(Adds further comment, paragraphs 12-13 and 33)
BRUSSELS Dec 23 (Reuters) - Europe's highest court this week gave its full backing to an EU law, meaning all airlines will have to pay to offset carbon emissions for flights in and out of Europe from Jan. 1, drawing anger from the United States and China.
China's state-run Xinhua news agency warned of a trade war over the inclusion of airlines in the EU's Emissions Trading Scheme (ETS), although the foreign ministry stated its opposition less stridently and called on the European Union to talk to other governments.
The U.S. government said it was dismayed by the ruling and wanted the issue to be addressed by the U.N.'s International Civil Aviation Organization (ICAO).
"We continue to have strong legal and policy objections to the inclusion of flights by non-EU air carriers in the EU ETS (Emissions Trading Scheme)," Krishna R. Urs, deputy assistant secretary for transportation affairs at the U.S. State Department, said.
In the latest of a flurry of statements from airlines and their associations, the Association of Asia Pacific Airlines (AAPA) called on the EU to abandon its plans.
"This dispute needs to be resolved through constructive political dialogue, rather than embarking on a bruising trade war," the AAPA said on Friday. "We urge the EU to scrap plans to include foreign airlines within the EU ETS."
EU Climate Commissioner Connie Hedegaard welcomed the court decision, while adding she wanted to engage with partners.
"We reaffirm our wish to engage constructively with everyone during the implementation of our legislation," she said.
The following looks at what might happen next.
RISK OF RETALIATION?
Many in Europe dismissed the threats of retaliation as rhetoric.
"No one wants to see a trade war. No one wants to pay huge fines. There is a lot of sabre-rattling," Jean Leston, senior transport policy adviser at WWF, said.
Some said, however, there could be a reaction.
"The U.S. has remained steadfast in asserting that the ETS violates international law and represents bad policy on the EU's part," said Gabriel Sanchez, Adjunct Professor of Law at the International Aviation Law Institute at Chicago's DePaul University.
"The next logical step for the U.S. to take to register its disapproval is some form of trade sanction, even if it is nominal."
Before Wednesday's ruling, which had been widely expected, U.S. Secretary of State Hillary Clinton and U.S. Secretary of Transportation Ray LaHood wrote to EU officials urging them to reconsider and threatening unspecified action.
Legislation in the U.S. Congress, if passed, would make it illegal for U.S. airlines to comply with the EU law, but that would place airlines in the nearly impossible situation of being in breach of one jurisdiction whatever they did.
U.S. airlines have said that reluctantly they will comply with the EU law, although they are considering their legal options.
The EU penalty for non-compliance is 100 euros ($130) per tonne of carbon, much more than the cost of compliance.
European Commission figures show complying would add between 2 and 12 euros per passenger, depending on airlines' decisions about how much to pass on to their customers.
Thomson Reuters Point Carbon data points to a total carbon cost for the industry of 9 billion euros by the end of 2020.
European politicians have insisted the United States must comply with EU law just as the EU complies with U.S. legislation. Global and U.S. campaign groups have written back to Clinton and LaHood reminding them of the deep-seated U.S. belief in the rule of law.
"Asking America's allies to back down on strongly-supported domestic legislation to reduce global warming pollution from aviation is simply not consistent with the historical U.S. leadership role on either the environment or the rule of law," a letter signed by nine environmental organisations said.
The EU's Hedegaard has said she is willing to engage constructively, but also that the EU will hold firm.
The new law allows for "equivalent measures" to be taken into account.
It told the China Air Transport Association in June there were provisions in EU ETS rules to exempt airlines of countries taking equivalent steps to cut emissions.
Analysts said equivalent measures had to reduce carbon emissions in the airline sector, but were deliberately vague, allowing room for interpretation.
FURTHER LEGAL AVENUES?
The European Commission consulted widely on its decision to include airlines in its carbon trading scheme from Jan. 1 2012, which was agreed in 2008 with overwhelming political support.
The European Court of Justice is Europe's highest court and there is no right of appeal to this week's decision, although airline lawyers are seeking grounds for further action.
The court's ruling was very clear. It found the EU law did not breach national sovereignty and it covered emissions related to flights under the jurisdiction of the EU.
Lawyers have said it would be extremely difficult to mount a further legal challenge. They have also said threats of action before the World Trade Organization were idle and the ICAO was the only realistic forum.
INTERNATIONAL CIVIL AVIATION ORGANIZATION FINDS A SOLUTION?
Environmental groups say the best possible outcome would be that the ICAO - which has stalled for more than a decade on finding a global way to tackle rising levels of airline emissions - should come up with a solution at an international level.
"It's time for ICAO to get its skates on and quickly resolve this. Including aviation in the (EU) ETS was always designed as an interim measure before we could get a global deal," WWF's Leston said.
Sanchez of the International Aviation Law Institute said there was little hope the ICAO could "manufacture a global emissions agreement" in the next several months after years of failing to generate consensus on the issue.
IMPACT ON THE CARBON MARKET?
The carbon market showed little reaction to Wednesday's announcement, because it was widely anticipated.
Eventually, however, inclusion of airlines in the EU ETS could have a bigger impact.
Airlines initially would be required to pay for only 15 percent of the carbon they emit and would be allocated free allowances to cover the other 85 percent.
From 2013 to 2020, airlines are expected to buy about 700 million permits, according to Thomson Reuters Point Carbon data.
($1 = 0.7654 euros) (Editing by James Jukwey)