SENATOR BINGAMAN DISCUSSES CAP AND TRADE SYSTEMS

UNCLAS SECTION 01 OF 05 BRUSSELS 000592 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EIND ENRG EUN EWWT KGHG SENV TPHY TRGY TSPL SUBJECT: SENATOR BINGAMAN DISCUSSES CAP AND TRADE SYSTEMS WITH EU OFFICIALS REF: A. BRUSSELS 193 ¶B. BRUSSELS 259 ¶1. (SBU) Summary. Senator Bingaman met separately on April 5-6 with officials from the EU Commission, EU Council, European Parliament, and private industry to discuss the EU's Emissions Trading Scheme (ETS) and cap and trade systems in general. The underlying theme presented by the Europeans throughout the visit was the importance of close transatlantic cooperation during the U.S. legislative and implementation process to enable the most effective and economically viable linking of carbon markets. Specifically: -- EU Environment Commissioner Stavros Dimas emphasized the importance of cooperation to establish a single transatlantic carbon market and advance international climate negotiations. He expressed his interest in providing input as needed during Congress' development of a cap and trade system. -- Acting Deputy Director General for Environment Jos Delbeke expanded upon the discussion with Commissioner Dimas and provided many of the technical details and possible roadblocks the U.S. might face in developing legislation. He highlighte how the EU addressed the power sector and col-dependent Member States as well as energy-intesive industries. -- Henrik Hasselknippe, Global Head of Carbon Market Analysis for Point Carbon, focused on auctioning and allocation of emissions allowances, arguing that the logistics of the allocation process should be discussed separately from the legislation itself so as to preserve the environmental integrity of the legislation. -- EU Industry Commissioner Guenter Verheugen discussed how the EU addressed energy-intensive industries. Verheugen also used the meeting as an opportunity to promote the Transatlantic Economic Council (TEC) and the new Lighthouse Project on Energy and Climate Change. -- In a roundtable at the European Parliament led by MEP Avril Doyle, lead Parliamentarian for ETS, MEPs offered their assistance during legislation in the Congress and urged Congress to hold tight to the environmental integrity of the legislation. -- During a wrap-up dinner hosted by USEU, Philippe Leglise-Costa, French Deputy Permanent Representative to the EU and lead negotiator for the Climate and Energy Package, emphasized the importance of staying firm to the final emissions target and recommended against the inclusion of price floors or ceilings in the carbon price. End summary. -------------- Dinner with Commissioner Dimas -------------- ¶2. (SBU) Commissioner Dimas opened the Senator's visit by hosting a dinner in honor of the Senator. Dimas emphasized his support for the development of a cap and trade system in the United States, which he said could lead to a transatlantic carbon market and a global climate agreement in Copenhagen. Dimas emphasized that both sides must identify "what we can achieve together," despite some contrarian voices. Dimas noted Italian Prime Minister Berlusconi has complained that the EU is doing much more than the United States, and the EU should therefore push the United States to move farther. However, Dimas said the focus should be on pragmatism, and that the EU "must be constructive vis-a-vis the United States." (Note: USEU has noticed a distinct shift in rhetoric from Dimas in the recent months, a shift that may be attributed to Dimas working to prove that he can be a constructive interlocutor. See Ref A. End note.) Ultimately, Dimas argued that any U.S. cap and trade system needs to be linked to ETS. It is good for transatlantic business and a first step toward an OECD-wide carbon market. This will provide the impetus to pull in major emerging economies such as China and India. ¶3. (SBU) Turning to Copenhagen, Dimas reiterated earlier comments that the realm of the "politically possible" must be taken into account, and that the United States and the EU will need to work together. He said the road ahead will not be simple, and though most people focus on China and India, he believes that Russia and the Middle East countries will be very difficult. However, despite calls from different BRUSSELS 00000592 002 OF 005 countries, he explained that there cannot be a change from 1990 as the reference year, as it already exists in the UNFCCC process. Countries can calculate against another year for domestic purposes, but the final target needs to be set against 1990. Dimas then explained that he believes the UN must improve the clean development mechanisms (CDMs) process, and that the majority should go to projects in the poorest countries. By contrast, major emerging economies must first commit to domestic reductions in order to be eligible for assistance from the developed world. -------------- Discussions with Jos Delbeke -------------- ¶4. (SBU) Jos Delbeke, the lead drafter of the ETS Directive, provided further details on the decisions the EU made for ETS, building upon the conversation the Senator had with Commissioner Dimas. Delbeke stated his belief that the draft Waxman-Markey climate legislation is more comprehensive in areas covered than the EU's Climate and Energy Package. On the Package, Delbeke explained that there are several areas where the Commission still needs to develop implementing rules, most notably on allocation of emissions allowances, particularly among the power sector and energy intensive industries. He detailed that in Phase I of ETS, which ran from 2005-2007, the number of allowances available was off by 1-2% but said that Phase II, which began in 2008 and runs through 2012, will not have that problem. The Commission is much more confident in its numbers, and after the first year of Phase II, emissions in the EU are down. Despite the financial crisis, Delbeke argued that ETS was responsible for most of the reduction. (Note: Several independent agencies have evaluated the EU's emissions