THE WHITE HOUSE WASH I NGTON November 10 2000 MEMORANDUM FOR THE PRESIDENT FROM SAMUEL BERGER GENE SPERLING GEORGE FRAMPTON ROGER BALLENTINE SUBJECT Climate Change COP6-Negotiations Issues This memorandum follows up our background memorandum of October 6 Based on an interagency process that included participation from all relevant agencies this memorandum requests your approval of key elements of our negotiating strategy before COP6 begins on November 13 We are likely to return to you for additional decisions during COP6 I Additional Developing Country Actions As you know we are isolated in attempting to make significant progress on developing country participation at COP6 The official agenda relates primarily to resolving design questions for issues as emissions trading the Clean Development Mechanism CDM and the role ofsinks Whether developing countries will make binding commitments to reducing greenhouse gas GHG emissions is not on the agenda We could enter the negotiations insisting that the parties place developing country participation on the agenda or commit to a future “new dialogue” on the subject Developing countries however have shown no willingness to accept either ofthese alternatives Moreover the State Department does not envision a realistic possibility of any breakthroughs on this issue at COP6 We could instead enter the negotiations prepared to conclude a deal on other important topics without concrete progress on developing country participation Sidestepping the issue of developing country participation and not blocking consensus at COP6 over this issue will increase the likelihood ofreaching an agreement on the design ofthe Kyoto architecture z e emissions trading CDM sinks It also would limit our diplomatic isolation among the COP6 parties The drawback ofthis strategy is that it leaves the United States no clear path to move towards a larger role for developing countries in the treaty framework and leaves the Protocol open to attack by opponents as failing to meet the test ofthe Byrd Hagel resolution Further it would require that a future Administration decide whether to seek additional affirmative agreement on the role of developing countries before sending the Protocol to the Senate for its consideration cc Vice President Chiefof Staff Despite the drawbacks ofthe second approach there is a consensus among all agencies and your senior advisors that we should attempt to conclude an agreement on other important topics without concrete progress on developing country participation If you approve this approach and we succeed in obtaining a satisfactory agreement on the other key issues on the agenda at COP6 we can portray the achievement as a significant step toward designing a strong and effective treaty We would of course continue to pursue greater developing country actions both within and outside the COP process Approve Disapprove Discuss II New Funding Commitments Almost all countries in the negotiations including the Europeans strongly support a decision at COP6 under which industrialized countries would make new financial commitments to help fund technology transfer and capacity building activities in the developing world The most likely sources for U S funds to achieve that goal are 1 appropriated funds such as official development assistance or 2 funds generated from within a ratified and functioning Protocol such as a fee tax on the use ofthe Kyoto mechanisms There is in fact a strong push among many parties to the negotiations to impose a tax on emissions trading for these purposes There is a consensus among agencies that the Untied States has fulfilled its obligation to provide appropriated funds in the form of bilateral assistance programs and our contributions to the Global Environment Facility GEF which serves as the “financial mechanism” for the 1992 Framework Convention and to which the United States is the largest donor In addition the United States agreed to providing developing countries additional resources in acceding at Kyoto in 1997 to allocate a “share ofthe proceeds” from the Clean Development Mechanism CDM to help developing countries to adapt to climate change The United States has resisted additional commitments for two primary reasons First we believe major new resource commitments for developing countries should be made only in exchange for significant new developing country actions to mitigate GHG emissions Second the proposal on the table a tax on emissions trading would unfairly burden those parties who plan to use trading extensively to comply with the treaty most notably the United States and is universally opposed by the business community Given this background we could resist all calls at COP6 for new funds but would be diplomatically isolated in doing so Moreover a U S commitment to new funding may be necessary in order to achieve our objectives on such matters as the Kyoto mechanisms and sinks Instead offlatly resisting calls for new funding in the absence of firm commitments by developing countries through the interagency process we have developed a two-part strategy to address pressure that the United States accept for new funding commitments First we would agree only to non-legally binding “political” commitments to increase appropriated funds such as an increase in existing bilateral assistance for clean energy development capacity building and technology transfer Second we would offer a new U S proposal for substantial additional resource commitments from within the Kyoto system but only in a more equitable form than a tax on trading such as generating resources by the sale of emissions credits donated by all industrialized countries and only in exchange for new developing country actions -2- This approach would put us in a constructive posture while defending against a worse idea As noted above ultimately we anticipate that closing