Airlines Lose Fight Against EU’s Carbon Cap-and-Trade Program

International airlines lost a fight against the European Union’s planned expansion of its carbon cap-and-trade system, to which Europe’s highest court gave unreserved backing on Wednesday.

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The EU Court of Justice “confirms the validity of the directive that includes aviation” in the emissions-trading program, the Luxembourg court ruled today.

The EU law charges airlines for carbon emissions on flights to and from Europe. Beginning January 1, all airlines flying into or out of European Union airports will have to buy permits under the EU’s emissions trading scheme, the court ruled.

United Continental Holdings (NYSE:UAL), American Airlines (NYSE:AMR), and the Air Transport Association of America challenged the EU’s attempt to extend the world’s largest cap-and-trade program beyond its borders. At a hearing in July, the airlines said the plan to extend the EU carbon market to flights that depart from or arrive at an airport in the region was unlawful.

Earlier this year, the U.S. House of Representatives passed a bill prohibiting the country’s airlines from participating in the EU program after the industry estimated that participating in the cap-and-trade system would cost U.S. airlines $3.1 billion between 2012 and 2020. The measure needs the backing of the Senate and President Barack Obama to become law.

Critics of the EU’s cap-and-trade law, passed in June 2008, have argued that under the 1997 Kyoto climate pact, countries agreed to address aviation emissions jointly through the United Nations’ aviation body, the International Civil Aviation Organization.

However, talks at ICAO have yielded no significant progress over the past fourteen years, and the European Court of Justice said the EU was well within its rights to take unilateral action.

The EU already has a cap-and-trade system in place for factories and power plants in the region. Emitters exceeding their quotas must buy carbon permits, while those using under the limit can sell any unused allowances.

While emissions from most other sectors have fallen, airline emissions have doubled since 1990 and could triple by 2020, according to a European Commission report.

Today’s EU court ruling cannot be appealed, and the case will now return to the U.K. court that referred it, and which will now have to rule in line with today’s decision. However, there is some flexibility in how the regulation may be applied.

The EU law allows for “equivalent measures,” meaning incoming flights to Europe would be exempt from the carbon program should the nation from whence they came have its own measures in place to offset the international emissions.

The European Commission has calculated that costs per passenger could rise by 2 to 12 euros for airlines participating in the cap-and-trade program, much less than the 100 euro per allowance penalty it would impose on airlines not in compliance with the law. Airlines have given much higher assessments of the cost.

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