March 6 2001 MEMORANDUM FOR SECRETARY O'NEILL FROM MARK SOBEL Acting Assistant Secretary International Alfairs SUBJECT Meeting with Gary Edson NSC NEC on Steel Global Climate Change and AIDS DATE TIME March 9 2001 2 30 p m LOCATION Secretary's Office PARTICIPANTS Yourself White House Policy Advisor Gary Edson ATTACHMENTS Overview Tab A TabB TabC Steel Global Climate Change AIDS _--- TabB Global Climate Change Pati One of this Tab B attachment offers some observations related to your memo to the President on global climate change and your comments at the briefmg on February 21 200l Pati Two provides some backgronnd on an area of particular interest to Treasury the Global Environment Facility GEF While the GEF is not likely to come up in your meeting with Gary Edson it may be helpful to be aware of Treasury's interest in this matter Tab B Part One Developing Administration Priorities on Climate Change o You correctly note that the Kyoto Protocol targets if instituted in 2008 to 2012 and continued unchanged by snbsequent agreements would produce only a brief delay in the buildup of atmospheric concentrations However the assumption of the Patiies in the negotiations has been that each consecutive commitment period would involve different likely more stringent targets and the eventual inclusion of binding commitments by developing countries Thus the impact of the Kyoto targets forever scenario on concentrations is not necessarily the only or even the most plausible outcome ofthe Kyoto Protocol o You note the view that Kyoto could be used to push the nose under the tent Most economists familiar with climate change mitigation agree that although the Kyoto targets and timetables are infeasible a good mitigation approach would be to establish a modest carbon price signal and increase it gradually and predictably A slow and predictable increase in the price signal allows the economy to adjust using long run elasticities of substitution towards less greenhouse gas-intensive production and consumption This adjustment could in theory be accomplished with a series of commitment periods with reasonable but decreasing targets perhaps in combination with a safety valve as the basic Protocol structure envisages or with approaches such as gradually increased hmmonized taxes A key problem in implementing the Kyoto Protocol is that short run elasticities are very low making an ambitious first period target very expensive o If one includes the flexibility mechanisms the effect of full implementation ofthe Kyoto Protocol would not necessarily mean that the U S needs to reduce its own emissions or energy consumption by more than 30% by 2008 to 2012 Models predict that over half of the emissions reductions the U S would require under Kyoto would be achieved by impolting emissions allowances under the flexibility mechanisms Prepared by Economic Policy ---------- ---------'--- ----'-'-- Tab B Part Two Global Environment Facility GEF and Climate Change Summary Background The GEF created on a pilot basis in 1991 helps finance investments in developing countries that yield global environmental benefits One of the environmental issues that the GEF focuses on is climate change through support of energy efficiency and renewable energy proj ects A major crisis is looming for the GEF budget The U S is in a serious arrears situation having made only one of four payments to GEF-2 The FY02 budget request asks for only one more payment Going into the GEF-3 replenishment this year the best case scenario will involve the U S making two of the four payments it owes This will impact replenishment negotiations particularly at a time when the GEF is being asked to help finance the new persistent organic pollutants treaty which the U S strongly supports Our arrears problems with the GEF are in part due to a misperception in Congress that the GEF is funding back door inlplementation ofthe Kyoto Protocol on climate change Treasury has worked hard to prevent any association between GEF and Kyoto and we were successful last year in getting language into the FY01 House Foreign Operations Committee Report articulating that this is not the case However the State Department's latest positions in climate negotiations if pelmitted to prevail will make it more difficult for Treasury to make this argument in the future For example several proposals discussed in COP-6 last November are of concern to us These proposals tradable emissions fund Russia green fund and adaptation fund would directly link the GEF with Kyoto by having the GEF manage funds created out of two Kyoto Protocol mechanisms i e tradable emissions system and Clean Development Mechanism Tradable Emission Fund Prior to COP-6 the State Department was considering a proposal to require the developed countries to give a certain percentage of their assigned tradable emissions credits to a fund for developing countries and have the GEF manage this fund This proposal would be used to counter another proposal by the developing countries with EU support to tax tradable emissions The GEF as fund manager would then sell these credits and use the cash to assist developing countries in their climate change activities The total amount per year could be around $100 million depending on the price of carbon Our Issues o Associates the GEF with the Kyoto Protocol tradable emissions mechanism and what sounds like a tax by other means o Exceeds the GEF mandate as it would be required to broker facilitate emissions trades o Could be considered a give-away to developing countries of the hard-fought tradable pernnts system the U S obtained in the Kyoto Protocol and for which the World Bank Prototype Carbon Fund was created Russia Green Fund This proposal would use revenues from tradable permits to address Russia's environmental problems and have the GEF manage this estimated $8 billion fund Based on 1990 emissions rates Russia will be allotted generous emissions permits that it does not need which it can then turn around and sell The origins and detailsofthis proposal are unclear However given the Europeans' general dislike of using tr'ldable emissions to address climate change this would make the mechanism more palatable to them Our Issues o Associates the GEF with a Kyoto Protocol mechanism o Creates a precedent for the GEF to be a manager of other funds that may be created o Usage of funds unclear at this point Adaptation and or Mitigation Fund In COP-6 a proposal was furthered to have the GEF manage an adaptation or mitigation fund which would be funded by the Clean Development Mechanism CDM a Kyoto mechanism Although Treasury has previously been supportive of the idea of the GEF housing the Adaptation Fund created by the Climate Convention we have growing concerns that this will associate the GEF with the CDM created by the Kyoto Protocol According to State Depatiment negotiators it would be difficult for the US to change its position on the GEF and the Adaptation Fund at tins point The Adaptation Fund was created in the 1992 UN Framework Climate Change Convention but the source of its fund was left for future discussions The CDM was created in the Kyoto Protocol to enable industrialized countries to receive credit for frnancing emissions-avoiding projects in developing countries The Kyoto Protocol also detetmined that a share ofthe CDM proceeds would be used to assist developing countries Since Kyoto countries have decided to fund the Adaptation Fund with the CDM proceeds Most countries including the US and the GEF Secretariat have expressed support for having the Adaptation Fund housed in the GEF but fOnllal decisions will not be made until COP-6 resumes this summer State has been supportive ofthe GEF managing this fund because the US does not want to create any additional bureaucracies or mechanisms Our Issues o Governance structure for CDM would be in the UN system i e UNFCCC and Congress is not likely to support giving the UN such control over revenue U S businesses help generate which will essentially be tratlsferred to G-77 countries Mixing the GEF into this macroeconomic issue could further complicate GEF's problems in the Congress Prepared by International Affairs This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu