a November 30 1997 MEMORANDUM FOR THE PRESIDENT FROM FROM GENE SPERLING KA TI-ILEEN MCGINTY KATHLEEN DANIEL TARULLO JAMES STEINBERG TODD TODD STERN 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 of issues 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 Of the many issues to be resolved at Kyoto four are likely to require decisions from fi'om you you emissions targets joint implementation with developing countries overall developing country commitments and a national security exemption On each of these 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 of what would happen in the event we refuse 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 “process outcome 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 Targets Among industrialized nations the most significant outstanding issue is the level of the binding IO target Key proposals on the table are as follows EU --15 -15 percent below 1990 levels by 20 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 U S— 2008-2012 Canada -O Australia -20 IO — 1990 levels by 201 2010 — significantly above 1990 levels by 2010 When discrepancies in accounting methods are taken into account e g e g the treatment of carbon sinks “sinks” or the number of gases covered we believe our target is somewhat closerlj closer those of the EU and Japan than has been widely reported · EU and Japan than has been widely reported As As you you know know that that the the EU EU has has been been able able to to be be so so aggressively aggressively green on its target only because of its bubble The bubble allows different countries to have different targets — -- the emissions of “bubble” 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 of the 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 get targets targets somewhat somewhat higher higher than than the the EU EU To reach a deal at Kyoto containing enough of the key elements of the U S proposal joint Goint implementation developing country participation a U S target below 1990 levels of greenhouse 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 “reduction target” 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 of recharacterizing recharacterizing the the U S U S target target that that There may may be be acceptable acceptable ways ways of would would show show aa reduction reduction but but not not require require greater greater effort effort on our our part Your advisors advisors are actively exploring such options now One such optical change to our target -agreeing to defer inclusion of certain carbon sinks -- would put us one or two percentage “sinks” until methodologies improve — 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 of the 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 if it 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 budget period The potential real reduction in the first period could be in the I1 to 5 percent range Any reductions below the target you have already proposed would undoubtedly intensify the criticism by much of industry and many on the Hill The problem is exacerbated by recent projections from the Department of Energy suggesting that carbon emissions will be 5 percent higher in 2010 on a business-as-usual path than previously thought However such 2 reductions may be necessary to close a deal at Kyoto with other key elements of our package B Second budget period It is is possible possible that that reductions in the the seconcflf secohdl dget B Second budget period It reductions in dget period-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 the first 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 Joint Implementation Implementation Your recent efforts to gain support for joint 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 n JI and it remains very vulnerable The current negotiating text is inconsistent with the U S position it would allow joint implementation only among industrialized countri s 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 of joint implementation for example by limiting credits to 5 percent ofa of a country's country’s 1990 baseline We have allowed our negotiators to consider qualitative rather than quantitative limits e g measures e g Il “JI credits would be supplemental to domestic measures” Joint implementation remains critically important to those moderate businesses which have been at least tentatively supportive of your plan such as BP and several major utilities The importance of JI is further underscored by the difficulty we are having in negotiating developing country commitments see below In the absence of strong commitments from developing countries participation through mechanisms such as joint 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 of reaching your climate change goals will be affordable -- well below the $100-200 ton $ 100-200 ton costs that opponents claim n 3 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 n Jl Developing country commitments and the two-step process In your climate change speech on October 22 you said that the United “United States will not assume binding obligations unless key developing nations meaningfully participate in this effort effort ” This hinted at but did not explicitly detail a two-step “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 two-step approach approach I “I believe it would be unwise for the U S U S to be a signatory to any treaty that would not be approved by the Senate its own merits Those Those who who are concerned would not be approved by the Senate on on its own merits are concerned about the consequences of climate change should consider that agreeing to only half a loaf --that -that binds only the Annex I industrialized nations to emissions limitations --will —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 lost ” Senator Byrd's 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 of time -- are close to nil It thus looks increasing y increasingly likely that the most we could realistically achieve in Kyoto is an opt-in mechanism Article I10 0 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 of future 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 of a review “review of commitments 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 “meaningful participation participation” by developing countries Those devices are means to the end not the end in themselves Consequently we would need to emphasize that we 4 developing of developing mass of would not expect to submit the treaty for ratification until a critical mass Hill the Hill countries were participating meaningfully The reception of such an approach on the ifwe gootial a improv lik ly would bu mixed - oul_d _lik ly bus ness would and among business likely be mixed - but likely improve good al if we countnes developmg countries m gettmg had succeeded in getting Jomt joint 1mplementat10n implementation with developing -- with the Article 10 The issue for decision is whether the two-step approach in this form 10 your below falls or acceptable is -process follow-on a to reference general a plus opt-in process — is acceptable or falls below your bottom line Military national Military nationai security exemption exemption several During the past several months the Department of Defense has expressed several concerns about the climate treaty DoD is concerned about the impact of of emissions emissions on surge allies our with negotiations basing restrictions on U S military readiness on allies and and on surge Bosnia as such missions peacekeeping and Shield Desert Storm Desert operations e g e g such as Bosnia 42 about 42 vehicles about DoD accepts that its facilities including buildings and non-tactical vehicles percent of its 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% of U S emissions would be held harmless in any domestic emissions trading program DoD's DoD’s facilities would be covered by such such aa including 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 of the parties on this issue and a statement by the chair Last week DoD wrote the White House to state that a decision of the 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 of the 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 of the climate treaty on the military -- has received growing attention on the Hill and among industry groups opposed to the treaty 5