reductions in 2008, and the majority believes that ETS had much less to do with the reductions than the economic downturn. End note.) ¶5. (SBU) Delbeke said that for the power sector, the Commission wanted 100% auctioning beginning in 2013, as there is a strong fear that free allowances would lead to windfall profits as were seen in Phase I of ETS. However, during negotiations, Poland argued successfully that its strong dependence on coal (over 90% of electricity production) combined with the fact that the new Member States had not yet privatized their power sectors called for a phase in of auctioning of allowances. To keep their economies afloat, the new Member States said that their companies "need windfall profits." As such, several new Member States have the option to give away free allowances to their power sector beginning in 2013. Delbeke believes, however, that there are good reasons to assume these Member States will not choose that route, as all revenues from auctions go to the Member States. Despite the free allowance option, all new installations after 2008 will not qualify as an effort to stimulate modern investments in clean technology. Money is therefore available to incentivize carbon capture and storage (CCS),and Poland for example, has volunteered to implement two CCS pilot projects. Turning to nuclear, Delbeke explained that there is no nuclear policy at the EU level. Since there is a premium in ETS for the use of nuclear as a zero-carbon source of power, he expects many Member States will move in that direction, Germany included, despite its plans to phase out nuclear by 2020. ¶6. (SBU) When asked about offsets, Delbeke said that there should be a move away from CDMs for emerging economies. He argued that there needs to be a distinction between developing countries. CDMs should continue in least developed countries (LDCs) and small island developing states (SIDS),but developed countries should move to a sectoral crediting mechanism for the major emerging economies as a stepping stone to a carbon market. At the least, CDMs should not be offered to these countries if they do not sign up to a global climate agreement. However, Delbeke said that we should not look only internationally for offsets, and that many efforts should be undertaken domestically. Noting the large number of domestic offsets proposed in the draft Waxman-Markey cap and trade bill (50%),Delbeke said that domestic offsets will be allowed in the EU beginning in 2013, but there are no specific definitions at the moment. There will therefore be an opportunity to discuss if the domestic offset provision remains in the final Congressional legislation. -------------- Discussions with Point Carbon -------------- BRUSSELS 00000592 003 OF 005 ¶7. (SBU) Henrik Hasselknippe, Point Carbon's Global Head of Carbon Market Analysis, discussed allocation of carbon credits and carbon offsets, both in the EU and the United States. With some exceptions, the EU is planning to move to 100% auctioning of carbon credits by 2020. The EU would like to see one centralized auction, managed by one institution, but in reality, there could be up to 27 separate national auctions in addition to a centrally run auction. According to Hasselknippe, the legislative process for determining emissions targets and specific sectors should be separated from the administrative process of distributing allowances to ensure that the environmental goals of the legislation are not minimized by debates over how to auction or distribute allowances. When asked about whether other contributors to global warming, such as hydrofluorocarbons (HFCs) and black carbon, should be under a separate scheme, Hasselknippe expressed his belief that it would be best to have them included in the same cap and trade system. ¶8. (SBU) Turning to offsets, Hasselknippe said that the EU allowed too many offsets in Phase II, driving the price of carbon allowances down. Although the Waxman proposal offers 80% credit for offsets purchased, Hasselknippe believes it would be easier to impose limits on the total number of allowed offsets and let the market set a price. Along the same lines, he pointed out that Waxman's proposal is generous on offsets (2 billion total allowed, 50% domestic) and he argued that those numbers will be impossible to achieve in the United States. When asked about forestry offsets, he claimed that they are difficult to verify in contrast to the installation of new technologies. Hasselknippe pointed out that if there is heavy reliance on forestry offsets in the U.S. system, it will be hard to link with the EU system. Responding to the possible inclusion of domestic agriculture offsets, Hasselknippe pointed out that the EU has yet to accept anything like that as an offset, which could create problems for linking the two systems. -------------- Discussions with Commissioner Verheugen -------------- ¶9. (SBU) Commissioner Verheugen described the approach the EU took to protect energy-intensive industries from carbon leakage. Overall, Verheugen argued, in the present economic crisis it is important to combine short-trm measures with long-term objectives. The crisis can be used as an opportunity to convert to a low-carbon economy through the use of recovery funds to improve infrastructure and energy efficiency. However, Verheugen was quick o add that, we must be sure to protect energyintensive industries from international compettion when environmental regulation is introdued. Therefore in its ETS, the EU found a solution where certain sectors can receive free allowances, specifically steel and aluminum; chemicals; glass and ceramics; cement and lime; and paper and pulp. The full list will be decided by the end of 2009, and industries not on the list will be able to present their cases for why they believe they are at risk for carbon leakage. Although Verheugen and DG Enterprise pushed for all companies in these industries to receive 100% free allowances, the final legislative decision only provides the best 10% of companies in a sector by