November 30 1997 MEMORANDUM FOR THE PRESIDENT FROM GENE SPERLING KATHLEEN MCGINTY DANIEL TARULLO JAMES STEINBERG TODD STERN SUBJECT Kyoto -- Negotiating Guidance As the climate change negotiations begin in Kyoto we wanted to update you on the current state of play and identify issues on which your chief negotiators need bottom-line guidance On a variety ofissues significant differences remain between us and other major players such as the EU and G-77 An agreement at Kyoto is still possible but it will require key countries to make significant concessions from their stated positions Ofthe many issues to be resolved at Kyoto four are likely to require decisions fi'om you emissions targets joint implementation with developing countries overall developing country commitments and a national security exemption On each ofthese Stu Eizenstat will need to know where your bottom line is — the point to which you could move from a current U S position but beyond which you would consider an agreement unacceptable This exercise inevitably raises the question ofwhat would happen in the event we refijse to support an agreement we deem unacceptable The best case would be to negotiate some form of standstill agreement in which countries would lock in the progress to date and commit to continued prompt negotiations on the remaining issues This is the “process outcome” our negotiators would seek but a more problematic result with the U S relatively isolated and portrayed as the bad guy is possible as well Targets Among industrialized nations the most significant outstanding issue is the level ofthe binding target Key proposals on the table are as follows EU -15 percent below 1990 levels by 2010 Japan — 0-5 percent below 1990 levels by 2010 based on a formula that would produce different targets for different Annex I countries within this 0-5 percent range U S— 1990 levels by 2008-2012 Canada — 1990 levels by 2010 Australia — significantly above 1990 levels by 2010 When discrepancies in accounting methods are taken into account e g the treatment of carbon “sinks” or the number ofgases covered we believe our target is somewhat closer those ofthe EU and Japan than has been widely reported As you know that the EU has been able to be so aggressively green on its target only because of its “bubble” The bubble allows different countries to have different targets — the emissions of several EU countries would actually grow compared to 1990 — so long as the EU as an aggregate reduced by 15 percent In essence the entire EU gets the benefit ofthe special circumstances that have produced significant emissions reductions in the U K and Germany However opposition to the bubble is widespread In order to get the bubble the EU may well have to give on other points including for example a differentiated regime in which countries without a bubble might get targets somewhat higher than the EU To reach a deal at Kyoto containing enough ofthe key elements ofthe U S proposal joint implementation developing country participation a U S target below 1990 levels ofgreenhouse gas emissions may well be necessary EU leaders are demanding a reduction below 1990 levels as are many leaders in the developing world A “reduction target” -- even a small one — would allow these leaders to argue more effectively that Kyoto reflects real progress since Rio where nations agreed to reach 1990 levels by 2000 Optical reductions There may be acceptable ways ofrecharacterizing the U S target that would show a reduction but not require greater effort on our part Your advisors are actively exploring such options now One such optical change to our target - agreeing to defer inclusion of certain carbon “sinks” until methodologies improve — would put us one or two percentage points below 1990 levels without any increased effort though there could be downsides in such exclusion In addition the Japanese have proposed a technical change in the way three ofthe six covered greenhouse gases are accounted for EPA is analyzing whether this change is appropriate and how large an optical reduction it could produce probably no more than one to two percentage points Real reductions You will likely need to decide whether ifit became necessary in the final endgame to get an overall deal you would be prepared to reduce our target not just in optical terms but in real terms Such a reduction could in theory come either in a first budget period 2008-2012 or a second budget period 2013-2017 though the EU and developing countries will press much harder for a reduction in the first period A First budgetperiod The potential real reduction in the first period could be in the 1 to 5 percent range Any reductions below the target you have already proposed would undoubtedly intensify the criticism by much ofindustry and many on the Hill The problem is exacerbated by recent projections from the Department ofEnergy suggesting that carbon emissions will be 5 percent higher in 2010 on a business-as-usual path than previously thought However such reductions may be necessary to close a deal at Kyoto with other key elements of our package B Second budgetperiod It is possible that reductions in the secohdl dget period -- presumably 5 percent or more below 1990 levels by 2013-2017 could also be helpful Given the longer time horizon and the likelihood that such a target would be revisited before the second budget period begins this could be more palatable to constituencies at home However other nations seem intent on reductions in thefirst period it is unclear how much leverage a 5 percent reduction in the second period or even a 10-15 percent reduction would provide Furthermore committing now to specific reductions in a second budget period could remove leverage in future rounds of negotiations involving developing countries and we could be criticized for agreeing to two targets before developing countries agree to any Joint Implementation Your recent efforts to gain support forjoint implementation have helped to provide momentum for its acceptance and have sent a strong message to potential supporters that this remains a U S priority Nevertheless most key developing countries continue to oppose JI and it remains very vulnerable The current negotiating text is inconsistent with the U S position it would allowjoint implementation only among industrialized countries or with developing countries that voluntarily take on binding commitments under Article 10 see below and would postpone any decision on joint implementation with developing