Understanding the Link Between Aggregated Industrial Production and the Carbon Price - Green Energy and Efficiency: An Economic Perspective - page 115

CO 2 emissions coming from transport. However, lawsuits have been coming from
some EU as well as non-EU Member-States to protest against this scheme. Against
the over-allocation background for other (non-aviation) EU ETS sectors, we may
wonder whether this extension to aviation was such as good idea, and whether the
timing for such a bold regulatory move was appropriate.
The legal challenge to the validity of the EU ETS, as applied to aviation and
which was instigated by the Air Transport Association of America, supported by
the International Air Transport Association (IATA) and the National Airlines
Council of Canada (NACC),

nally concluded with the judgment of the European
Court of Justice Grand Chamber published on December 21, 2011. Not unex-
pectedly, the ECJ con rmed the validity of the EU ETS. 7 During the lawsuit,

complex questions arised as to the potentially extra-territorial nature of the ETS as
applied to airlines, whether it infringes sovereignty of airspace of non-EU countries,
and whether the EU ETS involves an unlawful charge or a tax on fuel [ 20 ].
Although the aviation component of the EU ETS has survived, the ECJ case by
no means brings to an end the legal and political disputes on this issue. Airlines
continue actively to consider their options for further legal action within the EU; a
dispute resolution process under the aegis of ICAO (the International Civil Aviation
Organization) continues to be a likely forum for further challenge; the US is pur-
suing its own legislation, which would prohibit US carriers from complying with
the EU ETS, and certain international carriers and industry associations are
threatening straightforward noncompliance.
As a consequence, Point Carbon 8 indicates that political pressure may force the
EU to show exibility when it comes to resolving the dispute over including

airlines in its carbon market - by either being lenient when it comes to policing the
scheme or generously interpreting conditions that allow it to repeal the law.
Last but not the least, as mentioned in the Introduction, the status of the CDM
and further EU ETS linkage are undermined by the absence of post-Kyoto agree-
ments (after December 2012). Taken together, all these facts contribute to cast a veil
of uncertainty on the future development of world and regional carbon markets.

3 The Link Between the CO 2 Price and Industrial
Production

In this section, we recall rst the economic mechanism by which CO 2 emissions,

industrial production and carbon prices are theoretically connected. Then, we
provide an overview of the current literature on this topic.

7 Air Transport Association of America e.a., v Secretary of State for Energy and Climate Change,
Case C-366/10.
8 Available at http://www.pointcarbon.com/news/1.2004752 . Last accessed on October 4, 2012.