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[Senate Report 112-195]
[From the U.S. Government Publishing Office]

112th Congress 
 2d Session                      SENATE                          Report
                                                                112-195
_______________________________________________________________________

                                     

                                                       Calendar No. 484

    EUROPEAN UNION EMISSIONS TRADING SCHEME PROHIBITION ACT OF 2011

                               __________

                              R E P O R T

                                 OF THE

           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                                   on

                                S. 1956

                 August 2, 2012.--Ordered to be printed
       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
                      one hundred twelfth congress
                             second session

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas
JOHN F. KERRY, Massachusetts         OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JIM DeMINT, South Carolina
BILL NELSON, Florida                 JOHN THUNE, South Dakota
MARIA CANTWELL, Washington           ROGER F. WICKER, Mississippi
FRANK R. LAUTENBERG, New Jersey      JOHNNY ISAKSON, Georgia
MARK PRYOR, Arkansas                 ROY BLUNT, Missouri
CLAIRE McCASKILL, Missouri           JOHN BOOZMAN, Arkansas
AMY KLOBUCHAR, Minnesota             PATRICK J. TOOMEY, Pennsylvania
TOM UDALL, New Mexico                MARCO RUBIO, Florida
MARK WARNER, Virginia                KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska                  DEAN HELLER, Nevada
                     Ellen Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
               Richard Russell, Republican Staff Director
            David Quinalty, Republican Deputy Staff Director
               Rebecca Seidel, Republican General Counsel

                                                       Calendar No. 484
112th Congress                                                   Report
                                 SENATE
 2d Session                                                     112-195

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    EUROPEAN UNION EMISSIONS TRADING SCHEME PROHIBITION ACT OF 2011

                                _______
                                

                 August 2, 2012.--Ordered to be printed

                                _______
                                

     Mr. Rockefeller, from the Committee on Commerce, Science, and 
                Transportation, submitted the following

                                 REPORT

                         [To accompany S. 1956]

    The Committee on Commerce, Science, and Transportation, to 
which was referred the bill (S. 1956) to prohibit operators of 
civil aircraft of the United States from participating in the 
European Union's emissions trading scheme, and for other 
purposes, having considered the same, reports favorably thereon 
with an amendment (in the nature of a substitute) and 
recommends that the bill (as amended) do pass.

                          Purpose of the Bill

  The European Union Emissions Trading Scheme Prohibition Act 
of 2011, S. 1956, as reported: (a) would give the Secretary of 
the Department of Transportation (DOT) the authority to 
prohibit an operator of civil aircraft in the United States 
from participating in the European Union (EU) Emissions Trading 
Scheme (ETS) if the Secretary determines the prohibition to be 
in the public interest; and (b) would direct the Secretary of 
Transportation and the Administrator of the Federal Aviation 
Administration (FAA), and other appropriate officials to enter 
into international negotiations, including agreements to pursue 
a worldwide approach to address aircraft emissions, and to take 
appropriate measures under existing authorities to ensure U.S. 
air carriers are held harmless from any ETS unilaterally-
imposed by the EU.

