Industry Perspective on Outcome of COP-6.5

William L. Fang

Summary
The resumed sixth meeting of the Conference of the Parties (COP-6.5) to the Framework Convention on Climate Change (FCCC) exceeded the low expectations that many had before the meetings and resulted in a broad political agreement on a range of issues contained in the Buenos Aires Plan of Action (BAPA). The broad agreement covers FCCC issues and many key rules of implementation for the Kyoto Protocol, addressing funding and other developing country issues; market mechanisms - emissions trading, joint implementation (JI) and the clean development mechanism (CDM); land use, land-use change and forestry (LULUCF); and compliance. Although much work remains to be done at COP-7 in Morocco late this fall 2001 to resolve important issues and flesh out substantial details, the ability of the ministers finally to reach significant agreement provides a tremendous lift to the Protocol going into COP-7.

The broad agreement was made possible by the general willingness of the major groups of Parties to compromise, in order to avoid a repeat of the collapse of negotiations in The Hague in November 2000, and because of President Bush's decision to oppose the Protocol, thus making its ratification problematic. Faced with the Protocol's imminent demise, the European Union (EU) became willing to compromise from its positions in The Hague in order to secure support from other Umbrella Group countries. The developing countries (Group of 77 and China) also relaxed their demands. The U.S. policy of limited participation, due to its opposition to the Protocol, created serious vacuums in leadership and expertise that helped the EU and developing countries at the expense of the Umbrella Group. The U.S. was largely content to play a supporting role to other Umbrella Group countries such as Japan, Australia, Canada and Russia, except for interest in funding issues and occasionally in mechanisms and compliance in order to protect U.S. interests. However, the compromises made by the Umbrella Group were in most cases not improvements over previous positions. Indeed, on such matters as mechanisms and LULUCF the results were worse.

Industry Concerns
Industry has a number of concerns with the broad political agreement announced - but by no means fleshed out in many respects - on July 23, 2001. Some of the principal concerns with the political agreement and other documents are:

Reducing emissions to narrow per capita differences. A mechanisms principle mandates that domestic actions must consider the concept of reducing emissions to narrow per capita differences between developed and developing countries so to achieve the FCCC's ultimate objective. This provision essentially gives developing countries a free ride on legally binding targets and timetables for the next 40-50 years.

Commitment period reserve. A requirement of a 90 per cent commitment period reserve for emissions trading (or 100 percent of five times the Party's most recent reviewed inventory, whichever is lower) would significantly disadvantage developed countries by severely reducing market liquidity and thus limiting the economic flexibility of emissions trading.

Fungibility. An L.6 document (a so-called "technical fix document" to the political agreement) indicated fungibility among assigned amount units, emission reduction units, and certified emission reductions. That document was superseded by the L.7 document (the final agreed-upon text for the political agreement, FCCC/CP/2001/L7) which deleted the favorable treatment of these units of emission reductions. Fungibility is important for lower transaction costs and increased liquidity in trading.

Eligibility to use mechanisms, supplemental compliance agreement and compliance amendment. There is a huge inconsistency in the political agreement between one provision that ties eligibility to use the mechanisms to a country being required to accept the supplemental agreement on compliance, and another provision that contemplates a compliance regime with binding consequences only being applicable after an amendment to the Protocol passes and is accepted by individual nations. Umbrella Group countries such as the U.S., Japan, Australia, Canada and Russia favor the latter provision, while the EU and developing countries support the former provision.

JI. The rules for JI are now much more complex, including a supervisory committee and provisions similar to the overly complicated rules for CDM.

Nuclear energy. The language pertaining to JI and CDM projects will be read as prohibiting credits for nuclear plants for developed countries. Industry believes this decision should be left to the host country. There is no similar prohibition for developing nations.

Forestry and LULUCF. First, CDM LULUCF projects are limited to tree-planting (afforestation and reforestation) - at least for the first commitment period - but do not include forest management. Second, for the first commitment period CDM LULUCF projects are capped at 1 per cent of a developed country's base year emissions multiplied by five.

Third, with regard to domestic activities under Protocol Article 3.4 and JI, severe limitations apply in the first commitment period for forest management. The application of the 85 per cent discount factor and 3 per cent cap on forest management would, for example, place the upper limit of U.S. Article 3.4 and JI forest management activities at 28 million tons of carbon (MTC) - assuming the U.S. were a Protocol Party - which would fall far short of the 300 MTC potentially eligible in the U.S. under an unrestricted approach. (In addition, the Article 3.4 forest management tons would have to netted against the Article 3.3 debit, which in the case of the U.S. has been estimated at as much as - 7 MTC.)

Other compliance issues. Industry has concerns about several aspects of the compliance regime, including a) the penalty provisions - the 1.3 penalty rate, the compliance action plan and the suspension of eligibility to make emissions trading transfers; and b) the appeals process. The penalty provisions are objectionable because the purpose of compliance should be restorative or rehabilitative, not punitive. The appeals procedure is too narrowly based, grounded only on denial of due process, and gives control over the appeals decision to developing countries.

Governance Issues
The composition of all of the governing boards and entities - including for the JI supervisory committee - unduly favors developing countries over developed nations, thus giving countries without legally binding targets and timetables voting powers over nations with emission reduction obligations.

William Fang is deputy general counsel of the Edison Electric Institute (EEI). The views expressed in this article are his and are not necessarily those of EEI. He is a vice-chair of the Section's Committee on Climate Change and Sustainable Development.