Harlan Watson <harlan_watson@yahoo.

com>
05/25/200212:05:13 PM

Record Type: Record

To: Phil Cooney/CEQ/EOP@EOP

cc:
Subject: Canadian Cleaner Energy Exports Proposal

Phil,

Attached Is a paper that argues that the US should

oppose the Canadian cleaner energy exports proposal.

Harlan

Do You Yahoo!?
Yahoo! ~ Official partner of 2002 FIFA World Cup
http://fifaworldcup.yahoo.com

ICGI- 5~24~02.Comm·ents on Why the US Should Oppose Canada's Proposal for Cleaner Energy
Exports Credlts.DOC

001685

CEQ 009575
 U.S. SHOULD OPPOSE CANADA'S PROPOSAL FOR EXPORT CREDITS:
IT WOULD CREATE PRECEDENTS HOSTILE TO U.S. INTERESTS

At the SBSTA workshop on "Cleaner or Less Greenhouse'Gas-Emitting Energy" (Whistler,

British Columbia, Canada - May 7-8, 2002), Canada presented its paper "Cleaner Energy
Exports and Global Environmental Benefits: Canada's Position." The' paper asserted that
Canada's exports ofnatural gas and hydroelectricity to the United States will create an annual
"global environmental benefit," which, in 2010, will be 69 million m.etric tonnes ofC02-equiva-
lent greater in 2010 than it was in 1990. The paper concluded: "At SBSTA 16, Canada will be
bringing forward a draft decision for consideration by CoP 8, requesting an accommodation to
provide it with credit equivalent to the global environmental benefit created by its cleaner energy
exports, i.e., 70 Mt CO2-equivalent per year, for the first commitment period only."

The following comments are limited to identification of two precedents, neither of which the
United States can afford, that would be established ifthe Canadian proposal were accepted.
Those grounds for U.S. objection to the Canadian proposal are in addition to the serious, sub-
stantive flaws that penneate the analysis Canada offers in support of its proposal.

De/acto amendment of the Kyoto Protocol that fails to comply with the amendment
procedures of the Kyoto Protocol is an unacceptable precedent that must be opposed

Article 3.1 ofthe Kyoto Protocol sets forth Canada's basic obligation under the Protocol: to
assure that its aggregate anthropogenic COrequivalent emissions of greenhouse gases listed in
Annex A do not exceed its "assigned amount" calculated pursuant to its quantified emission-
reduction commitment in Annex B "and in accordance with the provisions of this Article."! The
only adjustments to a Party's "assigned amount" required or allowed by Article 3 are those spe-
cified in Articles 3.3 through 3.'8 and 3.10 through 3.13.

None ofthose provisions sanctions "credits" or any other form of adjustment to a Party's
"assigned amount" by reason of its exports ofso-called "cleaner" energy (or any qther exports
claimed to result in a "global environmental benefit") to a country, such as the United States, that
is not a party to the Kyoto Protocol'. 2

Until Canada unveils its formal proposal, we cannot know exactly.what it means by "a draft
decision for consideration by COP 8 ... to provide it with credit equivalent to ... 70 Mt Car
equivalent per year, for the first commitmenfperiod only." Plainly, a mere decision bythe COP,
which purports to grant "credits" to Canada that are not provided for by Article 3, cannot modify
Canada's "assigned amount." This is because any such modification would constitute a de facto

I Subject to adjustments required or permitted by Article 3, Canada's Kyoto Protocol commitment is to reduce its
CO 2-equivalent greenhouse gas emissions by 6 percent below their 1990 level. '

2 Since the Canadian proposal is based on exports of so-called "cleaner energy" to a non-Party to the Protocol, we
need not be concerned with the hypothetical questions ofwhether such exports by an Annex B Party to another
Annex B Party could result in emission reduction units, (ERUs) under the joint implementation provisions of Article
6, or whether such exports to a developing country Party could result in certified emission reductions (CERs) under
the Clean Development Mechanism ofArticle 12. .

