02 November 2000

Loy Remarks on International
Climate Change Negotiations

Frank Loy, under secretary of state for global affairs, says the United States is determined to resolve as many of the Kyoto Protocol's outstanding issues as possible at the November 13-24 climate change conference in The Hague, the Netherlands.

Loy, in a speech delivered October 30 at the Earth Technologies Forum in Washington, D.C., said he is confident that international negotiators at the Sixth Conference of Parties (COP-6) to the U.N. climate change treaty will reach decisions on a number of remaining outstanding issues relating to the Kyoto mechanisms, such as emissions trading; so-called "sinks," such as forests that absorb carbon dioxide emissions; a strong, predictable and fair compliance regime; and the particular concerns of developing countries.

"Work on the protocol continues apace with every expectation that the international community will have a finished agreement for countries to ratify in time to meet their Kyoto commitments," Loy told his audience.

Negotiators in The Hague will attempt to finalize the rules for the Kyoto Protocol, which would require developed countries to reduce their collective greenhouse gas emissions by 5 percent from 1990 levels by the period 2008 to 2012. Greenhouse gas emissions, mainly carbon dioxide from the burning of fossil fuels, are believed to cause global warming.

Loy said that one of the major hurdles at the conference will be to overcome concerns about the potential competitive advantage of market-oriented approaches to reducing emissions as contrasted with regulatory measures. The European Union nations are concerned enterprises in the United States and other countries relying on market approaches, such as emissions trading, will enjoy a competitive advantage over European businesses that have been subjected to carbon taxes and extensive regulation.

Loy said, however, that the United States is seeking the most cost-effective and affordable solutions to climate change. "We believe that, if it is allowed to function effectively, the market, not governments, will determine the right investments in new technologies," Loy said. "We reject the notion that tackling climate change should be unreasonably painful."

Following is the text of Loy's speech:

Remarks by Frank E. Loy
Under Secretary of State for Global Affairs
International Climate Change Partnership
Earth Technologies Forum
October 30, 2000

Introduction

Thanks to the International Climate Change Partnership and the many other sponsors of this important conference for inviting me.

I assume most of you are familiar with the science behind climate change - both in terms of its causes and disastrous consequences - and that my role here is to answer two questions that may be on your mind.

First, what's going to happen next, particularly at the critically important Sixth Conference of the Parties, coming up in a couple of weeks at The Hague? And second, what are the prospects for timely U.S. ratification of the Protocol?

From Kyoto to The Hague

First a quick primer: The Kyoto Protocol was a historic step toward the protection of the earth's climate system. As we know, industrialized countries - which historically have been largely responsible for anthropogenic greenhouse gases - agreed to ambitious and legally binding emission reduction targets. In many ways, the United States' target is the most ambitious, given its tremendous economic growth since 1990. Based on current projections, the United States will have to reduce emissions from a business-as-usual scenario by over 30% in real terms to meet its Kyoto target. That figure stands in sharp contrast to the approximately 12% reduction required by industrialized countries as a group. In fact, the US will likely have to account for half of all emission reductions in the first commitment period.

Yet, standing alone, the Kyoto targets would represent little more than a momentary pause along a steep path of rising global emissions. The importance of the Kyoto Protocol, therefore, lies less in the initial emission reduction numbers, than in the structural elements of its climate control regime. I refer to the decisions to include: a basket of the six major greenhouse gases; a multi-year commitment period rather than a single target year; and sinks.

The most important structural innovation in the Protocol, however, was the creation of several new mechanisms designed to harness market forces to determine how and where to reduce greenhouse gas emissions: Emissions trading, joint implementation and the Clean Development Mechanism. The European Union is taking advantage of another mechanism allowing it to pool or "bubble" its emissions into a single supranational emission target.

In the United States, we have had a very positive experience with market based mechanisms to address environmental problems. Emissions trading in sulfur dioxide, authorized in the Clean Air Act Amendments of 1990, has allowed us to reduce SO2 pollution faster than planned, at a fraction of the estimated cost and with virtually 100% compliance.

In sum, the greatest achievement at Kyoto was the creation of an architectural framework for sustained, broad-based and cost-effective international action on climate change.

The Kyoto conference, at the same time, left unanswered a number of absolutely critical questions, such as:

• How the Kyoto mechanisms would work in practice;

• How to create a strong, predictable and fair compliance regime;

• How to define the role allowed to carbon sinks.

