Mr. Frank E. Loy
Under Secretary for Global Affairs
U.S. Department of State
Washington, D.C. 20520

Dear Secretary Loy:

        On behalf of the members of the International Climate Change Partnership (ICCP), I am writing to express our views on a number of the issues open for discussion at the upcoming meetings of the Subsidiary Bodies in Lyon and in preparation for the November Conference of the Parties meeting in The Hague.

        The ICCP is an international coalition of companies and industries dedicated to responsible participation in the climate change policy process. As such, ICCP members have been active participants in the discussions since 1991.

        The breadth of issues under discussion leading to COP 6 is quite extensive, ranging from compliance and reporting procedures to the detailed workings of the flexible mechanisms agreed upon under the Kyoto Protocol. This ambitious agenda was developed under the Buenos Aires Plan of Action.

        Expectations are high for a successful meeting and it appears the agenda is far more ambitious than could conceivably be completed within the time remaining before COP 6. ICCP believes it is imperative that negotiators concern themselves with what will make a successful treaty over the long-term rather than seeking short-term diplomatic solutions.

        The fundamental success of the Kyoto Protocol negotiations was the decision to employ market-based mechanisms as a primary means of achieving greenhouse gas emissions reductions. The successful fulfillment of these flexible mechanisms -- emissions trading, joint implementation, and the clean development mechanism -- continues to be the key to engaging the private sector to broadly participate in this endeavor in a manner that offers the best hope of achieving the global environmental objective while promoting worldwide economic growth.

        We are concerned that the current negotiating text with respect to these mechanisms contains numerous proposals that would hamper the operational utility of these mechanisms and significantly increase their costs. Taken together, the net effect of the explicit and implicit limitations being considered will dramatically reduce flexibility and render the mechanisms of little value. We are also concerned that some of these proposals seek to reopen issues that were considered resolved in the Kyoto decision. This concern is particularly high with respect to the issue of supplementarity as well as with the potential exclusion of technologies or practices such as sinks.

        Attempts to renegotiate these issues or to limit a nation's sovereignty on decisions of appropriate policies or practices to pursue, or to unwittingly hamper the ability of the private sector to cost-effectively pursue the flexible market mechanisms, threatens the very foundation of the Kyoto Protocol agreement thereby limiting its chances for ratification.

        In our view, the key issues to be resolved at the COP 6 meeting are those relating to the implementation of the flexible market mechanisms. Analysis continues to indicate that these mechanisms will be key to most Parties' ability to participate in the Kyoto Protocol regime, both in developed and developing countries.

        Successful completion of these mechanism issues will relieve many of the growing concerns within the private sector and allow for better planning and participation for long-term success in reducing greenhouse gas emissions.

        ICCP recognizes that the Kyoto Protocol is a work in progress. It is paramount that the United States remains committed to the overall framework outlined prior to Kyoto and that it systematically completes work on the remaining issues. The first of these issues is the market mechanisms. Enclosed is a summary of our views on these key mechanism issues. We have had lengthy discussions on the issues with your team and welcome the continued opportunity to provide input.

        Following up on the other important framework issues is also necessary, but these clearly have not been at the forefront of the discussions leading up to COP 6. These include identifying a comprehensible long-term objective and determining the role of developing countries in achieving the long-term objective.

        The goal for COP 6 should be to complete as much as can be done with regard to the flexible market mechanisms and to lay the groundwork for discussion of these other key issues. These climate negotiations are the most complicated global environment negotiations ever, and perhaps as challenging as any global economic negotiations. They require patience and perseverance and a sustained commitment to pursue environmental objectives in an economically balanced manner.

        We urge the United States and all other nations to approach COP 6 in a workmanlike manner and to understand that the ultimate credibility and success of the Kyoto agreement rests on the fulfillment of the Kyoto framework and not on its revision or reconstruction.

        ICCP wishes you success in this endeavor and looks forward to our ongoing participation in the policy development process.

Enclosure

ICCP KEY MECHANISM ISSUES (listed in order of importance)

Supplementarity -- To what extent will a given country be allowed to rely upon credits derived from external sources, versus achievement of reductions/sequestration via domestic actions.

