The European Union greenhouse gas emission allowance trading system (hereinafter referred to as the “EU ETS”) is undoubtedly the largest and most mature carbon trading market in the world today, playing a leading role in global carbon reduction activities. Its core legal framework is based on Directive 2003/87/EC, issued by the European Union in 2003. The participating countries include all thirty members of the European Economic Area (EEA), which consists of the twenty-seven EU member states, as well as three countries from the European Free Trade Association (EFTA): Norway, Iceland, and Liechtenstein. Since its trial run in 2005 and full operation in 2008, the EU ETS’ application scope for industries has progressively expanded. Initially, it only applied to sectors such as energy, oil refining, steel, cement, glass, ceramics, and paper, and did not cover the transportation industry. However, with the amendment of Directive 2003/87/EC through Directive 2008/101/EC, the civil aviation sector was included in the scope of the EU ETS as of 1 January, 2012. The most recent development, in accordance with Directive 2023/959 issued in May 2023, is that the EU ETS also applies to the shipping sector starting 1 January, 2024.

As part of the transportation sector, civil aviation operates under a geographic concept which is different to the one of the stationary industrial facilities initially covered by the EU ETS. This is especially true for international air transport, where an airline’s home country is one nation, while its international routes may connect or overfly numerous other countries or regions. This introduces certain complexities and challenges for the determination of the specific applicability of the EU ETS within the aviation industry. The principle established by the EU ETS is that, a route shall be subject to the EU ETS, as long as either the departure or destination airdrome is located within the EEA. This principle applies equally to airlines registered within the EEA (hereinafter referred to as “European airlines”) and to those from third countries outside the EEA (hereinafter referred to as “non-European airlines”, excluding airlines from the UK and Switzerland, which have special agreements with the EU). The EU’s unilateral implementation of this principle impacts significantly non-European airlines operating international routes that fly into or out of the EEA, and has faced substantial resistance internationally due to the lack of coordination or reciprocal measures with countries outside the EEA. Taking also into account the need to align with the International Civil Aviation Organization’s (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), the EU introduced regulations in 2014 and 2017 that temporarily limited the application of the EU ETS to flights where both the departure and destination airdromes are within the EEA — i.e., intra-EEA flights — until 31 December, 2023. With the issuance of Directive 2023/958 in May 2023, this limitation has been further extended until 31 December, 2026.

The EU ETS applies uniformly to European and non-European airlines operating intra-EEA flights. However, since non-European airlines do not have the same registration ties to a specific EEA country, and their routes within the EEA may involve multiple nations, the EU has designated a specific EEA country to oversee and regulate each non-European airline. From the perspective of non-European airlines, ensuring compliance under the EU ETS requires not only awareness of the regulatory requirements of their assigned administering country, but also an understanding of how to use legal means to protect their rights in the event of disputes with the relevant regulatory authorities. In this article, we will provide an explanation and analysis based on our team’s successful representation of non-European airlines in EU ETS related administrative reexamination and litigation in France, combined with relevant EU law knowledge.

▐ The “Decentralized” System of Administering Countries

Under the EU ETS, the supervision of airlines is decentralized to individual member states. Each EEA country has designated a competent authority specifically responsible for including the airlines under its jurisdiction into the EU ETS and overseeing their compliance. To reduce administrative costs, each airline is managed by only one single EEA country.

1. Determination of the Administering Country

Airlines registered in or licensed by an EEA country are naturally supervised by that country. As for non-European airlines, the European Commission, through Regulation (EC) No. 748/2009, directly designates which member state is responsible for overseeing which non-European airlines. This designation is not arbitrary or random — it is based on the “base year” of 2006, with the member state where the non-European airline had the largest CO₂ emissions during its flight activities in that year being designated as the administering country. The European Commission has listed the competent authorities of each administering country, along with the European and non-European airlines under their jurisdiction, which can be accessed and downloaded from the European Commission’s website. For instance, France’s competent authority is the Directorate General of Civil Aviation (DGAC) under the Ministry of Ecological Transition and Territorial Cohesion, responsible for supervising over 800 non-European airlines. Germany’s competent authority is the German Emissions Trading Authority under the German Environment Agency, overseeing more than 300 non-European airlines. Among the EEA member countries, only Liechtenstein does not take on the responsibility of supervising airlines.

The European Commission’s list of airlines is based on the aircraft fleet information submitted by the airlines. It serves merely to clarify the responsibility of member states in supervising airlines and avoids overlapping supervision; it does not automatically imply that an airline must assume obligations under the EU ETS. The fundamental criterion is whether the airline is engaged in aviation activities listed in Annex I of Directive 2003/87/EC. If an airline on the list has ceased such activities but the list has not yet been updated, the airline’s obligations under the EU ETS will cease as of the date when it stopped those activities.