a deal on favorable rules in the Kyoto framework i e unfettered emissions trading a non-bureaucratic CDM and broad use of sinks likely will require us to agree to some limited additional funding We believe that non legally binding political commitments in the near term are acceptable and that our offer to consider more significant resources from within the system will position us well going forward on the question of greater developing country actions to mitigate GHG emissions Nevertheless there is a significant likelihood that non-binding commitments ofthis type would be inadequate to reach agreement at the end ofCOP6 because we anticipate significant pressure for more binding and near term financial commitments which would likely generate strong criticism from Congress If we do face such a situation we will return to you for guidance The consensus among your senior advisors and all relevant agencies is that you approve 1 making only political commitments to increase funding and 2 offering a proposal for new funding within the Kyoto system in exchange for new developing country commitments Approve Disapprove Discuss III Sinks The Kyoto agreement included provisions to count forests and agricultural soils as “sinks” under the treaty but deferred until later the levels ofinclusion and specific accounting definitions Since 1997 parties have worked to produce national data on levels of greenhouse gas sequestration and to resolve a thicket oftechnical issues about accounting for sinks Before presenting the details ofthis policy issue we must note that there are significant uncertainties in the figures presented In 1997 prospective credit for existing or “business as usual” BAU sinks was one of the factors that allowed you to approve moving from our initial announced target of a zero percent reduction in our emissions below 1990 levels to our final target ofseven percent below 1990 emissions As an important point ofreference ifthe United States were able to count approximately 115 or more MMT ofBAU sinks that would be the equivalent of meeting our minus seven percent target without actually having to reduce emissions below 1990 levels Counting BAU sink reductions is a zero cost way to help meet our treaty obligations and thus much of business community thinks we should seek a large number ofthese tons The environmental community however would harshly criticize us for obtaining too large a number because it would reduce our “level of effort” toward meeting our target The United States is projected to have an annual level of emission sequestration in sinks of approximately 300 million metric tons MMT during first commitment period 2008-2012 If all this sequestration were to be counted it would represent roughly halfofthe net emissions reductions required for us in the commitment period Most other parties however are strongly opposed to letting us count any more than a very small fraction ofthis amount In response we have signaled our willingness to discount or phase in the amount ofsinks counted during the first commitment period -3- From a purely economic perspective your economic advisors Treasury CEA NEC would prefer to secure a high level ofBAU sinks credit because ofsinks’ critical role in reducing the cost Each 15 MMT ofsink credits reduces our cost by an estimated billion dollars per year The economic agencies however are sensitive to the concern ofsome that 100 MMT of credit appears to undermine our commitment to our Kyoto target Your environmental and science advisors EPA Interior OSTP Environmental Initiatives and CEQ prefer to secure less credit for sinks than the economic agencies They are concerned that obtaining too much credit represents a loosening of our Kyoto commitment They also note that the issue ofBAU sinks has drawn an intense lobbying campaign for us to reject these tons from a broad spectrum of environmental groups Based on these concerns all agencies have agreed that you should direct the negotiators in The Hague to negotiate for between 70 and 80 MMT of credit for sinks They believe that this target reasonably balances the need to control costs with the need to maintain our Kyoto emission reduction commitment The State Department cautions that although it will be difficult to achieve they support a goal of 70 - 80 MMT Approve Disapprove Discuss IV Compliance Price Cap There has been a long-standing debate about whether or not to include a mechanism whereby parties could purchase additional emissions allotments for a set price in order to remain in compliance Such a mechanism effectively a price cap would establish an upper limit on the cost per ton of greenhouse gas reductions and could effectively limit the overall societal cost of compliance with the Protocol Such a mechanism could provide certainty to the business community and could possibly improve the prospects of Senate ratification Moreover in the international negotiations it could lessen the need to pursue other means to constrain costs such as unlimited trading or a broad definition ofsinks and CDM activities Despite these potential benefits pursuing such a mechanism carries real risks Ifthe price level is seen as low while perhaps a positive for the business community it would be perceived as a major loophole in the Protocol by much ofthe environmental community On the other hand enviromnentalists would support a high price level because it would function more like a penalty than as a “safety valve” Ifthe price is set high however this could lead some to predict very high costs for the Protocol There is further concern that any price cap level could be criticized as essentially an international “tax” This idea is very complex and extremely controversial idea among both supporters and opponents ofthe Protocol We are currently working on this issue and may need to present it to you for decision during COP6 -4-