date: Wed, 25 Jun 2003 11:03:45 -0400 from: "Tom Jacob" subject: REFLECTIONS ON BONN... GLOBAL CLIMATE CHANGE CONTACTS: The UN Framework Convention on Climate Change (UNFCCC) convened its subsidiary bodies on Implementation (SBI) and on Scientific and Technical Advise (SBSTA) for their annual spring session in early June. Attendance was low, energy lower, and accomplishments minimal. The global effort to respond to climate change is facing an uncertain future. The agenda for this year's June meeting was familiar. That in itself is significant. Process questions such as methodological issues relating to national reporting under the Kyoto Protocol, reporting frameworks and their review (Protocol articles #5, 7 and 8); adverse effects on developing countries resulting from climate mitigation efforts in the developed world (Convention Articles 4.8 and 4.9, and Protocol Article 2.3); and mainstays such as technology transfer and capacity building continue to occupy significant time, as does the very complex challenge of developing Protocol rules for accounting for the climate impacts of land use, land use change and forestry (LULUCF). All must be wrestled to the ground, ultimately, but all continue to be pushed forward without final resolution. Significantly, the discussions on 4.8-9 and 2.3 continue to be particularly divisive, pitting the G77 & China, on the one hand, versus the developed nations on the other, over the question of what commitments were implied by these sections speaking directly to adverse effects on developing countries and "actions relating to funding, insurance and the transfer of technology." The issue, here is a very fundamental one of the obligation of wealthy developed nations to less developed nations. Perhaps more indicative of the state of the global climate change effort was the prominence of two particular issues at this meeting: the first project-related reviews by the Executive Board of the Protocol's CLEAN DEVELOPMENT MECHANISM (CDM), which found all of the first 14 proposals for project accounting methodologies lacking; and the controversy over the BUDGET for this global effort, which found challenge to both its scale and structure. All of this, of course, took place in a negotiation dimmed by the shadow of increasing uncertainty over RUSSIAN RATIFICATION of the Kyoto Protocol. The following several pages review each of those three items, and offer some thoughts about what they may portend for the global response to climate change? CDM ACTION: With respect to the CDM, the Protocol (Article 12) provides that projects implemented pursuant to this Kyoto mechanism can begin accruing tradeable emissions credits as of 2000. The Executive Board charged with overseeing this system, however, was not named until the Marrakech meeting in late 2001. It has had a huge task in creating the rules and procedures for this system, to account for and credit climate improvements for leading-edge projects in the developing world and enable those credits to be applied in the larger cap & trade regime in place in the Protocol-ratifying developed nations. With its basic rules now in place and a queue building for the first project proposals seeking CDM approval under those rules, the Executive Board sat down on Saturday morning at the Bonn session. Sunday night -- 20 intense meeting hours later -- the Board closed out its session emotionally and intellectually spent, having sent all 14 of the project-related methodology proposals back to remedy shortcomings, and having done a significant amount of soul-searching in the process. Included among the projects were a number from the World Bank Prototype Carbon Fund and others sponsored by The Netherlands ? the only country to have seriously taken on the challenge of funding such projects. It was a sobering process for all. Environmental advocates proclaimed appropriately stringent decision making, while project proponents publicly and privately derided the process and what some perceived to be a re-writing of the guiding CDM directives agreed in Marrakech. The reality probably lies in between, but there can be no disagreement that this continues the uncertainties that have plagued CDM. Specifically at issue in Bonn were proposed methodologies for determining baseline emission scenarios (what emissions could be expected in the absence of such projects), what the emissions will be with such projects, how they will be measured and, critically, how projects of these particular types are determined to be "additional" under terms of the Protocol. That latter point is looming huge over the CDM process, as it is being interpreted as a determination of how the project would be proven not to have occurred "but for" the CDM. The complex approach to these determinations has been developed and is now being implemented by an expert "Methodology Panel" charged with making recommendations to the Board. The Meth panel had recommended only one of the 14 proposed methodologies for approval (it was reversed by the Board on grounds that the associated monitoring methodology was not appropriately documented). Arising from the Meth panel's written analyses and recommendations were serious concerns