Insight: U.S., China turned EU powers against airline pollution law

BRUSSELS/WASHINGTON (Reuters) - The European Union's landmark effort to charge foreign airlines for carbon emitted on flights in and out of Europe was already failing by the time French President Francois Hollande shared his deep concerns with the European Commission chief in October.

The U.S. aviation industry had mustered fierce political opposition, China was threatening to withhold aircraft orders from Airbus and the most influential European nations feared retaliation against their national carriers. Chinese and Indian airlines refused to submit emissions data; U.S. lawmakers were readying a law that could make it illegal to pay the tariff.

Ultimately it came down to an economy-versus-environment debate, with issues of national sovereignty and freedom of the skies also playing a decisive role in grounding the effort for now, to the relief of global carriers and airplane makers whose businesses stood to lose out.

Direct pressure from the EU's three most powerful members, and France in particular, forced an abrupt one-year postponement of one of the most contentious efforts to curb global greenhouse gas emissions since the 1997 Kyoto Protocol, according to European sources familiar with the negotiations.

Hollande, nervous about the possible job losses at major French and European employer Airbus, raised the issue with EC President Jose Manuel Barroso at a meeting in Brussels in October, one of dozens of such encounters focused mainly on taming the debt crisis, one of the sources said.

Barroso decided the EC needed to make its move before the United States finalized a law that would formally shield its airlines from complying "so as not to be seen to be pushed," said the source, who asked not to be named because of the sensitivity of the disclosures.

Weeks later, on November 12, EU Climate Commissioner Connie Hedegaard told a hastily convened news conference that she was "stopping the clock" for a year before enforcing the law, a painful about-face on a signature initiative that has become the latest example of how difficult it remains to tackle climate change globally.

"Hedegaard was under extreme pressure," one senior EU official said. Another source said Britain, France and Germany were pushing to abandon the inclusion of aviation altogether. Hedegaard held out for a freeze with automatic reimposition of the law if no progress were made at the International Civil Aviation Organization (ICAO), the United Nations' aviation body.

"(Hedegaard) fought very, very hard for a year-long freeze," said the source. "Barroso backed her."

The delay took both environmental campaigners and industry by surprise, although pressure had been building steadily for months, even as the EC steadfastly defended the law.

A day after Hedegaard's news conference, the U.S. Congress approved the EU Emissions Trading Scheme Prohibition Act, which can be used to shelter U.S. airlines from compliance with the EU law. U.S. President Barack Obama signed the act on November 27.

Less than two weeks later, Chinese carrier China Eastern Airlines announced plans to buy 60 Airbus aircraft, a reversal of its earlier threats to withhold orders from Airbus because of the EU law. Fellow carrier China Southern ordered a further 10 Airbus aircraft last week.

China buys more than one in five Airbus planes currently being produced, according to the European aircraft maker.

MORE TIME TO WORK

Hedegaard gives a different reason for the delay. She says that an ICAO meeting earlier in November had made good progress toward a global framework to address aviation sector emissions, and she wanted to give it more time.

Asked about the lobbying effort, Hedegaard declined to comment but told Reuters she had the support of Britain, France and Germany for the freeze, meaning it would almost certainly be endorsed by member states.

Commission spokesman Isaac Valero-Ladron declined to comment on any lobbying by member states, citing the ICAO progress.

The European Union has long taken the lead on tackling climate change with ambitious carbon-cutting goals. Its Emissions Trading System (ETS) was designed to be the cornerstone of its climate-change policy, and it has led the way in saying it will sign up for a second Kyoto period.

But its efforts have run into the counter-force of economic pressure in difficult times. The European Commission and environmental groups had argued that including the global aviation sector under the EU ETS was justified because airlines do not face any emissions regulation. Adding on an extra one or two euros per passenger per flight seemed entirely reasonable.

To opponents, however, charging all airlines for emissions generated in international airspace just because they were using EU airports was a major breach of national sovereignty.

