09 01 99 WED 17 59 121001 005 FAX 2025652409 EPA UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON D C 20460 ■’t • BC3' OFFICE OF international activities Date September 1 1999 Page s 5 including cover To Frank Loy Robert Z Lawrence 647-0753 395-6958 Copy Roger Ballentine Ted Osins Mike Orfini Joe Aldy Jeff Miotke Duncan Marsh Bill Dilday 456-6468 456-9500 456-9500 395-6870 647-0191 647-0191 647-6876 If there are transmission problems please contact Martin Dicu email dicu inartiT @ epa gov tel 202-564-6442 fax 202-565-2411 Subject Marianne Bailey email bai1ev mariaTme@epa-gov tel 202-564-6402 fax 202-565-2412 Memo from Bob Perciasepe and Bill Nitze EPA re China 09 01 99 WED 17 59 @002 005 FAX 2025652409 EPA UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON D C 20460 SEP 1999 MEMORANDUM TO Frank Loy Undersecretary of State Robert Z Lawrence Member Council of Economic Advisors FROM Robert Perciasepe Assistant Administrator Office of Air and RaMiati William A Nitze Assistant Administrator Office of International Activities RE The Economics of Greenhouse Gas Emissions Abatement in China We support the idea of engaging the Chinese at the highest levels on the issue of Chinese ' participation in the international effort to address climate change We think an effective way to initiate an ongoing high level discussion of this issue would be to attach a short paper to the Vice President’s letter drawing from the CEA China paper We feel strongly that U S analytical findings should be presented in a way which will resonate with the Chinese and speak to their domestic concerns A suggested outline for such a paper is attached CEA has done an excellent job in pulling together the paper on climate economics in China We hope that this document and others derived from it will form a major part of the USChina dialogue Wc would suggest that providing a short paper to the Chinese at this time in lieu of the full CEA paper will be the most effective way to initiate a productive dialogue on the value of greenhouse gas goals among policy-makers It is critical that Chinese experts have the opportunity to corroborate the potential benefits with their own economic analyses leading to a productive high-level discussion of implications including areas of common interest Wc think it is important to present these ideas from the point of view of what is important to the Chinese China has the opportunity to gain new resources for air pollution -1- 09 01 99 WED 17 59 ®003 005 FAX 2025652409 EPA mitigation and sustainable development by participating in global efforts to reduce climate change We would begin the short paper with a portrayal of the costs of pollution to China and a sense of the technologies and investments that could sustain growth while improving the state of the environment This approach would demonstrate how greenhouse gas mitigation strategies can add support and resources to actions needed to meet domestic priorities To that basic information we would add a summarized description of the additional gains the Chinese would accrue from participation in CDM and emissions trading highlighting the idea that such participation would contribute fundamentally to Chinese economic modernization and providing some quantitative estimates of the potential for investment flows The cover letter conveying the short paper can strengthen our argument by describing key U S domestic actions on climate change particularly in applying economic policies and instruments The letter should also suggest follow-up actions including the establishment of a high-level group to review the nexus of Chinese economic policy and mechanisms such as trading and CDM In this way we will build a greater degree of trust and confidence with the Chinese We look forward to discussing this approach further with you and others in the interagency group We have already instructed staff to work with you in whatever way is necessary to convey this information including producing a draft of our suggested paper by COB Thursday Attachment cc Ted Osius Mike Orfmi Roger Ballentine Joe Aldy -2- 09 01 99 WED 17 59 @004 005 FAX 2025652409 EPA Outline for Short Paper to China Basic Prcmise Introduction • The US and China are taking serious domestic actions to reduce the risk of global climate change mention key actions • The US supports China’s on promoting environmentally sustainable economic development • China has identified significant problems associated with air pollution from current patterns of energy production and uses Air pollution is causing • millions of illnesses and premature deaths among the Chinese people • serious local and regional environmental damage and • a significant “drag” on China’s rate of economic growth The US recognizes the priority China places on addressing these air pollution problems • China has the opportunity to gain new resources for air pollution mitigation and sustainable development technology transfer and additional investment resources by participating in global efforts to reduce climate change • The US proposes a process to bring leading experts from both countries together to seek consensus on the magnitude of the opportunity to attract new sustainable development resources through this means • China may be able to minimize its key air quality problems with solutions that also stimulate technology transfer and economic growth by participating in global efforts to reduce climate change • The US proposes a process to bring leading experts from both countries together to work on identifying areas of consensus and common ground for action by our two governments Human Health and the Environment - Public health and environmental damage from energyrelated air pollution and other sources is a major and growing public policy concern in China Many actions that reduce risks to human health and environmental would also reduce the risks of global climate change • The recent Asia Development Bank report on China documented the human cost of environmental pollution in terms of increased mortality and illness Emerging Asia Change and Challenges Asia Development Bank Manila • China has identified its chief air quality problems as sulfur dioxide S02 and particulate matter PM World Bank 1997 has estimated the overall economic costs that SOj and PM pollution impose economic costs equal to 5 percent of GDP World Bank 1997 • It is possible to address these priority human health and environmental concerns in China while also reducing the risks of global climate change and stimulating the economy • The overlap between strategies to address China’s priority human healih environmcnt concerns and global climate change creates an opportunity to address multiple problems simultaneously with increased effectiveness Investment Needs - To meet its sustainable economic growth goals China has identified major industrial and energy infrastructure investment needs Many of these investments would offer significant climate benefits These benefits could enable China to generate additional flows of -1- 09 01 99 WED 18 00 @005 005 FAX 2025652409 EPA investment capital and technology to accelerate sustainable development • Recent years have already shown rapid and dramatic improvements in the energy efficiency and carbon intensity of industry and energy infrastructure in China • China is planning to turnover and upgrade much of its industrial and energy infrastructure over the next two decades offering substantial opportunities to reduce air pollution and to further slow the growth of greenhouse gases in China • Examples of projects which contribute economic human health and climate benefits might include 1 Liquid natural gas LNG infrastructure 2 City-wide domestic household heating 3 more efficient motors and 4 renewable energy • These climate change benefits could result in significant financial flows to China Mechanisms to Address Climate Change - China has a major opportunity to use the proposed flexibility mechanisms of the Kyoto Protocol to increase investment and technology transfer to combat air pollution and promote sustainable development • CDM will provide significant opportunities for technology transfer and investment flows • An even larger flow of technology transfer and investment resources would be possible through international emissions trading if China adopted a commitment to slow the growth rate of its greenhouse gas emissions • Preliminary estimates in the economics literature suggest that China could gain an additional technology transfer and investment flow of $__billion per year • These additional resources would made available by Annex I countries that are already subject to emissions targets under the Kyoto framework because they would benefit from the opportunity to reduce the cost of meeting those targets Commitment to Reduce GHG Emissions - The US wants to explore ways that China could frame a greenhouse gas emissions target that would increase technology transfer and investment resources available to China without inhibiting Chinese economic growth and development • A growth target with the amount of emissions indexed to the rate of Chinese economic growth — could allow China to take full advantage of the potential benefits that emissions trading could offer • Under these circumstances the United States could support the development of a growth target for China -2-