The European Court of Justice in Luxembourg dismissed arguments that imposing the European Union's cap-and-trade carbon credits program on flights to and from European airports infringes on national sovereignty or violates international aviation treaties. U.S. and other non-European airlines had sued the EU, arguing that they were exempt from the law.
Environmentalists called the law a first step in controlling carbon emissions in a key economic sector, and EU officials said they expected airlines to comply.
But Fitch Ratings said the decision could deepen rather than quell the dispute, raised in a lawsuit brought by U.S. and Canadian airlines acting through the industry trade organization Airlines for America. The protest was supported by China, India and other countries with international carriers.
"We believe threats of trade retaliation over the EU's cap-and-trade system will pose growing threats to aviation market access in both developed and emerging markets next year," Fitch said.
Retaliation could come in the form of slot allocations at airports and authorizing routes, especially in developing countries, Fitch said.
The U.S. airlines said the regulation was tantamount to "an exorbitant tax," but the EU said the added costs would amount to a few dollars per ticket and would open the way for efficient airlines to make money rather than lose it.
The carbon trading program, due to go into effect Jan. 1, is one of the widest-reaching measures adopted by any country or regional bloc to regulate emissions of greenhouse gases blamed for climate change. It aims to make airlines accountable for their carbon emissions, which contribute to global warming.
Although only 3 per cent of total human-caused carbon emissions come from aircraft, aviation is the fastest-growing source of carbon pollution.
U.S. airlines most affected are United Continental, Delta and American Airlines, all of which derive more than 20 per cent of global revenues from trans-Atlantic traffic, Fitch said.
The U.S. trade group said its members would comply with the EU directive "under protest," while reviewing legal options.
"Today's court decision further isolates the EU from the rest of the world and will keep in place a unilateral scheme that is counterproductive to concerted global action on aviation and climate change," Airlines for America said in a statement from Washington. "Today's decision does not mark the end of this case."
The National Airlines Council of Canada also responded saying, "While we respect the court's ruling and authority, the NACC is nevertheless disappointed."
"Although this is probably one of the last judicial recourses available under EU law, this ruling by no means settles this matter," said NACC president George Petsikas.
Under the scheme, each airline will be allocated pollution permits slightly less than its average historical emissions record. If it exceeds its limit, it can buy permits from other airlines that have emitted less than allowed and have leftover permits to sell. Emissions are counted for the entire route of an aircraft that touches down in Europe.
The intention is to induce airlines to emit less carbon by upgrading their fleets or becoming more efficient.
The International Air Transport Association voiced disappointment with the ruling, saying that "unilateral, extra-territorial and market distorting initiatives" like the EU's only make it harder to reach a deal through the International Civil Aviation Organization, the U.N. regulatory agency for airlines.
"What is needed now is for Europe to work with the rest of the world through ICAO to achieve a global solution," said IATA director general Tony Tyler.
The U.S. State Department echoed that sentiment.
"We're disappointed by the decision of the court," department spokeswoman Victoria Nuland said. "What the EU has done is to do an end run around ICAO, rather than dealing with these issues there... We don't think it's helpful to circumvent the agreed multilateral forum for addressing these issues."
But the EU says it enacted the measure precisely because major airlines had blocked concrete steps in ICAO to rein in carbon emissions.
Connie Hedegaard, the European commissioner for climate action, said she was "satisfied" with the ruling and ready to work with the airlines on implementing it. All revenue derived by the EU from the program will go toward fighting climate change.
An organization of budget airlines, the European Low Fares Airline Association, welcomed the decision, which it said would force big carriers to follow the same rules as small airlines do on internal European flights. It said 80 per cent of aviation emissions originate from long-distance routes.
The EU has calculated the cost to passengers will be minimal, ranging up to €12 ($15.70) on a one-way trans-Atlantic flight. For many flights it will be a euro ($1.32) or two.
But the airlines are receiving most of their permits for free for the first transition years. If the full market price of emissions is passed on to consumers — as happened with European utilities that received free permits — the airlines will benefit from windfall profits.
Peter Liese, the German lawmaker who ushered the bill through Parliament, said airlines should be paying about 1 euro ($1.32) to fly to the U.S. east coast, and any airline charging substantially more is either trying to "fool the passenger" or has "a very old and dirty fleet."
The ruling by the 13 judges said the EU was within its rights to impose the scheme on commercial airlines that choose to operate at European airports, and thus fall under EU jurisdiction.
It also rejected the appeal that the measures violate the Open Skies treaty prohibition against unilateral taxation or discriminatory treatment. It said the cost to the airline is subject to an open market, from which it also may profit, and is not a tax. It also treats all flights equally, as long as they land or take off from one of the EU 27's nations.
The directive, enacted in EU law in 2008, aroused an international protest beyond those airlines that joined the lawsuit.
The U.S. House of Representatives passed a measure two months ago directing the transportation secretary to prohibit U.S. carriers from participating in the program if it is unilaterally imposed.
Last week, U.S. transport chief Ray LaHood and Secretary of State Hillary Rodham Clinton wrote to the EU commission reiterating Washington's objections on "legal and policy grounds," and said the U.S. would respond with "appropriate action." They did not elaborate.
China and India complained about the issue at the recent 194-nation U.N. climate conference in South Africa. The New Delhi government reportedly told Indian carriers to defy the directive by refusing to submit carbon emissions data to the EU.
But the EU said all major international carriers, including those behind the lawsuit, were among some 900 airlines that have applied for free permits, and that it anticipated full compliance with the law.
AP writers Slobodan Lekic and Matthew Lee contributed to this article.