Also left unresolved were a range of politically-charged questions relating to the role of developing countries and domestic action.

It is in this sense that the Protocol is generally described as a work in progress.

COP-4 and COP-5

Following Kyoto, it became clear rather quickly that the Protocol was the most complex, broad ranging and ambitious environmental agreement ever negotiated by the international community - and that sorting through the outstanding issues would require a monumental amount of technical, scientific, legal and political work.

Since Kyoto, the international community has been working hard to put flesh on the Kyoto skeleton. We have reaffirmed our political will to finish the rules for the Protocol as soon as possible to allow for its early ratification and timely entry into force. We have reaffirmed our resolve to resolve as many outstanding issues as possible by November of this year in The Hague at the Sixth Conference of Parties, or COP-6.

COP-6

Even though most governments are working hard to make COP-6 a success, a significant number of major issues remain unresolved. The encouraging fact is that the European Union and the Umbrella Group share the same major objective: to create a climate protection regime with great environmental integrity. As someone with more than twenty years of experience in the environmental community, let me assure all of you that protecting the climate in a manner that has environmental integrity is not only our national goal, but is also my highest personal priority in this negotiation. I am particularly proud that the United States has led the way in pushing for a strong, legally binding compliance system, as well as beefed up monitoring and reporting requirements.

However, the EU and Umbrella Group's approaches to the question of the cost of the Protocol are quite different. The EU is concerned that implementing the Protocol, particularly in the United States, will be too easy. Some in Europe think that we have a moral obligation to change our lifestyle as quickly and radically as possible. In this sense, many in the EU believe that producing significant short-term pain and suffering is actually desirable, rather than something to be avoided. The EU is also concerned that enterprises in the United States and other countries relying on efficient market-oriented approaches will enjoy a competitive advantage over European businesses that have been subjected to carbon taxes and extensive regulation.

In contrast, the United States and its Umbrella Group partners believe that the most cost-effective and affordable solutions will build the broadest public support for action and stretch our dollars to achieve the maximum environmental protection. We are concerned that, under any assumption, implementing the Protocol will be a difficult exercise having discernible effect on national economies, and that if elaborated in the wrong way, it will cost more than is necessary. That is why we have sought scientifically sound inclusion of carbon sequestration opportunities, and why we have opposed arbitrary rules that would raise costs, such as limits on the market mechanisms. We believe that, if it is allowed to function effectively, the market, not governments, will determine the right investments in new technologies. We reject the notion that tackling climate change should be unreasonably painful.

Some have expressed concerns that our approach could undermine the environmental integrity of the agreement. We too want a strong agreement. To the extent that calls for environmental credibility refer to something more than a desire to make the agreement more expensive and painful than necessary, we stand ready to find reasonable solutions.

Because of our shared commitment to finding solutions, I am confident that (despite these differences) at COP-6 we will decide a number of major issues relating to the Kyoto mechanisms, sinks, compliance and a variety of issues of particular concern to developing countries.

So, the answer to the question "what has happened at the international level since Kyoto" is "a lot." Work on the Protocol continues apace with every expectation that the international community will have a finished agreement for countries to ratify in time to meet their Kyoto commitments. With a little luck, COP-6 will provide major momentum toward that end.

U.S. Ratification

Let me turn now to the second of the questions I raised at the outset - whether the United States will ratify the Protocol.

Let me make three points that I believe will remain relevant regardless of who is elected President a few days from now. First, the coalition in the United States supporting strong action on climate change is growing stronger every day. Second, the United States is already taking major steps to reduce its emissions, but more action is needed. Third, we still have a real opportunity to address the legitimate concerns of the U.S. Senate in a manner that will make U.S. ratification possible.

Recent U.S. Developments

The trend here at home is very encouraging. In economic terms, there has been a significant "de-coupling" of emissions growth from economic growth. In 1999, our CO2 emissions grew by about 1% while GDP grew by 4.2%. In 1998, CO2 emissions grew by about .4% while GDP grew by 4%. In the 1990's as a whole, U.S. energy related CO2 emissions grew by 12% while the US economy grew by 33%. The news is simple -- we are heading in the right direction.

Furthermore, the American people care more and more about the problem of climate change. Eighty percent of our public says they are concerned about global warming and want the government to do something about it, according to recent poll.

