE APPLICATION OF THE EU ETS SYSTEM 319 Even if this reaction is understandable we do not consider that it is sufficiently robust as to surely affirm that there is a real conflict between the principle of sovereignty and EU law. It should be noted that the thesis according to which third countries cannot freely exercise their sovereignty on their own airspace could be easily objected. As long as the aircraft registered in third countries remain in the airspace of their countries, it is subject only to its respective national laws. The European standard is applicable to such aircraft only when it land at, or depart from, the territory of the Union; this does not contradict the principle of territoriality, but it appears as an application of it. Similar conclusions are reached by analysing the compatibility of the ETS with Article 15 of the Chicago Convention, in particular in so far as the latter provides that no contracting State can apply duties, taxes or other charges in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting State or persons or property thereon. In fact, the trading system ETS does not seem to match any of the three hypotheses prohibited by this provision. The question was directly examined by Advocate General Kokott, who affirmed, on the basis of the same definitions accepted in the framework of the ICAO, that the duties are imposed as a compensation for a public service and their amount is determined by public authorities; the charges and, among them, the taxes are set by the authorities on the basis of criteria previously established such as the tax rate and tax base. Differently, the system of emissions trading is intended to promote the reduction of greenhouse emissions in a cost-effective manner, and it includes neither compensatory mechanisms nor a predetermination of the price governed by the public authority. As seen above, airlines are given a number of allowances calculated as a percentage of emissions in the previous year. In particular, 85% of the allowances is assigned for free, and the remaining 15% is auctioned (Article 3 quinquies, (1) and (2) of Directive 2003/87).The cost of these allowances is not fixed but it is determined solely by the market. If a company needs to purchase allowances exceeding the limit of the allowances it is assigned, their price is, also in this case, determined solely by the encounter of the supply and the demand. 7 COMPATIBILITY OF THE EUROPEAN SYSTEM ETS WITH THE PRINCIPLES OF FREEDOM OF OVER-FLIGHT OF THE HIGH SEAS AND OF THE EXTRATERRITORIAL APPLICATION OF THE LAW In the perspective of an action taken under Article 84 of the Chicago Convention, it is certainly important to verify whether the European ETS is in conflict with the rules that are not established by the Convention, but which provide for the

17 320 AIR AND SPACE LAW general legal framework in which the Convention is to be interpreted and applied. Among these rules, there certainly the one concerning the freedom of over-flight of the high seas and one relating to the exercise of the state s jurisdiction outside the state s territory (extraterritorial application of the law). These rules must be taken into consideration in so far as they are rules of international law applicable to the relations between the parties, 21 in accordance with Article 31(3) of the Vienna Convention on the Law of Treaties. With respect to the freedom of over-flight of the high seas, it must be recalled that this rule is part of customary law, codified in Article 87 of the Montego Bay Convention. 22 This rule implies the right of aircraft to fly over the high seas without being subject to any act of coercion by any state, to the exception of the state in which they are registered. 23 The Chicago Convention confirms this principle by providing that the rules relating to the flight and manoeuvre of aircraft it establishes (the so-called rules of the air) apply also to the over-flight of the high seas. In order to identify a conflict between the ETS rules and the principle of freedom of over-flight of the high seas it should be demonstrated that the former, by determining the allowances on the basis of the total length of routes, constitutes an act of coercion put into place by authorities other than those of the flag state. It seems that this view is hardly tenable. In part, because a measure which may eventually entail a fee does not constitute an act of coercion in the framework of international aviation law. In part, because the European discipline on emissions allowances is applied only, and solely when, an aircraft lands at, or departs from, an airport of the EU, whilst it does not apply whenever the aircraft simply flies over the Union. This implies that, even if it were postulated that coercion took place, it would be enforced only in the Union and not on the high seas. The Court assessed the legality of the Directive 2008/101 in the light of the principle of freedom of over-flight of the high seas and it reached similar conclusions. 24 It found that the aircraft that over-flights the high seas is not subject, in so far as it does so, to the allowance trading system, and added that, in the SeeVienna Convention on the law of the Treaties 1969,Art. 31, para. 3. See United Nations Convention on the Law of the Sea (UNCLOS) Dec. 10, 1982 (Montego Bay). See, in this respect,t. Ballarino & S. Busti, Diritto aeronautico e spaziale 63 (Giuffrè 1988). In fact, the Court, in the eleventh paragraph of its decision, considered that there were three principles of customary law, which were relevant to the case and applicable in the EU legal order, which could be used to assess the validity of the Directive 2008/101. Besides the principle of sovereignty over the state s airspace, the court referred also to the principle whereby no one can legitimately claim sovereignty over the high seas, codified in Article 2 of the Geneva Convention on the High Seas 1958, and the freedom of over-flight of the high seas, codified in Article 87 of the Montego Bay Convention on the Law of the Sea. However, in the course of its analysis the Court referred only to the first two and also evoked the objective territorial principle, also called effects doctrine.