CEQ 009576
 2

amendment ofthe Protocol; however, in the first instance, the authority to adopt such amend-
ment is vested exclusively in the Conference of the Parties serving as the meeting of the Parties
to the Protocol (COPlMoP), not the COP under the UNFCCC, and a Protocol amendment
adopted by the COPlMoP must be "accepted" (commonly called "ratified") by three-fourths of
the Parties to the Protocol before it can enter into force. 3

The United States fonnally should object to any proposed decision ofCOP-8 that either ill pur-
l2Q!!§to amend the Kyoto Protocol or !:ill confers "credits" ill similar benefits on Canada that, as
~ practical matter, enlarge Canada's "assigned amount" under the Kyoto Protocol and. therefore,
constitutes a de facto amendment oithe Protocol. 4 This i§. because the United States cannot
afford establishment of ~ precedent in ~ international body ofwhich!! i§ e member (the COP)
that accomplishes de facto amendment of ~ treaty in disregard ofthe treaty's procedural safe-
guards concerning adoption oftreaty amendments...

Granting Canada "credits" for its exports of"deaner or less greenhouse gas-emitting
energy" to the United States would establish a'precedent that is contrary to U.S. interests
and, therefore, must be opposed. .

Even though the United States will not be a Party to the Kyoto Protocol, a decision (by amend-
ment to the Protocol or otherwise) granting Canada "credits" for its exports of "cleaner or less
greenhouse gas-emitting energy" to the United States would establish a precedent that is very
contrary to U.S. interests.

3 Article 20.2 states that amendments to the Protocol "shall be adopted at an ordinary session of the Conference of
the Parties serving as the meeting ofthe Parties to this Protocol." The first meeting ofthe COPlMoP cannot occur
until after the Kyoto Protocol enters into force. Article 13.6. The ''ratification'' requirement is in Article 20.4.

4 Canada may seek a COP-S decision which ''recommends'' that the COPlMoP, at its first ses'sion, amend the
Protocol to grant Canada the "credits" it seeks or otherwise to modify Canada's "assigned amount." Although a
"recommendation" by the COP to the COPlMoP cannot legally bind the COPlMoP, it would not be politically free
to reject the ''recommendation'' any more than it could reject any provision ofthe "Marrakech Accords," which
COP-? adopted to implement the Kyoto ProtocoL Therefore, great care must be taken during consideration of a
proposal for a "recommended" decision by COP-S:

• A decision ofthe COP, which ''recommends'' a decision to the COPlMoP, must be adopted by "consensus"
ofthe COP, even though it recommends adoption of an amendment to the Kyoto Protocol, which, under
Protocol Article 20.3, may be adopted by a three-fourths majority vote of the Parties to the Protocol present
and voting.

• Nothing in the proposed COP-8 decision sbouid be allowed to limit or waive strict adherence by the
COPlMoP to the requirements ofProtocol Article 20 concerning the procedure for adoption of an
amendment to the Protocol. Among other requirements, Article 20.2 calls for the Secretariat to com-
municate the text of any proposed amendment to ''the Parties" (meaning the Parties to the Kyoto Protocol)
at least six months before the meeting at whicb it is proposed for adoption.

CEQ 009577
 3

If Canada currently were granted "credits" for its exports of "cleaner or less greenhouse gas-
emitting ,energy" to the United States, the precedent thereby established would be equally
applicable to any future climate-change treaty to which the United States and Canada were
Parties, if that treaty, in one manner or another, established "targets and timetables" for reduc-
tions of greenhouse gas emissions either in absolute or percentage amounts compared to prior
emissions levels or relative to economic output ("carbon intensity"). In either situation, the
justification for the "credits" is that the exporter has created a "global environmental benefit"
because the exported energy displaces what otherwise would be the importer's use of more .
carbon-intensive energy. '

The problem for the United States arises from the fact that, insofar as treaty-relevant transactions
between developed countries are concerned, credits obtained by one Party must be offset by
debits to the other Party. This is necessary to "keep the books in balance." The principle is
illustrated by the provisions ofProtocol Articles 3.10 and 3.11, which require that, when emis-
sion reduction units or part of an assigned aniount are acquired pursuant to Articles 6 (joint
implementation) or 17 (emissions trading), they are added to the "assigned amount" of the
acquiring Party and an equal amount is subtracted from the "assigned amount" of the transferring
Party.

