Aircraft Lessors Seek Protection From EU ETS

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Published: August 11, 2012

International tension over the EU’s law making all airlines flying in and out of Europe pay for their carbon emissions has prompted aircraft leasing companies to change the terms of their contracts, lawyers familiar with the situation said.

Since the start of this year, the European Commission has begun enforcing legislation to make all airlines take part in its Emissions Trading Scheme (ETS), prompting threats of a trade war and proposals for blocking legislation in the United States.

So far, nearly all airlines have complied, but Chinese and Indian carriers missed an interim deadline for data submission — a requirement of the law — earlier this year.

Persistent failure to respect the EU’s law could lead to fines and in the most extreme cases, aircraft could be impounded, prompting leasing firms to protect themselves.

None of the half-dozen leasing firms contacted wished to comment.

“These leasing/financing companies are beginning to include provisions in their leases providing that the lessees, or permitted sub-lessors, will operate the aircraft in compliance with the EU ETS,” Annie Petsonk, a lawyer at the Environmental Defence Fund, a US advocacy group, told a US Senate committee earlier this summer.

“They are also including provisions that ensure that any liability for non-compliance with the EU ETS cannot be shifted to the owner/lessor/financer of the aircraft.”

The total aircraft fleet held by leasing companies accounted for nearly one-third of the world’s active fleet in 2010, and is expected to rise until 2015, according to research firm Frost and Sullivan.

“Aircraft is so expensive, and, additionally, for operators and airlines their profitability and cash flow tends to fluctuate. It’s common for carriers these days to lease,” said John Mulligan, research fellow at the International Aviation Law Institute in Chicago.

One international law firm said ETS clauses were becoming more prevalent in leasing contracts, but were not universal.

“The preliminary view was there was no need for a particular provision as general ‘compliance with all laws’ provisions covered ETS,” Keith Wilson, London-based partner at Berwin Leighton Paisner, said.

“Since then, a number of specific ETS clauses are going into contracts to try to ensure compliance and if there is not compliance, to make sure the financial burden of any penalty falls on the airline operator.”

India, which has said it won’t comply with the EU law, is heavily reliant on planes leased from companies and banks located from Delaware to the Cayman Islands to Dublin.

With the exception of state-owned Air India, almost all the aircraft used by cash-strapped Indian airlines belong to leasing companies, according to India’s Directorate General of Civil Aviation.

COST

The cost of complying with the EU’s scheme is around EUR€2 per passenger for a flight from Beijing to Frankfurt, much less than the penalty for non-compliance of EUR€100 (USD$ 120) per tonne of carbon.

Airlines argue the cost is still significant when the industry is under stress because of the economic slowdown, and they are worried about the precedent. Governments have complained it is extra-territorial.

Airlines and non-EU governments alike say the UN’s International Civil Aviation Organisation (ICAO) is the correct body to come up with a plan to curb airline emissions.

The Commission said it only included all flights because more than a decade of debate at ICAO failed to deliver, but it too is now looking to ICAO for a solution.

Provided the ICAO can agree a concrete plan to curb airline emissions, the Commission has said it could waive its scheme.

The US Congress meanwhile has increased the pressure on all sides and complicated the legal situation, with legislation that could be used to make it illegal to observe the EU’s law.

Legislation to bar compliance with foreign laws is rare.

The Environmental Defence Fund said the two known US precedents were a law, now repealed, banning US trade and investment in South Africa as a sanction against the nation’s apartheid laws and anti-boycott laws.

The anti-boycott laws, which are still in force, can bar US firms from furthering or supporting the boycott of Israel sponsored by the Arab League.

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