regarding whether the rules developed for these baseline methodology reviews were in fact applying a criteria excluding projects that would be financially viable in their own right ? so called "investment additionality." Project proponents were all the more frustrated by the insular character of the advisory review, which did not afford proponents an opportunity to discuss their proposals directly with reviewers or Methodology Panel, or even to respond to questions and concerns. A broad range of questions were raised by the CDM Board on both the methodology proposals and on the process applied by the Meth panel. They attempted to clarify a number of the latter points through clarifying interpretations of some key questions. The rejection by the COP of the EU idea of some "positive list" of categorically approved projects and methodologies has led the CDM Board to apply a "bottoms up" approach to their process. This means that a structure of approved methodologies that can help expedite projects through actual project approvals under CDM will be built only over time, through Methodology Panel recommendations and the methodology decisions of the Board. The June meeting marked the first real operation of that process. Its test, now, is twofold: 1) whether it can self-correct and deliver more consistent, workable guidance; and 2) whether that guidance will end up challenging a broad range of development projects to deliver leading-edge standards of greenhouse gas emissions or will be interpreted so narrowly that it leaves the field to only a small number of projects that cannot otherwise compete. THE BUDGET: The proposed biennium budget of the UN Framework Convention was challenged on two levels in Bonn ? both significant and both led by the United States. Challenged were the proposed budget increase and the apportionment of the budget between work in pursuit of Framework Convention activities (to which the US is a Party, having formally ratified that instrument), and the activities advancing the Kyoto Protocol (from which the current US Administration has distanced itself). The proposed budget of $37.1 MM included about $5.9 MM work on the Protocol, according the analysis by the Secretariate ? about 16% of the total. The budget proposal is approximately 2.3 times the level at the time the Kyoto Protocol was approved (1996-97), having been steadily ramped-up in the intervening years. In the end, the SBI sent to the Conference of the Parties a recommendation that includes three options for the budget level: $32.8 MM, 35.8 MM or "any other amount." It calls to the attention of the COP that the budget incorporates activities relating to the Protocol, pending the entry into force of that instrument and the convening of its first "Meeting of the Parties" to assume responsibility at that point for its operation. The US did not get the separation of the budget items, but did clearly send its "shot across the bow" to remind other Parties to the Convention who will be Parties to the Protocol (assuming it enters into force), that the two instruments are not one and the same, and that the US will not be paying for the latter. Given that the US is expected to be the largest contributor to the convention under the "indicative scale" system of voluntary contributions employed within the UN system, its status in such matters is crucial. The US has contributed toward the regular budget of the current biennium, but at a level reduced by its proportionate share of the activities geared to the "prompt start" of the CDM program discussed above. Even with that reduction, its $1.5 MM credit to the current biennium is second only to Japan's $2.6 MM. Another indication of the challenge faced by the UNFCCC is the fact that midway through the second year of its current biennium budget, the contributions of countries are short by over $8.5 MM ? approximately 30% of its biennial budget. Uncertainty regarding the timing and ultimately delivery on contributions is a perpetual fact of life on the global frontier. Countries have discretion over their budgets and exercise that discretion for any number of economic and political reasons ? the intergovernmental institutions are at their mercy. In the case of the UNFCCC, the combination of the low ebb in energy, the ongoing difficulties in getting beyond posturing in key issue areas, the startup problems of the Kyoto mechanisms, the budget difficulties and the larger uncertainties of the Russian Federation's ratification are beginning to lead to an uncomfortable question: just how committed are the countries of the World to a globally coordinated response to climate change? RUSSIAN FEDERATION STATUS: The growing uncertainty regarding Russia is perhaps indicative of some fundamental dynamics at work. With the withdrawal of the US from the Kyoto picture, the stakes for Russia changed dramatically. Suddenly, the bottom fell out of the emissions trading market ? a market in which the wrenching contraction of its manufacturing and economic base had secured for Russia a dominant position. It also tipped the scales such that its ratification of the Protocol would now be required in order for the instrument to come