tions. In addition, because the Protocol sets different targets for each industrialized country and the target is based on what is now an eight-yearold baseline, the U.S. in effect will shoulder a disproportionate level of reduction and may be placed at a competitive disadvantage.

• Unless the Developing Countries also commit to emission reductions, the Protocol is incomplete and will not work. The Byrd-Hagel Resolution, unanimously adopted by the U.S. Senate in July 1997, states that the U.S. should not be a signatory to any protocol unless it mandates "new specific scheduled commitments to limit or reduce greenhouse gas emissions for the Developing Country Parties within the same compliance period." Many Developing Countries are rapidly growing their economies and will become the largest emitters of greenhouse gases in the next 15-20 years. Greenhouse gases know no boundaries, and stabilization of greenhouse gas concentrations cannot be achieved without global participation in a limitation-reduction effort. Moreover, regulating the emissions of only a handful of countries could lead to the migration of energy-intensive production—such as the chemicals, steel, petroleum refining, aluminum and mining industries-from the industrialized countries to the growing Developing Countries.

• Certain carbon “sinks” may be used to offset emission reductions, but the Protocol does not establish how sinks will be calculated. Carbon sinks, a natural system that absorbs carbon dioxide, have tremendous potential as a means of reducing emissions, but too much is currently unknown to make a fair determination. It is unclear how sinks might help the U.S. reach its emission-reduction commitment. It is understood that the rules for sinks will be addressed at the Fourth Conference of the Parties (COP4) in Buenos Aires, but until they are fully fleshed out their potential impact cannot be evaluated.

• The Protocol contains no mechanisms for compliance and enforcement. Simply put, it would be inappropriate for any country to ratify a legally binding international agreement that lacks compliance guidelines and enforcement mechanisms. The Protocol outlines a system of domestic monitoring with oversight by international review teams, but what constitutes compliance and who judges it will not be determined until after the

Protocol enters into force. The means of enforcement—also unknown-is equally critical, since a country's noncompliance could give it a competitive advantage over the U.S. and eviscerate the agreement's environmental goals. • The Protocol includes flexible, market-based mechanisms to achieve emission reductions, but it does not establish how these mechanisms would work and to what extent they could be used. The U.S. intends to rely heavily on market-based mechanisms to find the most efficient and cost-effective ways to reduce emissions. But until the rules and regulations are established it is uncertain how effective these mechanisms will be and to what extent they can be used by companies. Many countries are resisting these market-based mechanisms and their reluctance may hinder the development of adequate free-market guidelines. The absence of many countries from the marketplace, and the possible limitations and restrictions on the marketplace, could render these mechanisms useless or of little value.

• The Protocol leaves the door open for the imposition of mandatory policies and measures to meet commitments. Just as the U.S. favors flexible market mechanisms, the European Union and many Developing Countries favor harmonized, mandatory "command-and-control" policies and measures-such as carbon taxes and CAFÉ standards-to meet commitments, and they will have numerous opportunities to seek adoption of these policies.

Finally, the procedures for ratification of, and amendment to, the Kyoto Protocol make it difficult to remedy before it enters into force. The Protocol may not be amended, nor can rules and guidelines be adopted, until after the Protocol enters into force. The Clinton Administration is now considering the negotiation of a separate or supplemental protocol to attain necessary additional commitments, but this approach would open all issues to further negotiation.

The Business Roundtable believes that the Congress and the American people cannot evaluate the Kyoto Protocol until the Administration sets out a plan as to how it intends to meet the targets of the Protocol. To place the magnitude of the U.S. reduction commitments in perspective, it is the equivalent of having to eliminate all current emissions from either the U.S. trans

portation sector, or the utilities sector (residential and commercial sources), or industry. The Administration needs to detail how targets in the Protocol will be met, and how the burden will be distributed among the various

sectors of the economy.

The Business Roundtable feels it is imperative that a public dialogue take place on the major issues highlighted in our Gap Analysis before the Protocol becomes the law of the land and government agencies begin to write regulations.

