Tuesday, September 25, 2012

Senate Passes Thune Bill Unanimously...What next for EU Aviation Directive?

Earlier this week, the U.S. Senate unanimously passed the Thune Bill, which prohibits and protects airlines from complying with the European Union's Aviation Directive. http://www.reuters.com/article/2012/09/24/uk-usa-carbon-airlines-idUSLNE88N00K20120924. The Directive, implemented earlier this year, requires all commercial carriers landing and taking off from airports EU nations to pariticpate in the EU's emissions trading scheme [ETS]. The Directive has faced strong opposition, notably from U.S. airlines and governments such as China, India, and the United States. The governments of China and India have explicitly prohibited their airlines from complying withthe EU Directive and China is reportedly cancelling or reducing its Airbus orders in retaliation.

The United States Senate has passed a bill authorizing a similar ban on compliance with the Directive. The Bill, S. 1956, or the "Thune Bill," as it is known after its sponsor Senator John Thune (R-SD), gives the Secretary of Transportation the power to prevent airlines from complying with the EU Aviation Directive. [http://ww.govtrack.us/congress/bills/112/s1956/text].

The Bill vests with the Secrertary of Transport the authority to prohibit U.S. civil aircraft carriers from participating in the EU-ETS scheme. In making the decision, the Secretary must determine whether imposing such a prohbition is in the public interest, taking into account various important factors, including the impact on U.S. consumers, carriers, and operators; U.S. interest in economic, energy, and environmental security; and U.S foreign relations and international commitments. [Section 2].

The Thune Bill also requires the Secretary of Transporation and other government officials "to take other actions under existing authorities that are in the pulic interest necessary to hold operators of civil aircraft of the United States harmless from the emissions trading scheme..." [emphasis added] [Section 3(2)].

While the objective of the Thune Bill, to prevent unilateral action by the European Union on an issue requiring multilateral cooperation, is understandable, the language of the Bill and the approach of the Senate could potentially put U.S. taxpayers at risk, even those who do not avail of the airline services, unless the scope of the hold harmless provision is clarified.

In most contracts and law, a "hold harmless" clause guarantees or indemnifies a particular person or group. It is unlcear from the language of the Bill whether this is the intended purpose of the hold harmless clause. It is equally unclear that the purpose of the clause is not to indemnify civil aircraft carriers.

If the hold harmless clause operates to indemnify airline, it could work as follows: under the EU Directive, airlines that do not comply with it will be fined at a rate of about $125 for each metric ton of emissions produced by the airlines. The EU countries enforcing the Directive also have the authority to ban flights of non-complying airlines from entering airports in the EU territory. If an EU nation takes either step, the airlines could seek indemnity from the Secretary or other appropriate administrative agencies, who would be legally bound to provide reimbursement if the hold harmless clause is in operation.

Whether an airline can claim indemnity depends on the interpretation that could be given to the various conditions in the hold harmless provision. Specifically, the Bill requires the Secretary of Transportation to take measures "in the public interest" to hold the airlines harmless. If the provision is interpreted naroowly to mean the interest of passengers, then the Secretary must according to law reimburse the airlines. If, on the other hand, the public interest is construed more broadly to include the general public, then airlines may not receive reimbursement. Given the general functions of the agencies identified, however, it is likely that they will construe public interest narrowly and value the public interest in preserving lower and competitive airfares, rather than broader tax implications. In such an event, the requirement that agencies take into account public interest could well lead to a situation where American tax payers bear the burden of indemnifying airlines. It is equally unlikely that the U.S. government would leave airlines in a legal dilemma, where both compliance and non-compliance with the Directive would cost them.

Thus, while the Thune Bill mirrors the action taken by other governments such as China and India, the legal solution that it offers must be applied in a manner that ensures that American taxpayers do not face undue economic burden. International negotiations and remedies may be a better way to resolve the problem. Alternatively, the Bill before it is finally adopted, should clarify the scope of the hold harmless provision and the public interest language, or ensure that taxpayers do not bear the brunt of a problem faced by civil aircraft carriers.



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