countries until after the completion of an ongoing pilot project in 2000 We are still working quietly with Brazil on a compromise proposal However the prospects for success are unclear In addition you should know that many countries are seeking percentage limits on the use ofjoint implementation for example by limiting credits to 5 percent ofa country’s 1990 baseline We have allowed our negotiators to consider qualitative rather than quantitative limits e g “JI credits would be supplemental to domestic measures” Joint implementation remains critically important to those moderate businesses which have been at least tentatively supportive ofyour plan such as BP and several major utilities The importance ofJI is further underscored by the difficulty we are having in negotiating developing country commitments see below In the absence ofstrong commitments from developing countries participation through mechanisms such asjoint implementation becomes especially important In addition joint implementation and emissions trading are among the key devices that allow us to argue that the overall cost ofreaching your climate change goals will be affordable - well below the $ 100-200 ton costs that opponents claim The questions for decision are a whether we must have joint implementation with developing countries for credit in the treaty and b whether you would at the limit accept a quantitative restriction on Jl Developing country commitments and the two-step process In your climate change speech on October 22 you said that the “United States will not assume binding obligations unless key developing nations meaningfully participate in this effort ” This hinted at but did not explicitly detail a “two-step” approach to the developing country issue Under such an approach we would reach agreement at Kyoto but not seek to ratify the agreement without further developing country commitments You should be aware that Senator Byrd whose resolution passed 95-0 by the Senate this summer lays down a strong marker on this issue wrote you this week to reject the two-step approach “I believe it would be unwise for the U S to be a signatory to any treaty that would not be approved by the Senate on its own merits Those who are concerned about the consequences ofclimate change should consider that agreeing to only half a loaf-that binds only the Annex I industrialized nations to emissions limitations —will subject a protocol to intense domestic criticism as premature unbalanced and inequitable Further I believe it would make binding commitments by the developing world less likely as crucial negotiating leverage would have been lost ” Senator Byrd’s views notwithstanding the reality is that there is no prospect for developing countries to sign on to their own binding targets at Kyoto In fact the prospects for the strong Kyoto Mandate that our negotiators were once hoping for — in which developing countries would agree now to commence future negotiations over binding targets within some period oftime - are close to nil It thus looks increasingly likely that the most we could realistically achieve in Kyoto is an opt-in mechanism Article 10 under which any developing country could voluntarily accept its own binding target in the months or years ahead plus a general statement concerning a follow-on process offuture negotiations in all likelihood without any specific reference to binding commitments At its weakest this reference to a follow-on process could take the form ofa “review of commitments” for the world as a whole a provision the EU would accept Such a review could lead to but would not guarantee a new negotiation over developing country commitments Neither the opt-in mechanism itself nor a general reference to a follow-on process would represent “meaningful participation” by developing countries Those devices are means to the end not the end in themselves Consequently we would need to emphasize that we would not expect to submit the treaty for ratification until a critical mass of developing countries were participating meaningfully The reception ofsuch an approach on the Hill and among business would likely be mixed - but would likely improve a good al ifwe had succeeded in getting joint implementation with developing countries The issue for decision is whether the two-step approach in this form with the Article 10 opt-in plus a general reference to a follow-on process — is acceptable or falls below your bottom line Military nationai security exemption During the past several months the Department ofDefense has expressed several concerns about the climate treaty DoD is concerned about the impact of emissions restrictions on U S military readiness on basing negotiations with our allies and on surge operations e g Desert Storm Desert Shield and peacekeeping missions such as Bosnia DoD accepts that its facilities including buildings and non-tactical vehicles about 42 percent ofits total emissions should be subject to greenhouse gas limits to the same extent as non-military facilities To address these concerns we have shaped a package under which military operations and training which account for roughly 0 7% ofU S emissions would be held harmless in any domestic emissions trading program DoD’s facilities would be covered by such a program We have also pursued several issues under the climate treaty including authority for the United States to take emissions from our military bases overseas into our national totals which due to downsizing would likely make our targets easier to reach This provision would address concerns about basing negotiations and now appears achievable at Kyoto An outstanding issue however relates to surge operations Our negotiators originally explored a treaty provision exempting emissions from surge operations but it now appears unlikely that this can be achieved at Kyoto We are currently exploring a number of weaker procedural devices including a decision ofthe parties on this issue and a statement by the chair Last week DoD wrote the White House to state that a decision ofthe parties at Kyoto would address its concerns but that absent such a decision the U S should not join an agreement In the event our negotiators are unable to obtain a decision ofthe parties or other means of addressing this issue you will need to decide whether to proceed with the treaty nevertheless You should know that this issue — the impact ofthe climate treaty on the military -- has received growing attention on the Hill and among industry groups opposed to the treaty