Under the EU ETS, each airline is independently responsible for its flights and subject to supervision as a separate legal entity. Therefore, different airlines belonging to the same group may be allocated to different administering countries: European airlines due to differing registration countries, and non-European airlines based on which member state is the most affected by their emissions.

In the case of aircraft operated under a dry lease, where the aircraft is under the lessee’s control and operated under the lessee’s name and qualifications, the lessee is usually regarded as the aircraft operator under the EU ETS. Conversely, in a wet lease, where the aircraft is under the lessor’s control, the lessor is normally considered as the aircraft operator under the EU ETS.

Once an administering country is designated for a non-European airline, it generally does not change. However, according to Article 18a(1) and 18a(2) of Directive 2003/87/EC, a reallocation or adjustment of the administering country may occur under certain circumstances. Reallocation can happen in the following cases: 1) if the European Commission and EUROCONTROL jointly revise the listing rules to improve the accuracy of the aircraft operator registry; 2) if errors occur in the registry due to incomplete or inaccurate information held by the European Commission or EUROCONTROL; 3) if the scope of the EU ETS expands or new member states join the system. Such cases, however, are rare. A change in the administering country refers to a situation where, during the first two years of a trading phase, a non-European airline’s flights have no emissions impact on its originally designated administering country. In this case, the airline should be reassigned to the member state most affected by its emissions during the first two years of the said trading phase, as from the next trading phase.

2. Relevant Authorities and Applicable Legal Framework

Although each non-European airline is supervised by only one administering country within the EEA and the competent authorities within the administering country have been clearly defined, airlines will still need to interact with other government departments and European institutions during their integration into the EU ETS and while fulfilling their related obligations:

1) The EU ETS registry management authorities within member states. In different member states, the EU ETS registry may be managed by different institutions. In France, for example, although the Directorate General of Civil Aviation (DGAC) is the competent authority for airlines, the EU ETS registry is managed by the Caisse des Dépôts et Consignations (CDC). Therefore, airlines mainly need to liaise with the CDC regarding carbon allowance procedures. Activities such as joining the EU ETS system, applying for an aircraft operator’s allowance account, and allowance surrendering are all handled through the CDC’s online system called SERINGAS. Of course, the emissions monitoring plan and emissions report, to be valid, must be approved by the DGAC.

2) The financial authorities of the administering country. If an airline fails to surrender allowances on time, leading to fines or late payment penalties, such administrative procedures will likely be carried out or led by the financial department of the administering country.

3) EUROCONTROL. This organization holds data on all flights operated by airlines across Europe. It plays a particularly important role for small emitters, i.e. operators whose annual CO₂ emissions are less than 25,000 tons for flights within the “Full Scope” (where either the departure or destination is within the EEA) or less than 3,000 tons for the “Reduced Scope” (flights entirely within the EEA). Small emitters can use a simplified procedure for having their emissions reports verified, which means they are not required to engage an independent verification body annually. Instead, they can obtain the relevant flight data from EUROCONTROL’s EU ETS support system and submit it simply to the DGAC.

The legal framework under which the administering countries supervise non-European airlines is quite specific, reflecting the uniqueness of the EU’s legal structure. EU laws are organized into five main levels: 1. The foundational treaties, including the Treaty on European Union, the Treaty on the Functioning of the European Union, and the Charter of Fundamental Rights; 2. General principles of law as confirmed by the Court of Justice of the European Union (CJEU); 3. Legislative acts; 4. Delegated acts; and 5. Implementing acts. Directive 2003/87/EC, which governs the EU ETS, falls under legislative acts, but its specific document format is a “directive”. This means that while member states are bound by the objectives it establishes, they have flexibility in the form and methods of implementation. Member states must incorporate the directive’s requirements into their national legal frameworks. In French law, for example, EU ETS regulations are reflected in the Environmental Code, particularly Articles L.229-5 to L.229-12, and Articles L.229-18 and R.229-37-1 to R.229-37-11.

Although member states transpose the EU directives into their respective domestic laws, no substantial differences arise between the national legal frameworks. However, differences in member states’ legal systems, enforcement and judicial procedures, legal traditions, and cultural environments may raise concerns that non-European airlines might receive different treatment in different administering country. In reality, the risk of differential treatment is quite low. This is partly because the legal cultures and values across EU member states are largely aligned, and partly because the CJEU plays an effective role in supervising and regulating member states’ implementation of EU law.