emissions with 100% free allowances. The best 10% is determined by a benchmarking process through analysis of commercially and publicly available data. Those companies that do not meet the best 10% benchmark will be required to purchase some of their allowances. (Note: Several officials throughout the visit noted the high administrative burden associated with the benchmarking scheme. For example, there could be up to 60-70 benchmarks depending on production processes, with chemicals alone requiring over 40. End note.) ¶10. (SBU) In addition to the EU's treatment of energy-intensive industries, Verheugen took advantage of the meeting to promote the inclusion of energy and climate in the Transatlantic Economic Council (TEC). Verheugen was quick to note the importance of using the TEC to harmonize regulation, and he said that he hopes that Congress can play a larger role in the TEC under the Obama Administration. He argued that as the EU and United States develop environmental legislation, the new Energy and Climate Change rubric under TEC can be used so "we write rules together." (Note: A new Lighthouse project for Energy and Climate Change in the TEC was proposed by the U.S. side in 2008. It appears set to be adopted this year, and is focused on innovation and regulation of key sectors for addressing energy and climate BRUSSELS 00000592 004 OF 005 change, including biofuels, CCS, energy efficiency, automobile emission standards, and air traffic management as a way to reduce aviation emissions. End note.) -------------- Roundtable with European Parliament -------------- ¶11. (SBU) MEP Avril Doyle (Ireland, Center-Right EPP-ED group),who guided ETS through the European Parliament, highlighted the difficulties Senator Bingaman would likely face during U.S. climate legislation negotiations. MEP Doyle was joined by MEP Giles Chichester (UK, EPP-ED),EPP-ED Spokesperson in the Industry and Energy Committee, and MEP Anders Wijkman (Sweden, EPP-ED),who led the Renewables Directive in the Environment Committee. While explaining that the EU "is not going to tell (the U.S.) what to do," Ms. Doyle made clear that if the Parliament "can help from (its) experience," it will do so. She requested that Senator Bingaman ensure that a future U.S. cap and trade system would be able to link with ETS. She said such an interconnected EU-U.S. system, with the EU and the United States "singing from the same hymn sheet" would be "irresistible" to the rest of the world and would facilitate the conclusion of an agreement in Copenhagen in December. (See Ref B.) ¶12. (SBU) Doyle echoed sentiments heard earlier in the day that EU measures to prevent carbon leakage could apply to 85% of EU industry, but only in case no global climate agreement is achieved. Responding to comments that U.S. coal states were calling for a two-tier bill to take into account their specific situation, Doyle explained that the Eastern EU member states, which also rely heavily on coal, were fully covered by the EU ETS but had until 2027 to introduce 100% auctioning of emission allowances. She predicted that most of these states would not wait until 2025 but would introduce full auctioning at an earlier stage, to use the auctioning revenues for investment in green technologies. ¶13. (SBU) Both Wijkman and Doyle explained that the possibility under the EU ETS to use offsets for up to 50% of internal CO2 emission reductions had been quite controversial, because there were many uncertainties regarding the effectiveness and quality of these offsets. Doyle said that the UN should be able to rapidly develop rules for quality proofing of CDM projects to ensure only "gold standard" projects can be used as offsets. She asked Senator Bingaman to consider introducing an "enabling clause" into the U.S. legislation to allow U.S. industry to make use of such quality-proofed offsets. Doyle and Wijkman advised the Senator against introducing price floors or ceilings on the price of carbon, as it would seriously limit the possibilities for linking the EU and U.S. systems. Addressing the possibility that the United States will include domestic agriculture offsets in its legislation, Doyle explained that in the EU, the "non-trading" sectors such as agriculture, transport, waste, and heating/cooling of buildings were excluded from ETS, and therefore could not participate in any offset projects under current EU legislation. -------------- EU Institutions Dinner -------------- ¶14. (SBU) In a dinner hosted by USEU MinCouns, Senator Bingaman had the opportunity to engage with four senior EU officials knowledgeable in the ETS legislative process. Philippe Leglise-Costa, Deputy Permanent Representative of France to the EU and lead mediator on the Climate and Energy Package, led the conversation, providing a very candid perspective. Leglise-Costa was joined by Jaroslaw Pietras, Director General for Environment in the EU Council Secretariat; Nancy Kontou, Head of Cabinet for Commissioner Dimas; and Jonathan Evans, British MEP and Chairman of the Committee for Relations with the United States. Leglise-Costa focused on two key points in the development of any cap and trade legislation: emissions targets and carbon prices. With regard to emissions targets, he argued that it is imperative that the legislation be firm as to the exact target and the date it comes into effect. Any flexibility allows for gaming of the system. On carbon prices, he said there needs to be some way to deal with extreme volatility, but the introduction of price ceilings or floors is not the way to go. The market will handle itself, and the addition of bureaucracy will only serve to increase uncertainty. BRUSSELS 00000592 005 OF 005 -------------- Comment -------------- ¶15. (SBU) Senator Bingaman's visit to Brussels was exceptionally well received by the EU interlocutors. The EU is proud of its Climate and Energy Package, and specifically proud of ETS. As such, the opportunity to provide insights and recommendations to a key U.S. Senator has helped to advance U.S.-EU relations. MURRAY .