The U.S. favors no elaboration of supplementarity. The negotiating text contains a variety of options, including: no elaboration, suspension of mechanisms if domestic action is not the primary means of achieving reductions, a 50% cap, or a 25-30% cap.

Fungibility -- Will the credits accruing under the various mechanisms be fully fungible, i.e., interchangeable (all will be denominated in tons of CO2-equivalent reductions) and eligible for multiple transactions. The value of a CER would be significantly reduced, for example, if it cannot be subsequently traded. A number of developing countries are concerned that CDM activities and credits be kept separate from JI credits. The current negotiating text includes options for fungibility and non-fungibility.

Additionality -- What tests will be applied to specific JI or CDM projects to ensure that they are benefiting the environment and contributing to sustainable development in ways that would not have otherwise occurred. Ascertaining whether a reduction represents "business as usual" is cumbersome and subjective, especially in instances where new capacity is being added. Negotiating text includes four different proposed tests for this:  environmental additionality (whether emissions are less than would have been), financial additionality (whether funding displaces other resources), investment additionality (whether value of the credits is key to economic viability of the project), and technology additionality (whether technology is best available in given circumstance).

Share of Proceeds -- The Protocol provides for a portion of the proceeds from CDM projects to be set aside for administrative expenses and to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation. The current draft text extends this notion to JI and emissions trading and contains multiple options for how (and how much) such a share is to be calculated.

Public Involvement -- Proposals in the current text would facilitate (in some cases require) internet-driven, open-ended public input at both the policy and project decision making levels, even where host country regulations would not normally provide for same or would limit same to, for example, the local community.

Equity -- Whether allocation of credits/development of projects under the mechanisms would be constrained by some tests of geographic or social equity (text includes notion of contributing to long-term goal of convergence of per capita emissions levels between developed and developing countries).

Project Limitations -- Text includes no nuclear power option and option of no sinks until science is clarified. European Council proposes that a positive list of eligible projects be adopted at COP 6 and no inclusion of sinks in CDM.

ADDITIONAL ISSUES

Entity Participation -- Private "legal entities" must be assured the opportunity to participate in the holding and transfer of ERUs, CERs, and AAUs with the consent of the directly-involved Parties.

Baseline Determination -- What standards will apply in determining what the "business-as-usual" baseline is, against which to judge relative improvement in emissions or sequestration for specific JI or CDM projects. This becomes very tricky when one looks beyond end-of-pipe retrofits or replacement technologies. This is especially true in the case of CDM, where the aim is to ensure that new development occurs in a more responsible manner, since the test must consider both technological capability and prevailing conditions in the host country.

Validation, Registration, Certification, Verification -- How will specific projects be judged to have met the criteria; how will they be registered and accounted for, and how will they be monitored to verify that they have in fact achieved the reductions/ sequestration for which the credits were awarded. The text currently has the potential to treat all of these as separate decision steps, seriously compromising efficiency and timeliness.

Project Documentation/Confidentiality -- Text contains elaborate documentation requirements in conjunction with project-level activities for which CDM or JI credit is being sought, raising questions of demarcation point between confidential business information and public disclosure and public involvement mandates.

Institutional Structure -- What new or existing institutions will take on what policy and decision making roles under the mechanisms and how will they relate to each other and to the overall decision making body of the Protocol (the Conference of the Parties to the Convention serving as the Meeting of the Parties to the Protocol -- the so-called COP/MOP).

Liability -- Annex I countries can trade away a portion of their allocation of carbon emissions, as long as they reduce emissions commitment level by that amount.  However, there is question as to who bears liability should it subsequently be determined that their actual emissions exceeded that level: is it "buyer beware" or does the country of origin for the "credit" have extra liability in that circumstance, with the acquiring country retaining full rights under the initial transaction. This question can have spillover effects if the acquiring country turns around and apportions the extra rights secured in the trade to, for example, industry -- does the company using those extra rights suddenly see them evaporate.