EU AIRLINES URGE COMPROMISE

Long before Hollande's meeting with Barroso, nervous EU airline chiefs, including from French carrier Air France-KLM and Germany's Lufthansa, and top brass at Airbus wrote to the prime ministers of Britain, France, Germany and Spain, warning of the risk of jobs losses because of canceled orders and other potential retaliation.

"The aim must be to find a compromise solution and to have these punitive trade measures stopped before it is too late," the CEOs wrote in a letter in March.

Airbus, part of aerospace group EADS, said early this year that China had been holding back on deals to buy passenger jets worth at least $12 billion. That forced the company to delay part of a planned production increase that would have generated an extra 1,000 jobs, it said.

Airbus employs about 55,000 workers, most in Europe. Beyond those directly employed are tens of thousands of workers whose employment is indirectly linked to Airbus.

Still, Hedegaard insisted publicly and privately that the only way the EU would back down would be the creation of an alternative global scheme, and that individual nations could be exempt if they introduced their own plans for cutting aviation emissions.

For example, in a letter to Indian Civil Aviation Minister Ajit Singh on March 30, Hedegaard said the commission could meet half-way provided "India itself undertook comparable action" to tackle emissions.

Around the same time, before Hollande's election in May, then French Prime Minister Francois Fillon wrote to Barroso urging a resolution, saying the European Union must "make all the necessary efforts" to find a solution acceptable to countries outside the region.

Only months later would other EU members begin to express their reluctance, according to an EU official close to the debate.

Some countries began to realize that their own agencies, not the EC, would be responsible for collecting fees from and imposing penalties on hostile non-EU airlines that have threatened to retaliate. Under EU law, penalties start at 100 euros ($130) per ton of carbon.

U.S. AIRLINE LOBBY EFFORT

While China pressed from the east, U.S. politicians pressed from the west, with the powerful airline lobby joining forces in the name of protecting the sovereignty of U.S. airspace.

Florida Republican Congressman John Mica, who co-authored the House version of a bill blocking U.S. airlines from the EU ETS with Democratic Senator Claire McCaskill of Missouri and Republican Senator John Thune of South Dakota, says U.S. lawmakers made several direct appeals to their European counterparts to back down.

"We knew there was opposition from other countries. We met with the EU and also the folks we considered our allies," Mica told Reuters in an interview.

Airlines for America (A4A), a lobbying group, spent more than two years convincing the Obama administration and Congress to oppose the EU scheme. It has spent over $4.3 million so far this year to influence the blocking bill and other industry issues, according to lobbying tracking website Open Secrets.

The group is now taking advantage of its success to lobby for a national overhaul of U.S. airline regulations and taxes.

"This issue has really united unions, corporations and the industry in a new way, and the airlines absolutely want to build on that as we move into a national airline policy," said Sean Kennedy, senior vice president for global government affairs at A4A.

PRESSURE ON ICAO

The way forward for the law after the one-year moratorium looks uncertain.

The dominant influence of Britain, France and Germany within Europe could make it difficult to restart the clock, although Hedegaard insists it would start automatically if ICAO fails to deliver.

Mica said the U.S. law was necessary because he is skeptical ICAO can deliver. More than a decade of fruitless debate at the ICAO was what led the EU to impose its aviation law in the first place.

More than a year of high international tension has galvanized the slow-moving U.N. body, which requires the approval of all 190 members to seal any deal. Its first meeting of high-level diplomats, which takes place in Montreal this week, is charged with devising a framework and will be closely watched.

"The United States and its coalition of unwilling surrogates blamed Europe and said an ICAO global agreement was the only way," said Bill Hemmings, program manager at campaign group Transport & Environment, an environmental campaign group. "Well now's the time for this coalition to deliver the goods in ICAO."

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On the edge of the "cliff," U.S. cities like Charleston

CHARLESTON, South Carolina (Reuters) - For 37 years straight, Joseph P. Riley Jr. has sat behind the mayor's desk here, shaping this city and its budget.