18 THE APPLICATION OF THE EU ETS SYSTEM 321 circumstances of the case, such aircraft could also cross the airspace of one of the Member States without its operator thereby being subject to that system. 25 In this context, one might wonder if the system for calculating allowances conflicts with the principle of the exclusive jurisdiction of the flag state on aircraft overflying over the high seas. Such principle is complementary to the principle of the freedom of over-flight. According to the latter principle, no coercive measure can be taken on aircraft by any state other than the flag state, whereas the former principle affirms that only the law of the flag state is applicable to aircraft overflying the high seas. The Court has not examined the compatibility of the Directive with this principle as it did not consider it proven that such principle is part of general international law. Even if the contrary conclusion were reached, it should be noted that the possibility to call into question the EU law would not be an open avenue. This would be due to a consideration similar to the one whereby it is possible to uphold that the directive does not violate the principle of territoriality. Indeed, as noted above, the European regime on emission allowances does not apply with respect to the over-flight of the high seas, but only with respect to the presence of the aircraft is in the territory of EU Member States. Greater attention should be paid to another matter, related to the exercise of the legislative jurisdiction outside the sphere of territorial sovereignty. In fact, it is possible to read in this perspective the part of the Directive which affirms that the exchange system takes into account the entire route of the carrier, including the over-flight of the territory of other States and the high seas. In this regard, examples of extraterritorial application of competition and fiscal law have been mentioned during the proceedings by the Advocate General. 26 In the fiscal area, the extraterritorial application of law allows to take into account the worldwide income of the person to whom the law applies, while in the competition field the extraterritorial application of rules allows to take into account the effects within the state of the conduct of foreign undertaking which takes place abroad. Contrary to this position, it has been correctly observed that the application of European standards to flights that begin and/or end outside the EU is not founded on sufficiently meaningful links, such as those that are related to the extraterritorial application of fiscal norms. In particular, the phases of takeoff and landing on European soil would represent transient and non-continuative events, which are not comparable to the situation of the person subject to the fiscal Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, para See Conclusions of Advocate General J. Kokott, paras

19 322 AIR AND SPACE LAW discipline. 27 This consideration appears to be well founded, since the application of fiscal rules to a company normally requires its permanent establishment in the territory of a state. This assumption seems not to be applicable in this case, since the operations of landing and takeoff of the aircraft are not comparable to the permanent establishment of the carrier in the territory of a state. However, it should be noted that the Court, differently from the Advocate General, seems to have been aware of the weakness of the above position vis-à-vis the international law. The Court has understood the different assumptions underlying the extraterritorial application of fiscal and competition law and it has suggested the possibility of drawing a parallel with the latter but not with the former. It should be noted that, while the national fiscal discipline may take into account the turnover achieved outside the territory by taking into consideration the particular connection between the firm and the state, such as its permanent residence in the latter, the rules protecting competition apply to the actions that take place outside the national territory, provided that such actions produce effects within the state. These are very different circumstances: the permanent establishment of a firm in the country does not necessarily entail the internal effects of his conduct, and, vice versa, the internal effects of the external conduct of a firm do not imply (indeed normally exclude) the establishment of the latter in the country. Therefore, it is simplistic and inaccurate, although this has sometimes been done, to join these two phenomena into a single doctrine of objective territoriality. The Court of Justice, in order to ascertain the compatibility of the allowances exchange system with international customary law, made reference, as mentioned, to the extraterritorial application based on the effects, such as in the case of competition or of environment protection, and it did not refer to the extraterritorial application founded on the relevance of the link between the subject and the national territory, as in the case of fiscal law. It affirmed that: the fact that, in the context of applying European Union environmental legislation, certain matters contributing to the pollution of the air, sea or land territory of the Member States originate in an event which occurs partly outside that territory is not such as to call into question, in the light of the principles of customary international law capable of being relied upon in the main proceedings, the full applicability of European Union law in that territory B.F. Havel & J.Q. Mulligan, The Triumph of Politics: Reflections of the Judgment of the Court of Justice of the European Union Validation the Inclusion of Non-EU Airlines in the Emission Trading System, 37 Air & Space L. 3, (2012). Judgment of the Court (Grand Chamber) Dec. 21, 2011, Case C-366/10, Air Transport Association of America, para. 129.