The three countries from the EFTA – Norway, Iceland, and Liechtenstein – are not EU members and therefore are not under the jurisdiction of the CJEU. However, under the EEA Agreement, the legal framework of the EEA is derived from EU law. EU single market rules have been transposed into the EEA’s legal system, with the exception of policies related to agriculture, fisheries, taxation, foreign trade, and currency. EEA member states are obligated to implement the common EEA legal framework uniformly. EU member states are supervised by the European Commission, while EFTA member states are overseen by the EFTA Surveillance Authority. The judicial systems also operate on a “dual-track” system: the EFTA Court has jurisdiction over Norway, Iceland, and Liechtenstein in matters related to the EEA, with status and functions equivalent to the CJEU within the EU. This consistency in internal legal mechanisms within the EEA ensures that both EU and EFTA member states apply essentially the same legal norms, providing equal treatment to enterprises.

▐ Compliance Legal Risks and Remedies

Although non-European airlines may be subject to different administering countries, with each administering country directly applying its domestic laws derived from EU directives, the consistency of the EU and EEA legal mechanisms ensures that their compliance risks under the EU ETS are essentially the same.

1. Compliance Risks under the EU Legal Framework

Directive 2003/87/EC is a binding EU legislative act, and its implementation is necessarily backed by corresponding legal sanctions. Under the EU ETS mechanism, if an airline fails to join the EU ETS system on time or fails to surrender the previous year’s allowances by the end of September, a series of administrative measures will be triggered. Using France as an example, the Caisse des Dépôts et Consignations, as the manager of the EU ETS registry, will first issue a report confirming the airline’s violation; the Directorate General of Civil Aviation (DGAC) will then send a formal notice to the airline based on this report. In principle, the airline has one month to comply with the notice and surrender the outstanding allowances. If the airline fails to do so within this period, the DGAC is entitled to impose fines based on the number of unsurrendered allowances, with each allowance corresponding to a fine unit. In 2013, the fine unit per allowance was set at €100, and this amount is indexed to the EU Harmonized Index of Consumer Prices, increasing each year. For instance, the fine unit was €105.39 in 2019 and €106.36 in 2020. Late payment of the fine will also result in statutory late fees.

Fines are an administrative penalty and do not absolve the airline from the obligation to surrender the allowances. This means that, in addition to the payment of the fine, the airline is still required to surrender the allowances within the prescribed deadline and bear the associated costs. If the airline has opened an aircraft operator’s allowance account but fails to pay the fine or surrender the allowances, the allowances in its account will be frozen and cannot be transferred or used.

The most severe sanction that an airline could face stems from Articles 16.5 to 16.11 of Directive 2003/87/EC: if the administering country has exhausted all available enforcement measures and the airline still refuses to fulfill its obligations under the EU ETS, the administering country has the right to request the European Commission to impose an operational ban on the airline. This would prohibit the airline from operating any activities within the entire EU (with the actual impact extending to the entire EEA). In practice, a request to the European Commission for such a sanction would likely arise from repeated serious violations by the airline or from egregious cases where the airline repeatedly refuses to correct its violations or pay fines despite multiple warnings.

When applying for an operational ban, the administering country must submit comprehensive evidence and detailed explanations of the measures already taken by its regulatory authorities, as well as arguments supporting the necessity of the ban at the EU level. After receiving the application, the European Commission will seek opinions from other member states and relevant regulatory bodies. Once an operational ban is imposed, all member states must enforce it strictly. Undoubtedly, an operational ban by the European Commission would have catastrophic consequences for an airline, representing a compliance risk of the highest level that must be avoided at all costs.

2. Remedies in Administrative Procedures

Non-European airlines can no longer challenge the application of the EU ETS to their intra-EEA flights. Therefore, their only viable option is to join the EU ETS within this “Limited Scope” and properly fulfill the related obligations. However, striving for compliance does not mean that non-European airlines must passively submit to unreasonable demands. When faced with unreasonable requests from the administering country, it is both necessary and feasible to protect their own interests through appropriate legal means.

Non-European airlines often have more concerns and apprehensions compared to European airlines when dealing with the authorities of the administering country. Their core management organs are usually located outside the EEA, and they may not even have liaison offices within the EEA. As a result, they may lack sufficient understanding of the administering country’s administrative system, legal framework, and judicial processes, and have fewer opportunities to communicate with the competent authorities. This is especially true for non-European airlines from developing countries, which may be particularly skeptical or resistant to administrative reexamination or litigation aimed at directly challenging specific administrative decisions. These airlines may fear that “suing the government” could worsen relations with the authorities of the administering country or even lead to retaliatory actions.

Here, it is important to understand that the administrative legal environment in EU countries is highly advantageous. It is transparent, stable, and effective, allowing parties to use legal means to protect their rights. Administrative authorities in these countries are also accustomed to the constraints of administrative reexamination and litigation. In particular, France, the birthplace of the administrative litigation system, has a long tradition in this area and operates an unique administrative court system that is independent from the judicial court system. What may be seen in China as a high-risk process that “burns bridges” with the authorities is merely a formal channel of communication and reasoning between the enterprises and the administrative authorities in the EU legal environment, without affecting their relationship. The situation is similar in the EEA countries of Norway, Iceland, and Liechtenstein. Therefore, no need for non-European airlines to have excessive concerns when seeking remedies in relation to the administering country.

