RECORD TYPE PRESIDENTIAL NOTES MAIL CREATOR John D Gibson CN John D Gibson OU WHCCTF 0 EOP WHCCTF CREATION DATEAriME 21-JAN-1999 10 27 50 00 SUBJECT Notes from diplomatic strategy meeting TO Todd Stem CN Todd Stern OU WHO 0 EOP @ EOP WHO READ UNKNOWN CC Dirk Fomster CN Dirk Fon-ister OU WHCCTF 0 EOP @ EOP WHCCTF READ UNKNOWN TEXT Attached are a write up of my notes from Saturday's diplomatic meeting Let me know if you want them processed any further jdg ATTACHMENT ATT CREATION TIME DATE 0 00 00 00 00 TEXT Unable to convert ARMS_EXT ATTACH D91 MAIL41964812M 036 to ASCII The following is a HEX DUMP NOTES FROM DIPLOMATIC STRATEGY MEETING 1 16 98 Topics Emissions Trading CDM Participants Todd Stem Rosina Bierbaum David Festa David Gardiner Bob Perciasepe David Hales Julie Anderson JeffFrankel Melinda Kimble David Doniger David Sandalow George Frampton Frank Loy Mark Mazur Dirk Forrister TJ Glauthier John Gibson Roger Ballentine Beth Amer Mike Orfini Ron Minsk invited attended T Stern TDS Purpose of meeting is to identify our diplomatic objectives on trading and CDM and formulate plan to achieve them Premise is that if we just repeat our talking points over the next two years in communications and at diplomatic meetings then we aren't likely to achieve our objectives F Loy We also need to get to a 3rd point Need to understand that the framework is not likely to change unless we contemplate positions we haven't Need to try to get a breakthrough It may be that we decide to simply bull our way through keeping our same positions but right now we need to be creative and consider new positions M Kimble Need to remember that we have an Umbrella Group position on trading Important to realize that we will undermine the Umbrella if we shift our position w o bringing them along Example is liability - Umbrella position is that seller should be liable Automate d Record s Management System Hex-Dump Conversion D Sandalow Most of our problems on emissions trading stem from lack of understanding We need an emissions trading communications strategy but also a constituency strategy for reaching out to various groups TDS Are there any other issues that are important under these two broad categories trading and CDM that are not on the agenda My assumption is where we butt heads most directly is on trading caps Russian hot air follows from this If there were no hot air we would still have a problem on caps but less so Liability is also an important issue as is equity D Hales Transfer tax also issue TJ Glauthier Secretary Richardson also wants there to be a focus on process There are lots of meetings happening — bilats regular meetings trips to developing countries etc - important for us to have a plan on what is going to be said done at these meetings TDS Yes good point But probably better to cover those concems at the developing country strategy session G Frampton Let me ask very simple question If Russian hot air is the source of most hostility on trading then if we are willing to accept limits of some type on how much hot air we will buy is that inconsistent with our position on caps Group Response Yes D Hales There is an idea out there however for a tax of some type on emissions trading with the proceeds going into some type of fund G Frampton It seems that free trading on allowances is the Holy Grail for us — why M Kimble We need to realize that if you talk about these issues in a vacuum w o a discussion of monitoring registries etc then it's a very frustrating conversation If you address these issues then you can give some confidence to skeptics that you aren't double counting and go from there Larry Summers has been emphatic — We need a source to buy from in the first budget period Need to give time for the transition Once you have monitoring and enforcement you can go from there — it will give people confidence G Frampton If you have this system do we still say we need 60% from hot air Can't we accept some cap like 25% or something unclear whether he meant that US gets 60% of its allowances from hot air or that US buys 60% of the hot air TDS What is the total % we need in the 1st budget period Automate d Record s Management System Hex-Dump Conversion J Frankel Our analysis shows that in the 1 st budget period Russia and Ukraine are the big sellers There are 3 interrelated issues here 1 — Assuming a system w complete confidence tough standards etc yes no doubt U S needs those tons badly 2 — Russia hot air issue 3 — potential for abuse of the rules These are 3 logically distinct issues We have talked about scenarios like an empty tank provision to keep Russia for instance from selling all its allowances in the 1 st year One disadvantage is that if you start talking about that it's a real slippery slope G Frampton Are there any other burdens we can agree to that wouldn't affect us but would increase confidence You've just named one F Loy If you put some cap on Russian sales — it's recutting the basic Kyoto deal but let's assume you can do it — is that really a slippery slope D Doniger This is something to talk about at the end of the debate It is best discussed after you've talked about and come to agreement on the integrity issues It's better to talk to the Russians about what they will do with the money — an initiative for instance to get them to plow the money back into environmental projects Only after you've had these conversations should we even discuss caps M Kimble W in Annex 1 universe there are a fixed number of tons That is a supply issue If we really achieve a 5 2% reduction by 2012 that will be a significant environmental accomplishment R Ballentine What does it look like down the road When both hot air and real tons are on line — is there a point at which we can make real tons more attractive M Kimble Need to remember that the term