                          Background and Needs

  The EU has instituted a ``cap and trade'' policy, known as 
the ETS, in an effort to combat greenhouse gas (GHG) emissions. 
The EU implemented the system in 2005, covering approximately 
11,000 power stations and industrial plants in 30 European 
countries. The EU ETS caps the total amount of emissions each 
year for certain industries and creates ``allowances'' that 
permit covered entities to emit a specific amount of GHGs. Each 
year, each covered industry is allocated allowances to cover a 
portion of their total forecasted emissions. The remaining 
allowances are available for purchase through government 
auction or between participants, creating a ``carbon market''. 
At the end of the year, a company must submit enough allowances 
to the EU to cover all their emissions, or pay penalties to EU 
member states. The EU's current plan reduces the emissions cap 
over time to further limit GHGs in the future.
  Aircraft operators, including airlines, were incorporated 
into the EU ETS beginning in January 2012. According to the 
Congressional Research Service, global aviation GHG emissions 
account for two to three percent of the world's GHG emissions. 
Any flight, with limited exceptions, that originates or lands 
in the EU, including those operated by foreign aircraft 
operators, are subject to the ETS. The emissions cap for 
aircraft operators in 2012 has been set at 97 percent of their 
average emissions from 2004 through 2006. Within this overall 
emissions cap, aircraft operators have been allocated 
allowances to cover 85 percent of these emissions. Aircraft 
operators will have to submit allowances, or pay penalties, for 
their 2012 emissions in April of 2013. For the 2013 through 
2020 time period, the aircraft operator emissions cap has been 
set at 95 percent of the industry's average emissions from 2004 
through 2006. Over this period, the aircraft operators will be 
allocated allowances for 82 percent of these emissions. Even 
without traffic growth, the diminishing portion of allowances 
allocated by the EU will increase the exposure of aircraft 
operators to increasing costs. Since most airlines expect 
growth in their operations over this time frame, it is 
anticipated the allocated allowances will cover an increasingly 
smaller percentage of the air carriers' actual emissions. The 
airline industry currently estimates the cost of the EU ETS at 
$3.1 billion through 2020, but that cost may increase as carbon 
market prices change.
  There has been strong opposition to the inclusion of non-EU 
aircraft operations in the ETS from the global aviation 
industry and sovereign countries around the world. A primary 
concern that has been raised is that the ETS includes emissions 
produced by foreign flagged aircraft while operating outside 
the EU's airspace. Opponents argue the EU has no jurisdiction 
to regulate emissions in foreign or international airspace 
based on long-standing international obligations established 
under the Chicago Convention of 1944. Opponents also have 
significant concern with the eventual costs of complying with 
the ETS. While proponents of the ETS claim the initial costs to 
airlines and passengers will be relatively minimal, the airline 
industry has very thin margins, and the cost of allowances are 
expected to increase over time as the cap decreases and fewer 
allowances are provided by the EU. In addition, a July 2012 
proposal by the European Commission to increase carbon market 
prices shows the market is vulnerable to manipulation. Finally, 
many aviation stakeholders point out that there is no 
requirement that the proceeds of the EU ETS be used to reduce 
aviation emissions, such as improvements and modernization of 
air traffic management; the ETS does not guarantee this. 
Regardless of the use of the revenues generated from the ETS, 
U.S. airlines oppose the ETS arguing it is de facto taxation on 
the industry and other aircraft operators in a manner that is 
inconsistent with treaty obligations under the Chicago 
Convention, which was ratified by all 27 EU member states.
  On September 30, 2011, 26 International Civil Aviation 
Organization (ICAO) member countries, including the United 
States, China, India, Japan, Korea, Russia, Mexico, and several 
Latin American countries, signed a joint ``Delhi Declaration'' 
at the New Delhi meeting of the ICAO Council opposing inclusion 
of international aviation in the EU ETS. Instead, the 
declaration supports ICAO efforts to develop meaningful 
aircraft carbon emissions standards with a target of adopting 
such standards at the ICAO General Assembly in 2013. It urges 
the EU to refrain from including non-EU flights in the EU ETS 
and to work collaboratively with the international community. 
On November 22, 2011, the ICAO Council approved the opposition 
to the EU's application of ETS as expressed in the New Delhi 
declaration.
  On December 16, 2011, Secretary of State Hillary Clinton and 
Secretary of Transportation Ray LaHood sent a letter to 
European Commission officials expressing strong opposition to 
the EU ETS stating that ``application of the ETS to airlines of 
non-EU states is inconsistent with the legal regime governing 
international aviation and with ICAO guidance on emissions 
trading.'' They urged the EU to work with the broader 
international community through the auspices of ICAO to address 
the challenges of reducing aviation emissions.
  In February 2012, representatives of the United States and 22 
other countries met in Moscow and produced a joint declaration 
urging EU member states to cease applying the ETS to civil 
aviation. These countries unanimously agreed that the EU should 
instead participate in ongoing efforts within ICAO to address 
aviation emissions through a global solution that would be 
adopted worldwide. The next ICAO meeting, the 38th Assembly in 
September 2013, will review progress toward development of such 
a global framework to reduce emissions.
  If an agreement cannot be reached in advance of April 2013, 
when the first submission of aviation allowances come due for 
the aviation sector, the issue may be elevated to the ICAO 
Council through an Article 84 proceeding under the Chicago 
Convention treaty. This is the formal process to resolve 
aviation disputes between two or more states subject to the 
Convention.

