Tuesday, September 25, 2012

US Senate Passes ETS Opposition Bill

Over the weekend, the United States Senate unanimously passed a bill opposing the EU's inclusion of foreign carriers in its emissions trading scheme. The issue is starting to draw increased media attention, and a few good recent summaries of the issues at stake can be found here and here. We won't repeat the substance of those summaries, but will discuss how most of the reports on the legislation are less dismissive of the bill's potential impacts than our post from when it first became clear that passage was likely. For those that have written about the bill, their primary emphasis has been on the provisions that prohibit U.S. operators from participating in the program and hold operators harmless for that non-participation. The latter is an issue we have not yet discussed, but it raises the possibility that if U.S. operators are fined for non-participation, the Secretary of Transportation would have to hold the operators "harmless" by either paying the fines with U.S. tax dollars or levying offsetting fines on EU operators and sparking a trade war.

Our skepticism about the consequence of these provisions was largely based on the discretionary language used in both provisions, instructing the Secretary of Transportation to prohibit U.S. participation and hold operators harmless only after determining that such a prohibition "may be in the public interest." Thus, while the legislative branch will have expressed its hostility to the EU scheme, the participation of U.S. carriers will ultimately be determined by the executive branch. It is important to note that such discretionary language was not included in the House version of the bill passed last summer, so our analysis could change if the House does not approve the more flexible language included in the Senate bill. Additionally, given the politics involved, we probably overstated in our earlier analysis the actual amount of discretion afforded the Secretary of Transportation. If the President were to sign the bill it would make little sense for a cabinet official within the same administration to then determine a prohibition was not in the public interest and essentially render meaningless the majority of the bill's contents. This suggests that the discretionary language may be unimportant, because the policy decision will be made when the President signs the bill. 

However, it is equally possible that the discretionary language affords the Obama administration flexibility that will be helpful to its negotiations toward an ICAO solution. If the law is passed and signed with that flexibility intact, the administration can negotiate with the EU and within ICAO while holding the law in its back pocket as an implied threat should international negotiations fail.  Without the discretionary language, the administration may be forced to negotiate with a trade war already unleashed. 

 

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