into force (as of early June, 110 countries have ratified the Protocol, but those countries cumulatively account for only 43.9% of the developed country1990 emissions ? short of the 55% required. Now Russia is studying its options. Significantly, it last year moved responsibility for its climate change policy out of the hands of its scientific ministries and vested leadership in its economic ministries. In Bonn, the Federation was careful to note that it is thoroughly reviewing the range of issues, and that it is conducting a full and precise assessment of economic and social consequences, "with economic development our first-order concern." Prominent considerations in that regard now reportedly includes not only the potential return on its inventory of tradeable emission credits (if it is able to cut the right deal with the EU), but also the question of how the economic development (re-development) of the Russian economy will fare over the longer term under a progressively more stringent Kyoto Protocol. Certainly Russia is not alone in applying an economic decision calculus to the global climate process. Clearly the US has been doing so since before Kyoto, as manifest in its economically-driven decision to withhold US endorsement of any agreement that did not subject its economic competitors in the developing world to comparable constraints. Similarly, OPEC countries have been equally transparent in the economic imperative that drives their relentless pressure on Articles 4.8-9. And, of course, the imperative for economic growth is the driver for the developing countries in resisting any hint of the kinds of emission caps that are the key feature of the Kyoto Protocol's treatment of developed countries. WHERE ARE WE HEADED? Missing from the shorter term economic decision calculus that seems to be driving many countries in this process, is the convergence in the longer term, of environmental and economic consequences if climate change is unabated, and the grim reality that the longer we wait to take prudent action, the more difficult if not impossible our task will be. This judgement, of course, presupposes the validity of the weight of current science in pointing the finger at anthropogenic emissions as the destabilizing element. It is important to understand that some at the core of US climate change policy still do not agree with this (and much of the US business community has sought shelter in their view). However, beyond the (transient?) questioning of the science is another question lurking in the background of the US stance that may be more important for the climate challenge in the long run. Its symptoms are all of the above and the current malaise of the UNFCCC process. It is simply the question of whether the established mode of massive "nothing is agreed till everything is agreed by everybody" negotiation can reasonably be expected to deliver on a task as monumental as restructuring the global economy. That question is unavoidable. More to the point, it will begin to come to the fore at COP-9 in Milan in December, regardless of the outcome in Russia. That is because the ultimate fate of the Kyoto Protocol, even if Russia ratifies and it comes into force, will increasingly be driven by expectations of what happens beyond the first commitment period. The evidence from Delhi of the first foray into discussions of post-first commitment period suggests that all of the dynamics implied above will have to be dealt with if the path to that longer term future is to be successfully charted ? the deeply entrenched views of equity, complicated by motivating considerations of economic self-interest; the horrendously complex task of creating new global institutions from scratch that we see so evident in the painful emergence of the CDM; and the simple reality that we are trying to reorder the World on an uncertain budgetary shoestring. Interestingly, these same dynamics will be at work if Russia declines to ratify and forces the whole process back to the drawing board. The challenge in both circumstances will be to recognize the realities confronting us in addressing the long term challenge of climate change, and to fashion a process that can move us forward to a truly meaningful response. The next step in that journey may well be to take a hard, cold look at the way we've been doing our business? - - - - - - - - - - Thomas R. Jacob DuPont -- Senior Advisor, Global Affairs Internet Address: tom.jacob@usa.dupont.com Wilmington: 302-774-6873 fax: 773-2010 Washington: 202-728-3610 fax: 728-3649 This communication is for use by the intended recipient and contains information that may be privileged, confidential or copyrighted under applicable law. If you are not the intended recipient, you are hereby formally notified that any use, copying or distribution of this e-mail, in whole or in part, is strictly prohibited. Please notify the sender by return e-mail and delete this e-mail from your system. Unless explicitly and conspicuously designated as "E-Contract Intended", this e-mail does not constitute a contract offer, a contract amendment, or an acceptance of a contract offer. 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