On a recent afternoon, Riley, 69, reached for a draft copy of next year's spending plan and wondered aloud about what might get cut should politicians in Washington fail to find an agreement this month, unleashing $600 billion worth of spending reductions and tax hikes next year.

Hiring new police officers for the city of 123,000 could be put on hold, Riley said. A new piece of equipment for the fire department would have to wait. Sanitation workers might be in trouble, too.

"The thought that they would allow the economic harm that would ensue if we went over the fiscal cliff is mind-boggling," said Riley, a Democrat who was elected to his 10th term last year.

Charleston, a beautiful city steeped in history and awash in tourist dollars, would seem at first glance a world apart from the harm that could be caused by the combination of spending cuts and higher taxes. Economists predict its arrival could send the United States hurtling back into a recession.

At its edges, however, Charleston harbors the people who are most vulnerable to Washington's intransigence, making the city an emblem of a country's worry and of the powerlessness people feel in the face of Washington's indecision.

The sting of automatic cuts would be felt acutely by those who work in the defense sector and the poor. They form two prominent groups in Charleston County who may share little but the knowledge that federal belt-tightening is less a nuisance than an existential threat.

In South Carolina, defense spending accounts for $15.7 billion in annual economic activity - more than one in 10 dollars spent in the state - and nearly 140,000 jobs.

The Charleston area alone, which includes a large Air Force base and a Navy facility, holds more than 66,000 defense jobs and nearly half of the state's military economic activity, according to a report released last month by the South Carolina Department of Commerce.

While Charleston, like the rest of the state, has seen a boom in military spending over the last decade, the area has the state's second-highest concentration of people living in poverty, according to 2010 U.S. census data. More than one in four children live in poverty in the surrounding county.

From the anticipated cuts to the military to the shrinking of the safety net, Charleston shows what's at stake should the United States fall off the fiscal cliff.

'DEVASTATION'

A fast-talking engineer originally from Detroit, Michigan, Rebecca Ufkes founded UEC Electronics with her husband in neighboring Hanahan 17 years ago. Walking past employees in blue lab coats assembling components for military vehicles and commercial products last week, Ufkes described the chilling effect the possibility of cuts have had on Charleston's defense industry.

In September, Ufkes traveled to Washington as a part of a lobbying effort organized by the Aerospace Industry Association, hoping to impress politicians with the dangers facing her 200-person company and its competitors should the anticipated $500 billion in defense cuts, over 10 years, come to pass.

She came away encouraged by her state's largely Republican representation in Washington but frustrated by other lawmakers.

"South Carolina is a very pro-business state," she said. "They are very keen on economics. It's just that we are only one of 50 states."

Ufkes, 48, said she worries not only about the uncertainty that has left defense contractors unsure where to invest but the impending tax increases, which she said will put her company, active in the commercial marketplace as well, at a disadvantage against foreign rivals.

"Probably the solution is not going to be perfect for UEC," she said, "but I don't want it to be devastating. Compromise and devastation are not the same thing."

With a mug declaring, "Failure is not an option," sitting on her desk, Ufkes predicted that her company would make it, no matter how devastating the cuts are.

"If we don't survive," she said. "I don't know who will."

NO 'GIFTS'

Five miles (eight km) from Ufkes' cutting-edge electronics manufacturer is the struggling North Charleston neighborhood of Chicora-Cherokee, where Bill Stanfield and his wife, Evelyn Oliveira, arrived fresh out of Princeton Theological Seminary 10 years ago.

They founded Metanoia, a development organization focusing on bettering the community by securing housing loans, planting a garden, and running after-school and summer programs.

Through government services like AmeriCorps, the national volunteer group, and funds from sources like the U.S. Department of Housing and Urban Development, Stanfield said his group received nearly a fifth of its funding from the federal government last year.

With politicians facing immense pressure over limiting cuts to entitlements like the Medicare health insurance program for seniors and the Social Security retirement program, advocates for the poor say they expect painful reductions in spending on education and housing.

"I don't know if our housing program would survive," Stanfield, 39, said.

Cuts to education will hit South Carolina hard, where the schools have bled money over the last five years.

