Subject: Analysis of Bonn Agreement on Kyoto Protocol "political issues"
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Date: Fri, 27 Jul 2001 06:36:04 -0700 (PDT)

Agreement was reached on Monday, July 23 on several key political issues related to the Kyoto Protocol.   Delegates at the Bonn climate change negotiations are expected to work through Saturday to develop additional decisions that will "incorporate and give full effect" to the agreement.  It is likely that adoption of some (or all) of these decisions will be pushed to the next set of negotiations in Morocco this fall.

Despite the media attention, there is a long and complex road ahead to a ratified treaty.  The major outcome of Bonn is that the road is still being traveled.  The agreement only covered a subset of key political issues.  Further, developed countries want the U.S. on board and this leaves room for the Bush Administration to offer an alternative -- though the window of opportunity could close shortly.  Please see links to several editorials below.

Impact on Enron
Even though the U.S. did not adopt this agreement and the Bush Administration will not support the Kyoto Protocol, its impact on Enron as well as other multinationals is unclear. The Kyoto Protocol negotiations have been driven by governments and impose mandatory emissions reduction targets on developed country governments that are Parties to the Protocol.  However, industry will have a role in complying with emissions reduction obligations. 

While the European Union has promoted "harmonized policies and measures" throughout this process, the Protocol leaves decisions on implementation of treaty obligations to domestic governments (that are Parties to the agreement).  Presently, U.S. companies with operations in countries that are Parties to the Protocol -- and have obligations under the Protocol  -- could face different standards, new greenhouse gas emissions regulations, domestic carbon taxes, among other options.  It is too early to tell how these issues will impact competitiveness or whether they will be interpreted as non-tariff trade barriers.   

Further, only Parties to the Protocol can utilize the market-based mechanisms under the Protocol (emissions trading, and project-mechanisms in developing countries through the Clean Development Mechanism, and project based mechanisms in other developed countries through Joint Implementation). Because the details are not yet worked out, it is unclear whether Enron would be able to participate in mechanisms or trading through offices in other countries outside the U.S.  It will be important that the U.S. develop linkages with the market-based mechanisms to enhance a global market for greenhouse gas emissions credits and lower compliance costs for firms with obligations. 

The agreement also increased the amount of carbon sinks that can be counted toward meeting a Party's emission reduction target in the first budget period (2008-2012).  The U.S. was set aside 28 million Mt C/yr in the event that it joins in at a later date.  Increased carbon accounting has the effect of lowering the burden of the emissions reduction target in the first budget period.  Of note, at the last set of negotiations in The Hague last November, the U.S. was close to receiving over 60 Mt C/yr.  This could contribute to more costly and burdensome reductions in the future for U.S. firms (as the U.S. could have a more stringent target to meet).

Key Provisions of the Political Agreement

Please see a summary of major elements of the Bonn agreement below.  I have also included a detailed summary provided by the Pew Center on Global Climate Change.

MARKET BASED MECHANISMS

Emissions Trading
No quantitative limits on the use of the market-based mechanisms (emissions trading, CDM or JI).  The EU retreated on this point.
No levy imposed on transactions.  Developing countries had championed levies as a source of financial assistance.
Seller liability would apply to transactions, with a commitment period reserve of either 90% of a Parties total budget (more attractive for net buyers) or the equivalent of five times its last national inventory (more attractive for net sellers).  This allows Russia to sell its "hot air" credits.

Clean Development Mechanism and JI
Nuclear power projects are not permitted under the CDM or JI
Afforestation and reforestation are the only eligible sequestration projects under the CDM
Small project "fast track" window in the CDM for renewable energy projects <15 MW, for efficiency and other projects equivalent to less than 15 GWh per year, and for new emitting projects that reduce emissions and with emissions of less than 15,000 tons per year.

COMPLIANCE

If parties are found in non-compliance, their compliance amount for the second commitment period is increased, they must formulate an action plan, and they are not permitted to participate in emissions trading.  This language is not legally binding, but political pressure to enforce the treaty obligations was likely to be the biggest driver for now.  The legally binding nature of the compliance regime will be revisited at the first meeting of the Parties to the Protocol (this would occur when and if it enters in to force).

Recent Editorials

Please see the attached links to editorials from USA Today, The Washington Post, The New York Time and The Wall Street Journal.

http://www.usatoday.com/news/comment/2001-07-25-nceditf.htm
http://www.washingtonpost.com/wp-dyn/articles/A52395-2001Jul25.html 
http://www.nytimes.com/2001/07/24/opinion/24TUE1.html
http://www.techcentralstation.com/NewsDesk.asp?FormMode=MainTerminalArticles&ID=77 (Wall Street Journal)

Please feel free to contact me with any questions.

Lisa Jacobson
Enron
Manager, Environmental Strategies
1775 Eye Street, NW
Suite 800
Washington, DC 20006

Phone: +(202) 466-9176
Fax: +(202) 331-4717