                         Summary of Provisions

  S. 1956, as reported: (a) would give the Secretary of 
Transportation the authority to prohibit an operator of civil 
aircraft in the United States from participating in the EU ETS 
if the Secretary determines the prohibition to be in the public 
interest; and (b) would direct the Secretary of Transportation, 
the FAA Administrator, and other appropriate officials, to 
enter into international negotiations, including agreements to 
pursue a worldwide approach to address aircraft emissions, and 
to take appropriate actions to ensure U.S. air carriers are 
held harmless from any ETS unilaterally imposed by the EU.

                          Legislative History

  Senator Thune introduced S. 1956 on December 7, 2011. The 
Committee conducted a hearing on June 6, 2012, to consider S. 
1956, which has twelve bipartisan cosponsors. The Secretary of 
Transportation, the European Commission, the Airline Pilot 
Association, the National Business Aviation Association, the 
Environmental Defense Fund, and Airlines for America testified. 
The House of Representatives passed a companion bill, H.R. 
2594, the European Union Emissions Trading Scheme Prohibition 
Act of 2011, on October 24, 2011, by a voice vote. In addition, 
the FAA Modernization and Reform Act of 2012 (126 Stat. 11), 
included a Sense of Congress that application of the EU ETS to 
civil aviation is contrary to international law and that EU 
member states should work through ICAO to address aviation 
emissions. The FAA Modernization and Reform Act of 2012 directs 
the Executive Branch to ``use all political, diplomatic, and 
legal tools at the disposal of the United States to ensure that 
the European Union's emissions trading scheme is not applied to 
[U.S.] aircraft.''
  On July 31, 2012, the Committee met in Executive Session 
during which S. 1956 was considered. One amendment, in the 
nature of a substitute, was offered by Senators Thune and 
McCaskill during the Executive Session that incorporated a 
number of modifications offered by Members and technical 
changes suggested by DOT, FAA, and the Department of State. The 
bill, as amended, was ordered reported by voice vote.

                            Estimated Costs

  In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 403 of the 
Congressional Budget Act of 1974, the Committee provides the 
following cost estimate, prepared by the Congressional Budget 
Office:
                                                    August 1, 2012.
Hon. John D. Rockefeller IV,
Chairman, Committee on Commerce, Science, and Transportation,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1956, the European 
Union Emissions Trading Scheme Prohibition Act of 2011.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Megan 
Carroll.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

S. 1956--European Union Emissions Trading Scheme Prohibition Act of 
        2011

    The European Union (EU) has established the European Union 
Emissions Trading Scheme (ETS), a regulatory framework related 
to greenhouse gas emissions. Currently, the ETS covers 
emissions from air carriers that operate flights within, to, 
and from EU member states. Negotiations between the U.S. 
government and the EU about the applicability of the ETS to 
U.S. air carriers are ongoing, and the potential outcome of 
those negotiations is unclear.
    S. 1956 would direct the Secretary of Transportation to 
prohibit U.S. air carriers from participating in the ETS if the 
Secretary believes such a prohibition to be in the public 
interest. The bill would direct federal agencies to continue 
negotiations in pursuit of a worldwide approach to addressing 
aviation-related emissions and would authorize the Secretary to 
use existing authorities to ensure that U.S. air carriers are 
held harmless for any costs they incur if they participate in 
the ETS.
    CBO estimates that enacting S. 1956 would have no 
significant impact on the federal budget. We expect that the 
bill would not alter the scope of diplomatic efforts currently 
under way or federal agencies' costs to participate in those 
efforts, which are subject to appropriation. The bill would not 
affect direct spending or revenues; therefore, pay-as-you-go 
procedures do not apply.
    S. 1956 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    S. 1956 would impose a private-sector mandate, as defined 
in UMRA, if U.S. air carriers would be prohibited from 
participating in the ETS. The cost of the mandate would depend 
on how the prohibition is administered by the Department of 
Transportation. Because information about how the prohibition 
would be implemented is not available, CBO has no basis for 
estimating the cost, if any, to U.S. air carriers. 
Consequently, CBO cannot determine whether the cost of the 
mandate would exceed the annual threshold established in UMRA 
for private-sector mandates ($146 million in 2012, adjusted 
annually for inflation).
    On September 23, 2011, CBO transmitted a cost estimate for 
H.R. 2594, the European Union Emissions Trading Scheme 
Prohibition Act of 2011, as ordered reported by the House 
Committee on Transportation and Infrastructure on September 23, 
2011. The two bills are similar, and the CBO cost estimates are 
the same.
    The CBO staff contacts for this estimate are Megan Carroll 
(for federal costs) and Amy Petz (for the impact on the private 
sector). The estimate was approved by Theresa Gullo, Deputy 
Assistant Director for Budget Analysis.