According to the left-leaning Center on Budget and Policy Priorities, South Carolina's cuts to education have been the fifth largest in the country, slicing 18 percent off of per-student spending during that period.

The Obama administration, which Republicans consider a profligate spender, has felt like lean times in neighborhoods like Chicora-Cherokee, Stanfield said.

"You know Mitt Romney said that people voted for Obama because of gifts?" Stanfield said. "There's this misconception that President Obama has been a gravy train of funding. There was more funding under President Bush of these organizations than under Obama."

'GAME OF CHICKEN'

Last month, Riley, the Charleston mayor, went to Washington with a group of fellow city leaders, Democrats and Republicans, to lobby the White House and Congress to save cities from drastic cuts.

Vice President Joseph Biden and Democratic leaders from the House of Representatives and Senate met with the mayors. House Speaker John Boehner and other Republican leaders in Congress declined their invitation, Riley said.

While Riley supports Obama's proposal to increase taxes on income earned over $250,000, a sticking point in the negotiations, he and other mayors cautioned that ending the tax-free status of municipal bonds would strangle cities' access to needed capital.

Riley returned to Charleston feeling like a deal, which could prevent the harshest blows from hitting his city, its residents and jobs, was in the offing. Now, he said, he is not so sure.

"It looks like it's a game of chicken," he said, "and there are signals that they are going to go through with it."

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Boustany defeats Landry for La. congressional seat

BATON ROUGE, La. (AP) — Louisiana congressman Charles Boustany won a fifth term on Saturday by handily defeating his fellow Republican incumbent, Jeff Landry, in a runoff election.

The two men were forced into the same district when Louisiana lost a congressional seat because of anemic population growth in the latest federal census. The state will have six U.S. House seats in the new term that begins in January.

Boustany, a retired doctor from Lafayette, will represent the 3rd District covering southwest Louisiana and Acadiana.

"We're glad to get this done," he said Saturday night. "This looks like a very solid victory. We had a very strong ground game, which was a key element in the runoff. We reached out to a lot of voters with a solid message backed by the results I've gotten in Congress."

With nearly all precincts reporting, Boustany was ahead of Landry by a 3-2 margin. About one-fifth of district voters cast ballots.

The race had been attack-heavy, since both men ran as conservative Republicans opposed to the policies of President Barack Obama and had little philosophical ground in which to distinguish themselves.

The district design favored Boustany, a traditional Republican candidate allied with House Speaker John Boehner. Landry, a freshman congressman, was the tea party favorite, but he was unable to build enough grassroots support to oust Boustany.

Pearson Cross, chairman of the political science department at the University of Louisiana-Lafayette, said Boustany was the "de-facto incumbent" throughout the race.

"Most voters in the district have voted for Charles Boustany, think he's done a good job, are comfortable with him," Cross said.

Landry said it was difficult to overcome Boustany's advantage in the district design. Boustany had represented more than two-thirds of the parishes in the configuration of the new 3rd District.

"In those parishes that I represented, we did extremely well. In those parishes that he represented, he did well. It's kind of tough when seven out of 10 of those parishes were his," Landry said.

Though they had three other challengers in the November election, the two congressmen had campaigned as though it was a two-man race since the election sign-up period in August.

Boustany described his GOP opponent as a good ol' boy politician who would say anything to get elected, habitually skipped votes in Congress and spread distortions about Boustany's record to distract voters from his own lack of accomplishments.

Landry criticized Boustany as lacking the courage to make tough votes for his district and instead following in lockstep with Republican leaders even if south Louisiana voters didn't support the policy.

The race was one of Louisiana's most expensive congressional contests, with nearly $6 million spent between the two men and even more from outside groups. Boustany had a significant edge in fundraising, raising nearly $2 million more than Landry, according to the most recent campaign finance reports filed with the Federal Election Commission.

