Under the law, all airlines flying to and from European Union airports will have to buy permits under the EU's emissions trading scheme from January 1.

The initial cost is expected to be minimal but would rise to an estimated 9 billion euros by the end of 2020.

"Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue, nor the open-skies agreement," the European Court of Justice ECJ.L said.

Wednesday's ruling was in line with expectations after a senior adviser to the court issued a preliminary opinion in October that found the EU legislation did not infringe other states' sovereignty and was compatible with international accords.

EU Climate Commissioner Connie Hedegaard, for whom the carbon trading scheme is one of the main weapons to combat climate change, was among the first to welcome the decision.

"After a crystal-clear ruling today, the EU now expects U.S. airlines to respect EU law as the EU respects U.S. law," she said in a Twitter posting.

"We reaffirm our wish to engage constructively with everyone during the implementation of our legislation," she added in a statement.

Airline associations were also swift to react.

U.S. airline industry body Airlines for America said it was reviewing its legal options, but meanwhile would "comply under protest".

"The U.S. government and dozens of others around the world are increasing pressure on the EU to come back to the table to consider a global sectoral approach," it said in a statement.

LONG PROCESS

A case against the EU was initially brought to the London High Court of Justice by the Air Transport Association of America, American Airlines (AMR.N) and United Continental (UAL.N), but the London court referred it to the ECJ in Luxembourg.

Critics of the EU rules, agreed in June 2008, have argued that under the 1997 Kyoto climate pact, countries pledged to address aviation emissions jointly through the U.N.'s aviation body, the International Civil Aviation Organization ICAO.L.

More than a decade on, talks at ICAO have not yielded significant progress, and the ECJ said the EU was within its rights to take unilateral action.

But the United States, where environmental legislation has become a focus of disagreement between Democrats and Republicans, has angrily rejected the EU plan.

Draft law in the U.S. Congress, if passed, would make it illegal to comply with the EU legislation.

In a letter sent to EU officials last week, U.S. Secretary of State Hillary Clinton and U.S. Secretary of Transportation Raymond LaHood urged the EU "to reconsider this current course" and re-engage with the rest of the world.

"Absent such willingness on the part of the EU, we will be compelled to take appropriate action," they said in the letter.

INTERNATIONAL CIVIL AVIATION ORGANIZATION

Lawyers and some environmentalists said the next logical step would be for ICAO to come up with a global solution soon.

"The EU's leadership is really significant. This is a first step. What we need now is a broad-based system from ICAO," Pamela Campos, an attorney at U.S. lobby group the Environmental Defense Fund, said.

The ruling by the ECJ, Europe's highest court, is final, although there is some flexibility in how the regulation may be applied.

The EU law allows for "equivalent measures", meaning that incoming flights to Europe would be exempt if the nation from whence they came had measures in place to offset the international emissions.

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 around 700 million permits, according to Thomson Reuters Point Carbon data.

"We expect the aviation sector's burden in the EU's emissions trading scheme for 2012 to be close to 500 million euros, based on our current price forecasts for 2012," Andreas Arvanitakis, associate director, Thomson Reuters Point Carbon, said in a statement.

"The sector will face a shortfall of around 60 million tonnes (of carbon). The cost rises to 9 billion euros total by the end of 2020."

The EU carbon market pared losses immediately after the ruling but stayed negative. Analysts said the decision had been widely anticipated but could provide support for the longer term as airlines stock up on permits.

Already, the EU sets a cap on the level of emissions allowed from factories and power plants. Emitters exceeding their quotas must buy carbon permits, while those within their limits can sell any unused allowances.

Emissions from most other sectors have fallen, but those from airlines have doubled since 1990 and could triple by 2020, Commission figures show.

DIFFERING COST ASSESSMENTS

Depending on airlines' decisions on how much to pass on, the European Commission has calculated costs per passenger could rise by 2 to 12 euros, much less than the 100 euro per allowance penalty it would impose on airlines that do not comply.

Airlines, which have given much higher assessments of the cost, have called for a global, rather than a piecemeal approach. The EU has said it fully agrees with that but has run out of patience with efforts to find a worldwide solution.

"This decision represents a green light towards an emerging patchwork of complex, bureaucratic and punitive regional schemes, which will ultimately have no impact on improving the environment and will hit passengers," Carolyn Leung, a spokeswoman of Cathay Pacific Airways Ltd (0293.HK), said.

Singapore Airlines (SIAL.SI) said the EU was being unfair.

"It could also cripple competitiveness as it offers carriers operating through hubs closer to Europe an unfair advantage," spokesman Nicholas Ionides said.

Qantas (QAN.AX) said the "patchwork approach" was flawed, but its policy was to comply with carbon law wherever it operated. A spokesman said it was still finalising policy, but anticipated costs would be passed on to passengers.

(Additional reporting by David Fogarty in Singapore, Narayanan Somasundaram in Sydney, Alison Leung in Hong Kong, Jeff Coelho and Nina Chestney in London, Laurence Frost in Paris; Editing by Rex Merrifield, Alison Birrane and Jane Baird)

• A Permanent Economic Emergency