hot air is itself an EU rhetorical device J Frankel 2 3 of Russian sales in the 1st budget period will be hot air Beyond that it all depends on LDC participation assumptions about the Russian economy what the second budget period numbers are etc R Ballentine Couldn't we have a phased-in cap D Doniger What we want to happen is what happened with sulfur tons are cheaper than we thought overall solution is cheaper therefore people agree to tighter second budget period more environmental success etc D Forrister Industry needs a free market signal in order to get going but fact is they will do stuff domestically technology development etc There is also a growing realization in the EU business community that they also need unfettered trading Can we reach out to them D Hales Keep in mind that the with respect to developing countries their position is that all things Automated Records Management System Hex-Dump Conversion are possible once we US show that we are really doing something at home D Sandalow Have to keep in mind too that polling shows that our public is skeptical of trading TDS Until you tell them the price Then the numbers tum around G Frampton Does EPA have a standard emissions trading briefing — what I call a Corps of Engineers briefing Group Response Yes and EU and others are sick of it M Kimble The word is spreading however UN is actually now using the EPA briefing D Gardiner Need to appreciate link between trading and compliance US stance on latter affects our credibility on the former D Sandalow Hot air also an issue with the right wing They see it as paying Russia for doing nothing TDS To sum up our working proposition is no caps It needs to stay that way until the 11th hour and then it gets changed only with a hi-level decision Let me ask will a 50% cap really bite J Frankel Economic models say yes It all depends on one's assumptions about technology TDS Every week it seems like there's a technology announcement of some breakthrough Impression one has is that there are real breakthroughs happening J Frankel To some extent we are stuck with the models we have And the fact remains that our emissions keep going up — can't argue with the facts M Mazur What does a 50% cap do though J Frankel Let's just stipulate that it has a huge incremental effect in the cost D Hales Let's remember too though that economic models also say that the cost of doing nothing is also very high TDS So we know what we want How do we get it How do we avoid an 11th hour scenario 1 — We need to be leaders in monitoring registries etc — trading integrity issues 2 — We need to be leaders in pushing compliance 3 — We need to be leaders in pushing a deal w Russia D Sandalow We also need to be leaders in public communications on the international level G Frampton And in targeted education of particular groups Automate d Record s Management System Hex-Dump Conversion F Loy 1 agree with all this but is this the time to flesh all this out We need a credible system yes — we can stipulate all that But even if we do all this correctly we will make progress people will be better educated etc But the question is — will we have a trading system at the end of 2 years No We need in interim something that developing countries can see sooner rather than later — something they will like that will benefit them TDS That's fine to skip ahead to CDM but we will then have to come back to the game plan for trading G Frampton I agree This discussion has been useful in reaffirming the wisdom of pursuing our current position TDS We need someone to do an outline of points that will set up the game plan meeting Project assigned to D Doniger D Sandalow G Frampton Beginning of CDM discussion M Kimble The way the Kyoto Protocol is written CDM is the one flexmechs that can come on line first — almost right away Certain issues are involved here and on emissions trading that can be resolved in SBSTA CDM can start 11 months from now Also important to realize that CDM can be very complex Important to identify what issues are most important to resolve more quickly F Loy There are 3 issues 1 how far do we want to have elaborated before we start up We could start as fast as possible or we could start only when all the loose ends are tied up realizing that a sloppy start will set a bad precedent for trading Regardless there is a need for some intemational mechanism or body — not yet set-up 2 starting CDM opens us up to charge that we are implementing Kyoto — to which I suppose our answer is so what 3 must deal with argument that starting up CDM will lower appetite among developing countries to participate in trading i e taking on a target D Sandalow We should be so lucky that CDM works so well that it lowers appetite for trading We can live with that TJ Glauthier The 2 systems need to merge CDM will always be small potatoes relative to emissions trading We should get started as fast as possible to show benefits Automated Records Management System Hex-Dump Conversion D Hales For any country that makes a difference CDM will always be overwhelmed by emissions trading Even if you have whole sector CDM Need to move fast and demonstrate that with briefings J Frankel 1 worry more that CDM will be so unsuccessful additionality transactions costs etc that it will undermine trading D Doniger There is a real potential for collusion in CDM — could seriously undermine trading TDS Have to make the best system we can Key issue is additionality We have to strike a balance between making it not so hard that no one can do it and not so easy that it is sloppy and we just have phantom reductions D Gardiner Let's be really focussed Example the power sector in China We know it is critical we know a relatively lot about it This way we enhance our credibility TDS We also need the big picture on this