SENATOR BINGAMAN DISCUSSES CAP AND TRADE SYSTEMS

UNCLAS SECTION 01 OF 05 BRUSSELS 000592

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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.

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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

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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.

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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.

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Discussions with Point Carbon
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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.

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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.

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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.


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Comment
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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
.