date: Wed, 25 Jun 2003 11:03:45 -0400
from: "Tom Jacob" <Tom.Jacob@USA.dupont.com>
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





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