I. INTRODUCTION

On December 11, 1997, in Kyoto, Japan, the Parties to the United Nations Framework Convention on Climate Change (the "Framework Convention" or "FCCC") reached an historic and unprecedented agreement to impose legally binding limitations on man-made greenhouse gas emissions of industrialized countries listed in Annex I to the Framework Convention (the "Developed Countries").' The "Kyoto Protocol" sets differentiated targets for Developed Countries to reduce or limit their emissions; the United States must reduce its emissions 7% below 1990 levels by the years 20082012.2 The Protocol does not mandate specific policies or measures to achieve these reductions, and establishes, in concept, market mechanisms which may help Parties find more efficient ways to reduce emissions.

The Kyoto Protocol builds on commitments made by one hundred and sixty-seven countries under the Framework Convention in 1992 for Developed Countries to voluntarily return their greenhouse gas emissions to 1990 levels by the year 2000. In 1995, the Parties determined that voluntary aims would be insufficient and that post-2000 objectives needed to be established by the Parties. Through the "Berlin Mandate," the Parties committed to negotiate a new agreement that would include legally binding emission reduction measures for Developed Countries. The Berlin Mandate specifically excluded the Developing Countries-including China, India, Brazil, Mexico and one hundred and thirty other nations—from any new obligations to curb their emissions.

The Kyoto Protocol is open for signature at the United Nations headquarters in New York until March 15, 1999. Thereafter, Parties to the Framework Convention can still join the Protocol by accession.3 The Protocol will enter into force on the ninetieth day after: (a) not less than fifty-five Parties have joined the Protocol; and (b) a sufficient number of Developed Countries have joined the Protocol to account for at least 55% of all carbon dioxide (CO) emissions by Annex I Parties in 1990. The Clinton Administration has announced that the President will sign the Protocol within the one-year period at the "time that makes the most sense in terms of the overall diplomatic situation," but that he will not submit the agreement to the United

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PAPER NO. 1: CANADA

(on behalf of Australia, Iceland, Japan, New Zealand, Norway,
Russian Federation, Ukraine and the United States of America)

NON-PAPER ON PRINCIPLES, MODALITIES, RULES AND GUIDELINES FOR AN INTERNATIONAL EMISSIONS TRADING REGIME

(In particular for verification, reporting and accountability)

PURPOSE

This paper sets out the preliminary views of Australia, Canada, Iceland, Japan, New Zealand, Norway, Russian Federation, Ukraine and the United States of America on the principles, modalities, rules and guidelines which provide the framework for international emissions trading. It is intended to facilitate on-going discussion on the development of an open international emissions trading system. Participation in the international trading system would be entirely voluntary.

2.

The focus of the paper is on key technical design features which are necessary to provide for an effective and efficient trading system. The key objectives of the design features are to keep the system as simple and transparent as possible and minimise the transaction costs of trading while at the same time remaining consistent with the Protocol's environmental objective of achieving at least a 5% overall reduction below 1990 levels of greenhouse gas emissions by 2008-2012 for Annex B Parties.

3.

A summary of the international emissions trading system proposed in this paper is contained in Appendix A.

2.

4.

INTRODUCTION

In December 1997, the Kyoto Protocol established emission targets for Annex B Parties. International trading is established in Article 17 of the Protocol'. The Conference of the Parties is authorised to decide on principles, rules, modalities and guidelines, in particular for verification, reporting and accountability.

5.

Domestic measures associated with international emissions trading are for individual Parties to determine and, as such, are not addressed in this paper (beyond the need for national recording systems). However, an important consideration in designing an international emissions trading system is not to restrict the right of each Party to put in place the domestic measures it chooses. Issues such as whether and how trading is devolved to legal entities and how revenue from trading might be treated have not been addressed as these are matters for individual Parties to decide.

1 Any reference to an 'Article' or 'Articles' in this paper refers to Articles of the Kyoto Protocol. Similarly,