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Analysis: Canada's foreign limits may hit oil sands growth

CALGARY, Alberta (Reuters) - New Canadian rules limiting control of its oil sands by foreign state-owned companies may turn away some investors who now covet more than minority stakes just as the industry seeks massive amounts of capital to fuel its growth ambitions.

The oil sands in western Canada, the world's third-largest crude reserve and the source for much of the United States' oil imports, need an estimated C$120 billion ($121 billion) in investment in the next decade, according to the Alberta government.

The scale of the investment means that the industry will need to tap foreign capital.

But, in approving the contentious takeovers of Nexen Inc and Progress Energy Resources Corp by Chinese and Malaysian state-owned companies, Prime Minister Stephen Harper put a limit on potential investment.

The government said future bids for control of oil sands businesses by state-owned enterprises (SOEs) would be allowed only in exceptional circumstances.

"The government's concern and discomfort for some time has been that very quickly a series of large-scale controlling transactions by foreign state-owned companies could rapidly transform this industry from one that is essentially a free market industry to one that is effectively under the control of a foreign government," Harper told reporters.

The policy suggests SOEs of foreign nations must be content with non-controlling interests in the 170-billion-barrel oil sands resource.

"The 'for sale' sign on the Canadian oil sands has been effectively removed, at least as far as SOEs are concerned," said Richard Steinberg, the chair of Fasken Martineau's mergers and acquisitions practice group in Toronto.

During the past decade, Chinese and other Asian companies, seeking energy to help fuel their growing economies, have steadily boosted the size of acquisitions, starting with minority stakes in start-up ventures, and increasing to, in two cases now, taking full control of oil sands projects.

Before its $15.1 billion bid for Nexen, China's CNOOC Ltd first became a 35 percent owner of the Long Lake, Alberta, oil sands project, by buying Opti Canada in 2011. This year it set its sights on the majority partner, Nexen, which also has assets in the Gulf of Mexico, North Sea and Nigeria.

"Would they have gone down that path, would they have bought Opti, if they had known it would be unlikely they would get approval to buy Nexen?" FirstEnergy Capital Corp analyst Michael Dunn said. "From that perspective, it's worrisome."

With its takeover of Nexen, CNOOC Ltd will get 100 percent of Long Lake and 7.23 percent of the Syncrude Canada mining and synthetic oil processing joint venture. Sinopec, another Chinese SOE, owns 9 percent of Syncrude.

The new restrictions could send Asian SOEs and their checkbooks to other jurisdictions that have fewer jitters about foreign control, an Asia-based energy banker said.

"If anything, this will only encourage Chinese and Indian bidders to diversify even further to places like Brazil, Kazakhstan, West Africa and others," the banker said.

Another banker took a less pessimistic view saying Canada, as a major source of energy, and Asia, as a major source of demand, needed one another.

"The reality is: Canada needs investment and Asia needs gas and that equation will drive deals," the banker said.

The bankers declined to be identified because they are not authorized to talk to the media.

More broadly, while Canada's statement was aimed at explaining how it would apply investment rules to oil sands, SOEs looking at acquisitions in other sectors "will face a tough process," said Subrata Bhattacharjee, a partner and co-chair of the national trade and competition Group at Heenan Blaikie in Toronto.

"The government's expectations for commitments and compliance will be very high," Bhattacharjee said.

FOREIGN-FUELED GROWTH

Tightened investment rules for the tar sands, which require expensive and energy-intensive methods to produce and process into refinery-ready oil, come as the industry aims to double production from the resource to more than 3.2 million barrels a day by 2020. That is a cornerstone of Harper's stated goal of turning the country into a global energy superpower.
The policy will not affect all foreign companies or those with government ownership, just those deemed to be controlled by their governments. Indeed, capital from the United States, Britain, France, Norway and a host of other countries has gushed into the sector for years.

Still, Ottawa has staked much of its trade policy on building ties with Asian countries, including China, especially in energy. In October, Canadian Energy Minister Joe Oliver said Indian investment in Canada's oil sands was lagging and energy group Enbridge Inc wants to construct a pipeline to the West Coast so Alberta crude can be shipped to Asian markets.