                      Regulatory Impact Statement

  In accordance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee provides the 
following evaluation of the regulatory impact of the 
legislation, as reported:

                       NUMBER OF PERSONS COVERED

  The reported bill would be consistent with the current 
operation of the air transportation system, thus the number of 
persons covered should be consistent with the current levels of 
individuals impacted under the existing aviation system.

                            ECONOMIC IMPACT

  S. 1956 is expected to have a positive impact on the U.S. 
economy. The transportation system is a key component of the 
Nation's economy. Provisions in this legislation aim to ensure 
the transportation system continues to facilitate commerce.

                                PRIVACY

  The reported bill is not expected to have any impact on the 
privacy rights of individuals.

                               PAPERWORK

  It is not anticipated that there will be a major increase in 
paperwork burdens resulting from the enactment of S. 1956.

                   Congressionally Directed Spending

  In compliance with paragraph 4(b) of rule XLIV of the 
Standing Rules of the Senate, the Committee provides that no 
provisions contained in the bill, as reported, meet the 
definition of congressionally directed spending items under the 
rule.

                      Section-by-Section Analysis

  Section 1. Short title.

  This section cites the short title of the Act as the 
``European Union Emissions Trading Scheme Prohibition Act of 
2011''.

  Section 2. Prohibition on Participation in the Europeans Union's 
        Emissions Trading Scheme.

  This section would direct the Secretary of Transportation, 
upon a finding that it is in the public interest to do so, to 
prohibit civil aircraft of the United States from participating 
in the European Union Emissions Trading Scheme, codified in EU 
Directive 2003/87/EC of October 13, 2003, as amended.
  The factors that would be considered in determining the 
public interest are: (1) the impacts on U.S. consumers, U.S. 
carriers, and U.S. operators; (2) the impacts on the economic, 
energy, and environmental security of the United States; and 
(3) the impacts on U.S. foreign relations, including existing 
international commitments.
  Prior to taking any action, but after the Secretary of 
Transportation determines it may be in the public interest to 
take some action, the Secretary must hold a public hearing at 
least 30 days before any such action is taken.

  Section 3. Negotiations.

  This section would direct that the Secretary of 
Transportation, the FAA Administrator, or any other appropriate 
office of the United States Government should, as appropriate, 
use their authority to conduct international negotiations to 
pursue a worldwide approach to address aircraft emissions, and 
shall, as appropriate, use their authority to hold operators of 
civil aircraft of the United States harmless from the European 
Union Emissions Trading Scheme, codified in EU Directive 2003/
87/EC of October 13, 2003, as amended.

  Section 4. Definition of Civil Aircraft of the United States.

  This section would define the term ``civil aircraft of the 
United States'' as that term is defined in section 40102(a) of 
title 49, United States Code, which ``means a citizen of the 
United States undertaking by any means, directly or indirectly, 
to provide air transportation.''

                        Changes in Existing Law

  In compliance with paragraph 12 of rule XXVI of the Standing 
Rules of the Senate, the Committee states that the bill as 
reported would make no change to existing law.

                                  
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