There is every reason to assume that, for the foreseeable future, the United States will be a large,
net importer of natural gas and hydroelectricity from Canada. 5 Although granting Canada
"credits" for those exports does not result in "debits" to the United States as long as it is not a
Party to the Kyoto P.rotocol, any future treaty to which the United States and Canada were
Parties and which involved accounting for the Parties' emissions necessarily would result in the
United States having to absorb "debits" to match the "credits" Canada would gain under the pre-
cedent it now seeks to establish. Those "debits" have a" cost to the United States and U.S.
importers. ofthe natural gas and hydroelectricity (equal to the market price of internationally
traded "credits") that is incurred in addition to the commodity price ~harged by the Canadian
exporters.

The notion that exporters of "cleaner or less greenhouse gas-emitting energy" should receive
"credits" because the exports create a "globa). environmentallienefit" knows no bounds. For
example, if Canada can gain "credits" for exports of natural gas and hydroelectricity, on what
basis could we resist claims for "credits" by exporters ofmore fuel-efficient or less-carbon-using
automobiles? At the recent Whistler workshop, which focused on Canada's proposal, 1Jlore than
one country noted the logic of extending "credits" to others who could claim that their exports
resulted in "global environmental benefit."

A principal objective of any future climate-change treaty to which the United States might
become g ~ in addition to those of environmental effectiveness and equitable burden-sharing
among the nations of the world, is that the costs ofUS. compliance be held to accg>table levels.

5 U.S. naturlll gas imports from Canada rose nearly 22.5% from 2.89 trillion cubic feet in 1996 to 3.54 trillion cubic
feet in 2000. U.S. Energy Information Administration, Natural Gas Annual 2000, p. 20, Table 9. Canada projects
that "[n]atural gas exports to the United States are likely to increase significantly between now and 2010." Canada's
Third National Report on Qimate Change, p. 13.

CEQ 009578
 4

nwould make that important objective even harder to obtain than before - and, therefore, would
be contrary to U.S. interests - if!! precedent were established for future negotiations. such as that
which ~ from Canada's claim for "credits" from "cleaner energy" exports to the United
States.

Conclusion:

The Administration has said it will not interfere with efforts ofother nations to pursue the Kyoto
Protocol. But there is a limit. As Under Secretary of State Dobriansky made clear in her
opening statement at COP-7 in Marrakech: ''the United States has no intention of discouraging
the work of other nations on the Kyoto Protocol; but we will protect legitimate u.s.interests. "

In her closing statement at COP-7, Under Secretary Dobriansky called to the Parties' attention
'the "many areas in which the Kyoto Protocol,and the rules elaborating it contain elements that
wol,l1d not be acceptable to the United States ifproposed in another negotiating context in which
we participate." One ofthe three examples she properly cited was "[r]ules that purport to change
treaty commitments through decisions ofthe parties rather than through the proper amendment
procedure." Any effort to modify Canada's ~'assigned amount," by means short of formal
amendment to the Kyoto Protocol, perpetuates that specific failing. Clearly, the United States
has a legitimate interest in opposing any such effort.

S~larly, there should be no question that the legitimate interests of the United States require it
to oppo~e in the COP proposals that, once adopted, would co~tute a precedent posing risk of
substantially adding to the economic costs the United States would have to bear in some other
international climate-change arrangement.

Other nations are w!1tching the United States. We are the target ofthe Canadian proposal. Ifwe
fail to speak up to protect oui own economic and political interests, it is tantamount to telling
others that we either do not care or we have no guts. Acquiescence by silence to decisions that
are contr~ to our national interests is not acceptable.

CEQ 00957~