There is yet another new U.S. trade dispute developing. This time it’s between the U.S. and the EU. No surprise here.

The European Court of Justice recently upheld the EU’s rules commencing January 1, 2012, to charge the world’s airlines for their greenhouse gas emissions. Specifically, it upheld application of the EU’s emission-trading system requiring taking into account the emissions for an entire flight that takes off from or lands in the EU. This is part of the centerpiece part of the EU’s effort to fight global warming.

Essentially the European scheme is a “cap-and-trade” system. It sets emission ceilings and allocates permits. An airline needs to pay for these emissions. Thus it will result in higher fees on tickets.

The U.S. contends the EU plans violates U.S. national sovereignty, the Open-Skies Agreement with the U.S, and customary international law. It also argues that such a plan amounts to an illegal subsidy under the WTO agreements. The House of Representatives has already passed a bill prohibiting U.S. airlines from complying with these new rules.

If there are two sectors that beg for multilateral governance they certainly are international aviation and global pollution.

It’s strange that on this issue the U.S. finds itself aligned with China. China has made it illegal for its airlines to abide by the carbon market rules. Thus putting its airlines in the impossible position of either breaking EU law or Chinese law. Nations have agreed upon joint opposition to the European plan in Moscow, including the Russian Federation.

The International Civil Aviation Organization has been trying to deal with this general issue for years as well as negotiators for the Kyoto climate agreement and other environmental agreements.

There may be an easy solution, and at least a short-term solution, to this brewing crisis. The EU could reconsider how it determines the emissions for foreign airlines so as to exclude a portion of the overseas flight in calculating the required payment or just simply exclude foreign airlines from the rules altogether.

It’s a tricky issue when a country tries to apply its rules extraterritorially. No one likes it, ever.