though - a whole vision I e if you want to start a CDM which window do you go to D Gardiner Focussing on specifics helps answer institutional questions We are beginning to frame the important issues at the assistant secretary and technical level Not really ripe to go much higher right now F Loy We need answers to these questions more than we need answers on emissions trading Would be enormously helpful to our efforts D Doniger We need to pick off of the B A list and focus at the upcoming UN workshop TDS How do we see this process playing out over the next 1 to 2 years What are the points along the way We have CDM work going on — are there outside events driving us to certain conclusions by certain dates D Sandalow Yes March 1 - submissions March 31 - submissions April-workshop June 10 - SBSTA October - C0P5 M Kimble UN has a CDM book that will shape a lot of thinking on these issues Brazil is doing a lot of the legwork Behooves us to influence this through the Brazilians There is an Aspen Institute workshop w Brazil in the spring Brazil's legwork is proceeding on a project-by-project approach Not so sure this is what we want D Hales Sounds like we should upgrade our representation at the Aspen sponsored meetings Automated Records Management System Hex-Dump Conversion D Gardiner The project-by-project approach is the high transaction costs high potential for collusion approach The high ground would be to say we want standards TDS Where are the tension points D Gardiner The argument for caps on CDM is stronger textually then it is for trading There is also the regional equity issue w respect to CDM that needs to be addressed TDS Where is the EU on this M Kimble Their thinking is not that far along Their basic point is that CDM will add tons to the system and they want to keep it small They see it essentially as a way of going over your target D Doniger We have this problem in the Clean Air Act Simplicity vs Quality control There is a real debate about whether projects really result in reductions that wouldn't have happened otherwise D Hales Additionality is really a system-boundary issue D Gardiner EU will be for maximum quality control TDS When will we have a paper or papers that will walk through the U S vision of this Institutional structure identification of issues on which we need resolution etc What is the schedule for producing this D Sandalow 2-3 weeks Gardiner and Mazur working 4 weeks to get back to this group M Kimble Need to factor in Umbrella meeting in Canberra in I week Watch Canada on this one — they are hosting a major ministerial D Sandalow That's tactical — need to get a draft text out there putting our vision forward TDS I thought there was a big push in business not to move CDM and emissions trading except in tandem Are we reconsidering that premise F Loy Seems to me that the appetite issue CDM discouraging participating in trading is not real On the other hand it seems to me that the model issue is real — seems like we agree that we can't move too quickly can't afford to be sloppy Need to be reasonably rigorous because we can't afford to take hits on either the issue that these reductions are fraudulent or that we are therefore setting a bad example for trading Automate d Record s Management System Hex-Dump Conversion TDS Is it even reasonable to say that CDM could go first Could it possibly start up before C0P6 M Kimble The Kyoto Protocol says it can In reality we need to take 2 things to C0P6 an emissions trading plan and a CDM plan D Doniger But I want trading to really start after C0P6 Not wait for 8 years D Gardiner But there are things we can do over the next 2 years to get actual CDM projects ready F Loy I think it will come out at the same place But I don't want us to wait until C0P6 to have a CDM plan But it will take that long if we let it Let's be able to have a plan that we can take — even to anti-traders — and get some momentum going M Kimble The most important issues are establishing a benchmark and additionality I also think it is key to move forward on trading and CDM in parallel D Forrister Remember too though that we still have our hole card which is that we can do trading anyway — we can do it legally among just the Umbrella TDS Yeah but playing that card has a high price — could blow up on you F Loy My point is that we should go as fast as we can to make CDM real Let's have real discussions with people about how it would work because that is a very useful discussion for us to be engaged in Don't let December 2000 date hold us up in having those conversations G Frampton Seems like there is a need to accelerate realizing that I a bad CDM is more of a threat to trading that trading is at least emissions trading is self-limiting 2 lots of anti-traders like CDM TJ Glauthier We need to be as concrete as possible Let's focus on power sector and within that maybe decide to focus on retrofits less theoretical problems than new plants TDS Can a developing country do its own CDM Isn't that a hell of a hard additionality issue If Brazil builds a good clean power plant and says we wouldn't have done it anyway — yep that's a tough additionality problem alright D Gardiner Another issue Lots of LDCs don't want sinks included in CDM because it doesn't involve technology transfer M Kimble Our position is that yes they are in and our position is that there should be no caps limiting CDM's usage F Loy Concur Automate d Record s Management System Hex-Dump Conversion TDS To summarize 1 In preparation for emissions trading game plan meeting D Doniger and D Sandalow will do an outline ready in 3 weeks 2 Need substantive papers on CDM a outline issues — tees up decisions on institutional issues b functional paper how to guide Papers on CDM ready in 4 weeks Automated Records Management System Hex-Dump Conversion