Alberta's government, which has strongly supported foreign investment in its oil sands as well as diversifying markets for the production, said it is possible that there could be a short-term negative reaction by potential buyers.

"The market capital votes with its feet and so I'm as interested as you are in terms of what the reaction to the decision is going to be in the marketplace itself," Cal Dallas, the province's international and intergovernmental affairs minister, told Reuters.

"I think that will be somewhat instructive in terms of what the direct impacts of the decision are. Longer term, the investment climate in Alberta continues, anywhere I travel to, to be seen as one of the most attractive in the world."

He said the province expects to have a say in any future oil sands deals.

From the oil industry's perspective, the rules are welcome as they clear up confusion about what Canada is looking for when it demands that foreign investments have a net benefit to the country. They had been criticized for being too vague.

"It doesn't stop the flow in my mind, and I honestly believe this, it opens the door to all those who have been watching this thing and saying, 'Just tell us how you want us to operate and we'll do that,'" said Greg Stringham, vice president of the Canadian Association of Petroleum Producers, the industry's main lobby group. "So that leads them down the path of more joint ventures, partnerships and those types of things."

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Same-sex couples wed in Washington state for first time

SEATTLE (Reuters) - As midnight chimed, public school elementary teachers Sarah and Emily Cofer tied the knot at a joyful mass wedding to mark the first day that same-sex couples can marry in Washington state.

"We're so proud to live in this state that recognizes love and commitment," said Sarah, 31, after she and Emily, 32, uttered the words "I will" before the aptly-named judge Mary Yu at Seattle's King County Courthouse.

Washington, Maine and Maryland became the first U.S. states to extend marriage rights to same-sex couples by a popular vote in November, in a leap forward for gay rights.

Washington's law went into effect on Thursday, when hundreds of eager couples lined up to apply for marriage licenses. The first legal same-sex weddings began on Sunday after a three-day waiting period required of all marriages expired.

The Cofers' union was the state's first same-sex wedding. Cameras clicked, observers clapped and their nine-month old daughter Carter - born to one of the pair and adopted by the other - cried.

The couple said they would head home and put Carter to bed.
They were followed by 11 other couples due to take their vows at 30-minute intervals through the night in Yu's 9th-floor courtroom decorated with poinsettia.
Boxes of tissues were on hand for tearful guests.

"I'm proud to be a witness to an extraordinary event in our history," said Yu. The marathon nuptials were "an opportunity to recognize that marriage and love and family are good", she said.

Preparing for their own night-time ceremony at the courthouse in downtown Seattle, lawyer Brendon Taga and banker Jesse Page, both dressed in dark suits, chatted with reporters.

"It's a culmination of our relationship. We're very fortunate to be living in this state," said Taga, 33.
OPINION SHIFT
U.S. public opinion has been shifting in favor of allowing same-sex marriages, already made legal in six states and the District of Columbia by lawmakers or courts, although not previously via a popular vote. Another 31 states have passed constitutional amendments banning same-sex marriage.

A Pew Research Center survey from October found 49 percent of Americans favored allowing gay marriage, with 40 percent opposed. Back in May, President Barack Obama became the first U.S. president to say same-sex couples should be able to wed.

As gays and lesbians readied for their nuptials in Washington state, the U.S. Supreme Court stepped into the fray over gay marriage on Friday by agreeing to review two challenges to federal and state laws that define marriage as between a man and a woman.
The high court agreed to review a federal law that denies married same-sex couples federal benefits that heterosexual couples receive, such as in taxes and immigration. It also took on a challenge to California's voter-approved gay marriage ban.

For same-sex couples now swapping vows in Washington state, the path to legalization has been a rocky one. The state's Democratic-controlled legislature passed a bill to legalize gay marriage in February, and Democratic Governor Christine Gregoire signed it swiftly into law.

But opponents gathered enough signatures to temporarily block the measure from taking effect and force the issue onto the state ballot. Voters, by 54 percent to 46 percent, ultimately approved gay marriage at the polls in November.

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