Business attitudes are evolving rapidly too, as this gathering today demonstrates. Just two weeks ago seven big companies, including Shell and DuPont, collectively committed themselves to substantial and voluntary reductions in their greenhouse gas emissions. Meanwhile, membership in the anti-Kyoto business lobby is dwindling. Ford, Daimler-Chrysler, Texaco and several other major companies have pulled out of the most vocal opposition group, the Global Climate Coalition.

So, the center of gravity of U.S. business has shifted toward a new coalition of progressive companies that are committed to finding an international solution to climate change. BP-Amoco, Shell International and Toyota, are leaders in this group, but so are home grown titans such as Boeing and United Technologies. Some in this group are agnostic on the Kyoto Protocol at the moment, but they are working with governments to make the agreement responsive to industry concerns. We, the U.S. climate change negotiators, are working hard to make sure that the Kyoto Protocol ends up being something that the business community and environmentalists can support.

As a consequence of economic, public and business changes, the political landscape is changing too. Formerly skeptical political leaders have come to accept the science of climate change. Governor Bush has said that he recognizes that climate change is a major problem. He has said that he would press for a domestic carbon emissions reduction program. Senator John McCain, once a climate-skeptic, recently held a hearing on climate change in which he acknowledged that the science has hardened considerably in the past decade and pledged to develop a domestic plan to deal with the problem. In the Senate, Democrats and Republicans alike are proposing legislation to deal with climate change. While not specifically tied to the Kyoto Protocol, some of these bills envision tax credits for international action by U.S. companies, an approach that would be largely consistent with the Protocol.

In sum, it is no longer fashionable to oppose action on climate change.

Domestic Action

One myth that perseveres is that the United States is not taking significant steps at home, when in fact President Clinton and Vice President Gore have shown tremendous leadership on climate change. They have secured from a reluctant Congress over $1 billion in funding for renewable energy and programs to reduce emissions in each of the last two years. The President has also taken extraordinary steps to implement domestic reductions through Executive Orders that do not require approval from Congress. These steps have directed the Federal Government, the world's largest energy consumer, to reduce petroleum used in Federally owned cars by 20 below 1990 levels by 2005 and reduce greenhouse gases from Federal buildings by 30 percent by 2010.

The President and Vice President are continuing to fight for more funding. This year, they have asked the Congress to approve $4 billion in funding for renewable energy, energy efficiency, bio-based energy, research and development, and other climate change programs. In addition, the President has proposed $4.1 billion over five years in consumer tax incentives to purchase clean cars, homes and appliances. I can assure you that these funding requests are high priorities for the White House in the final budget negotiations with the Congress.

Despite these new actions, the United States can and must do more. Absent a bold new commitment to climate change, such as in the Kyoto Protocol, the United States will continue to be part of the problem not the solution. Already today, many people abroad see us as slightly immoral on climate change. They see a country that is the greatest cause of the problem, with a rapidly growing economy and great national wealth, not doing enough to actually lower its total emissions and yet demanding greater action by poor developing countries. While I disagree with this perspective in many ways, I do share the view that further domestic action is needed here in the United States.

Senate Concerns

Let me address the fate of the Kyoto Protocol in the U.S. Senate. As the President has said, the Protocol is a work in progress. I believe the Senate has a number of legitimate concerns about the agreement as it stood in 1997. As many of you will recall, just prior to Kyoto, the Senate called for an international agreement that did not jeopardize the health of the U.S. economy and included developing country commitments. After Kyoto, President Clinton said he shared the spirit of the Senate's concerns and declared that he would not seek ratification of the Protocol until key developing countries participate meaningfully in the fight against climate change.

While U.S. ratification of the Protocol can never be a foregone conclusion, the roadmap is straightforward. I am confident that if the agreement addresses core U.S. concerns - achieving the environmental results we seek in a cost-effective manner and securing meaningful participation by key developing countries - the Protocol will receive a full and fair hearing in the United States.

Let me be clear. The cost-conscious approach of which I speak is in no way a cop-out. Real tons of carbon will be removed from the atmosphere. (In fact, more tons per dollar or Euro, and ultimately more tons overall, than would be the case if the cost were higher.) And the approach is neither free nor cheap. Huge amounts, amounts that are impressive even to high-powered Washington industry representatives and lawyers, will be spent both at home and abroad. Even under the best of circumstances, fighting climate change will be a major economic undertaking.

