Kevin Fay International Climate Change Partnership May 11, 2005

Business PerspectivesClimate Policy in the US and Japan: Prospects in 2005 and BeyondTokyo, Japan Kevin Fay International Climate Change Partnership May 11, 2005 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

ICCP • Organized in 1991 as Small Group of Large Companies • View that Science is Credible and Issue Not Going Away • Goal to Establish Credible Business Voice • Obtain Seat At Policy Table • Make Process go Smarter, Not Necessarily Faster or Slower

Key ICCP Accomplishments • First Group to Articulate LTO, and overall market-based framework • Prominent role in post-Kyoto Implementation Issues • First Business Group Invited to Brief Bush Cabinet • Current Participant in High Level TransAtlantic Climate Dialogue

How Does ICCP Function • Consensus-based organization • Bring parochial corporate interest • Manage issue rather than react • Rely on shared information gathering • Earn a seat at decision making table

Background - Science • Intergovernmental Panel on Climate Change (IPCC) 2001 report concludes the following: • The global average surface temperature is increasing. • Global average sea level has risen. • There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.

Background - Science • IPCC Assessment Reports - meet minimum credibility to drive policy process • Recognize general consensus on potential temperature increase and sea level rise • Other Effects - Large uncertainties likely to be unresolved before policy implementation • Current concern more properly focused on rate of change • Changing atmosphere in 200 year period to CO2 concentrations not seen in 50 million years

Background-Policy • United Nations Framework Convention on Climate Change (UNFCCC) - Rio • Called on developed countries to stabilize GHG emissions at 1990 levels by 2000, non-binding target • Basic principle - developed countries go first • Signed by President Bush (41) and ratified by US Senate in 1992 • Kyoto Protocol signed December 1997

Kyoto Protocol Elements • Worldwide differentiated target of 5.2% reduction between 2008-2012 • CO2, CH4, N20 - 1990 baseline • HFC, PFC, SF6 - 1995 baseline option • No international policies and measures • Maintenance of national flexibility

Kyoto Protocol Elements • Single basket of gases • all six gases included in reduction percentage • reductions and increases allowed between gases as long as overall target is met • sinks (forests, soil and land use) included

Kyoto Protocol Elements • Emissions Trading • Clean Development Mechanism (CDM) - including credit for early action • Entry Into Force - 55 Parties, 55% of Annex I Emissions

Kyoto Protocol Status • Political agreement reached in Bonn in 2001 that kept the Protocol process alive • Agreement reached in November 2001 that provides details of how the Protocol will function - Marrakech Accords • Pre-Ratification Lull in 2002-2004 • Russian Ratification – 2004 • Entry into Force – February 2005

Marrakech Accords • Agreement on compliance process and penalties, final decision on “binding” nature of compliance delayed until after ratification • Includes use of sinks (forest, cropland, and grazing land management, and revegetation are eligible activities) • No quantitative cap on the use of flexible mechanisms (emissions trading, CDM, joint implementation)

U.S. Position • The current U.S. position is that it will not become a Party to the Kyoto Protocol • President Bush has stated that the Protocol is “fatally flawed” because it does not include commitments for developing countries and because it would harm the U.S. economy • Rejection of Kyoto Protocol does not change U.S. commitments under the Framework Convention (UNFCCC)

U.S. Policy • Reduce GHG intensity of U.S. economy by 18% by 2012 • Enhanced GHG emissions reporting with baseline protection and credit for early action • Voluntary emission reduction commitments – opt in programs such as Climate Leaders

U.S. Policy • Increased Budget Levels/Tax Incentives • Science • Technology • Energy Efficiency • Bilateral Programs – Canada, Mexico, Japan, others • Technology Partnerships

U.S. Policy - Significance • New metric for success - emissions intensity • Provides transferable credits • Change in policy debate • Allows for dialogue to begin, even among Republicans • Sets tone for debate • President politically commits to stabilization

Congress • More focus in Senate than House • Energy bill, multi-pollutant legislation, registry bills, cap and trade • Bills Introduced to Begin Debate Anew - McCain/Lieberman; NCEP • New Byrd/Hagel legislation

States • CA. AB 1493 implementation • New England/Eastern Canada CCAP • NY Pledges California-type program • RGGI – 10 New England states, plus two observers • Cooperation among CA, OR, WA

Key Events -Domestic • Implementation of new U.S. policy • Budget outcome • New Cabinet Leadership Team • State Legislation

International Concerns • Lack of US seats on governing bodies • Attacks on technology • Violation of single-basket principle • Use of trade barriers against non-parties • Lack of consistency between Kyoto and non-Kyoto parties • Increasing gap between parties and non-parties

Key Events - International • Russian Ratification • European Trading System • Kyoto Entry Into Force • Blair G-8/EU Initiative

Perspectives • KP Process Moving Forward Despite Bush Administration View • KP Remains Market-Based Mechanism But Threatens to Become Less • International Dialogue Slowed by Economic/Competitiveness Concerns • Bush Program Initially Helpful But . . .

Perspectives (cont.) • Legislative activity picking up at Federal and State Level • California and New York programs of concern to industry • 9/11 and War(s) continue to take focus away • Budget concerns mounting

Perspectives (cont.) • Environment Not Priority of Bush Political Base • Administration slow to implement its program • Mixed Messages to Industry Unlikely to Produce Enough Voluntary Action in Near Term Nor Spur Technology Revolution

Perspectives (cont.) • KP Probably Not Sustainable Long-Term Without US • No Consensus on Long Term Objective, Policy Cannot Move Forward Without It • Global Cooperation is Key to Achieve Long Term Objective

Perspectives (cont.) • US multi-nationals covered by KP outside US • Significant voluntary announcements (autos, General Electric) show continued engagement • State activity in US causes US business to remain vigilant

Administration Goals • Complete Registry Rulemaking • Substantial Technology Program$$ • Significant Sector Voluntary Programs • Push Back on Mandatory Legislation • Bilateral Program Announcements • Technology Partnerships

Path Forward • Global Dialogue on LTO among major emitting nations • Significant Technology Challenge • Develop “Marshall Plan” for developing country climate initiatives

ICCP Activities • Focus on Registry Rulemaking • Participate in Legislative Discussions at Federal and State Level • Monitor Budget and Appropriations Process • Develop Dialogue on Long-Term Objective

ICCP Activities (cont.) • Monitor Market Mechanisms in KP • Maintain Liaison with International Officials and Business Community • Monitor Individual Country Program Development

Kevin Fay International Climate Change Partnership May 11, 2005