However, the legal systems of EEA countries are relatively developed and complex, which places high demands on the ability of the enterprises to navigate the legal intricacies. Non-European airlines need professional support from lawyers to understand the legal requirements of both the EU ETS and the domestic laws of the administering country, as well as the relevant enforcement, judicial procedures, and precedents. On this basis, they can develop an appropriate response strategy.

If an airline faces administrative penalties from the competent authorities of its administering country due to a failure to timely surrender allowances, or even faces the risk of an operational ban by the European Commission, its legal and lawyer teams must demonstrate a thorough grasp of legal technicalities and case details. At each stage of the case, they must accurately identify the enforcement and judicial bodies that need to be engaged and take appropriate actions to secure opportunities for presenting arguments. Using France again as an example:

1) Warning notice: If the airline fails to timely surrender allowances, the DGAC will issue a formal warning notice based on the report from the Caisse des Dépôts et Consignations before making a decision of fine. During the one-month warning period, the airline has the right to submit written or oral explanations or opinions to the DGAC and may use this time to take remedial actions to achieve compliance.

2) Payment notice and collection notice: After a decision of fine is made, if the airline does not voluntarily pay the fine, it will receive a payment notice from the Ministry of Finance. If payment is still not made, the airline will receive a collection notice demanding payment of the fine and related late fees. At this stage, the airline should consider actively engaging with the responsible department of the Ministry of Finance.

3) Administrative Reexamination: If disagreements with the competent authorities or the Ministry of Finance are not resolved, the airline may consider initiating an administrative reexamination. This can serve two purposes: to seek a reconsideration of the case by the administrative authorities and to urgently prevent the enforcement of specific administrative actions, thus avoiding further late fees. However, it is important to note that the time limit for initiating an administrative reexamination is very short, only two months. After this period, administrative reexamination is no longer possible.

4) Administrative litigation: Filing administrative litigation with the administrative courts is the ultimate means of seeking confirmation that a specific administrative action is unlawful. During this judicial procedure, the airline may present evidence and arguments to the court, demonstrating that the administrative penalty decision by the competent authorities or the Ministry of Finance is substantially or procedurally unlawful, in view to have the court annul the decision. However, the administrative litigation process does not suspend the enforcement of the disputed administrative action. Under French law, the time limit for administrative litigation is one year.

5) European Commission review of the operational ban application by the administering country: During the review of such an application, according to Article 16.9 of Directive 2003/87/EC, the European Commission must disclose the main facts and reasons underlying the application to the airline concerned. The airline has the right to submit its opinions in writing to the European Commission within ten working days of receiving the disclosure.

As we can see from the above procedures, the administrative procedures of the administering counties generally respect the principle of due process and uphold the right of the enterprises to present arguments. Moreover, administrative courts do not view procedural violations as mere formalities but assign them the same importance as substantial violations, since procedural defects in specific administrative actions can significantly harm the rights of the enterprises. For example, if the competent authorities fail to properly follow the warning notice procedure, the airline loses the opportunity to present its arguments or correct its errors in time to avoid penalties. Therefore, such defects should constitute valid grounds for confirming the unlawfulness of the administrative sanction.

The ability of an airline’s legal and lawyer teams to successfully respond to unreasonable demands from the administering country depends on their ability to comprehensively and meticulously understand the administrative and judicial procedural requirements of the administering country, identify the key arguments for defense based on a detailed analysis of the case, and strategically use the various procedures to protect the enterprises’ rights. Naturally, in case the demands or measures of the competent authorities change, they must also be able to adapt swiftly and adjust their response strategies accordingly.

▐ Conclusion

Green low-carbon development and addressing global climate change are critical topics impacting on the well-being and even the survival of all humanity. The aviation industry, as one of the major CO₂ emitters, plays a crucial role in this context. Over the twelve years of implementing the EU ETS, the aviation industry has made positive progress in carbon reduction, driven by this regional market mechanism. However, in the near future, it will face a new round of significant challenges, such as the full implementation of the ICAO’s CORSIA scheme, adjustments to the EU ETS based on the implementation of this carbon offsetting and reduction mechanism, and the expansion of greenhouse gas control to include other greenhouse gases generated by aviation activities, beyond just CO₂.

Reducing greenhouse gas emissions is closely related to technological innovation and economic operations, and largely depends on an effective legal regulatory system and corresponding law enforcement and judicial mechanisms. In the international aviation industry, the EU ETS’ system of administering counties will continue to play a fundamental normative and coordinating role. It is only by embodying the principles of fairness and justice in the specific regulation of airlines across different countries that the various systems aimed at greenhouse gas reduction can be truly implemented in an orderly manner.