EU Choice

To me, the most interesting and immediate question is not whether the United States will ratify the Kyoto Protocol, but whether other parties are prepared to work toward that goal. We will soon find out whether other Parties choose an agreement on their terms without the United States, or whether they prefer an agreement that may require some compromise of ideological positions, but will in fact be effective and will include the United States.

I believe the EU and others, for a number of reasons, will conclude that its interests and those of the environment lie in crafting an agreement that the United States can support. The United States accounts for approximately 25% of global industrial emissions. Any agreement that excludes the United States will not control global warming. In addition, European businesses may wonder why they are asked to assume significant new climate change obligations if U.S. competitors are not going to be subject to roughly the same rules.

I might note two additional factors relevant here: first, the idea of emissions trading is growing in popularity in capitals on the continent, and also in London and Brussels. Second, economists are warning that few countries, with the notable exception of the United Kingdom, are on track to meet their Kyoto commitments. I believe that these forces will allow governments at COP-6 to mold the Protocol into a sensible, practical shape, one the United States can support.

Developing Countries

Let me say a word more about developing country participation because this is an area where the United States is frequently misunderstood.

The undeniable fact is that climate change is a global problem that requires a global solution. To be sure, industrialization in the North contributed enormously to increased greenhouse gas concentrations. Developed countries, including the United States, must take significant steps immediately.

Acting alone, however, developed countries cannot stabilize global greenhouse gas concentrations. From a scientific standpoint, meaningful participation by key developing countries is a necessity. Several large developing countries will soon become the world's leading emitters. Developing countries already produce 44% of global fossil fuel emissions. In addition, developing countries are responsible for a disproportionate share of deforestation and other land-use practices that have raised carbon concentrations. Per capita energy intensity ratios (the amount of energy used by each person) in some, but not all, developing countries continue to rise briskly, despite the existence of clean technologies that were not invented when developed countries industrialized. In the immediate future, 80% of new electric power generation projects will occur in developing countries. All of us should want those projects to use the latest cutting edge technologies.

I mention these facts not to bicker about past or future responsibility - for that detracts from our common cause of halting global warming - but to highlight the need for all countries to be a part of the solution.

In a very real sense, developing countries have the most to gain from an effective Protocol in which all the industrialized countries participate. For developing countries, unfortunately, have the least capacity to adapt to climate change. The longer we wait, the harder it will be to stabilize greenhouse gas concentrations at acceptable levels and the harder these countries will be hit.

The 1992 UN Framework Convention on Climate Change points the way: each nation should take national and international steps commensurate with its capacity to contribute to the global solution based on the principle of common, but differentiated responsibilities.

Many developing countries have taken significant unilateral action already. China, for example, has sought to conserve energy and reduce emissions growth while simultaneously raising living standards dramatically. Without price reforms and energy efficiency gains, China's emissions would be more than 50% higher than they are now.

We recognize, moreover, that some developing countries (particularly the least developed countries) may lack the capacity to assume and implement legally binding emissions targets at this time. For these countries, other types of action would be appropriate. All developing countries should explore opportunities under the Clean Development Mechanism, adopt sound national policies on energy and land use, and pursue other climate-friendly measures under the Framework Convention.

The negotiating histories of both the Framework Convention and Kyoto Protocol demonstrate general agreement on the need to mitigate climate change while allowing for continued economic growth. The United States believes this formula remains the key to securing developing country action. Developing countries are finding in the Kyoto Protocol avenues to pursue their development and environmental goals simultaneously. There is a growing recognition of the potential of the Clean Development Mechanism to direct advanced technology and major capital flows to the developing world.

Though the CDM will stimulate investment in certain sectors, the potential of the CDM (with its project approach) to produce major macro-economic and carbon emission changes is limited. Building on the pro-environment, pro-economic growth formula of the CDM, we must find a more efficient and effective method for developing countries to get involved. That is why the United States, India and several other countries have recognized the urgent need for a new international dialogue about how developed and developing countries can fight climate change, and why China has expressed a willingness to consider new and creative approaches to this problem.

To conclude, let me reiterate what I said at the outset: there now is nearly total agreement among scientific, political and business leaders that climate change is real and that it merits the intense scrutiny of the international community. And the international community is responding - moving rapidly to finish work on the Kyoto Protocol in a manner that will pave the way for U.S. ratification.

Thank you for your attention, and I look forward to seeing many of you soon in The Hague.

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