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DE RUEHBS #0592/01 1141109
ZNR UUUUU ZZH
R 241109Z APR 09
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMUC/EU CANDIDATE STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 05 BRUSSELS 000592 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG EUN EWWT KGHG SENV TPHY TRGY
TSPL 
SUBJECT: SENATOR BINGAMAN DISCUSSES CAP AND TRADE SYSTEMS 
WITH EU OFFICIALS 
 
REF: A. BRUSSELS 193 
     ¶B. BRUSSELS 259 
 
¶1. (SBU) Summary.  Senator Bingaman met separately on April 
5-6 with officials from the EU Commission, EU Council, 
European Parliament, and private industry to discuss the EU's 
Emissions Trading Scheme (ETS) and cap and trade systems in 
general.  The underlying theme presented by the Europeans 
throughout the visit was the importance of close 
transatlantic cooperation during the U.S. legislative and 
implementation process to enable the most effective and 
economically viable linking of carbon markets.  Specifically: 
 
     -- EU Environment Commissioner Stavros Dimas emphasized 
the importance of cooperation to establish a single 
transatlantic carbon market and advance international climate 
negotiations.  He expressed his interest in providing input 
as needed during Congress' development of a cap and trade 
system. 
 
     -- Acting Deputy Director General for Environment Jos 
Delbeke expanded upon the discussion with Commissioner Dimas 
and provided many of the technical details and possible 
roadblocks the U.S. might face in developing legislation.  He 
highlighte how the EU addressed the power sector and 
col-dependent Member States as well as energy-intesive 
industries. 
 
     -- Henrik Hasselknippe, Global Head of Carbon Market 
Analysis for Point Carbon, focused on auctioning and 
allocation of emissions allowances, arguing that the 
logistics of the allocation process should be discussed 
separately from the legislation itself so as to preserve the 
environmental integrity of the legislation. 
 
     -- EU Industry Commissioner Guenter Verheugen discussed 
how the EU addressed energy-intensive industries.  Verheugen 
also used the meeting as an opportunity to promote the 
Transatlantic Economic Council (TEC) and the new Lighthouse 
Project on Energy and Climate Change. 
 
     -- In a roundtable at the European Parliament led by MEP 
Avril Doyle, lead Parliamentarian for ETS, MEPs offered their 
assistance during legislation in the Congress and urged 
Congress to hold tight to the environmental integrity of the 
legislation. 
 
    -- During a wrap-up dinner hosted by USEU, Philippe 
Leglise-Costa, French Deputy Permanent Representative to the 
EU and lead negotiator for the Climate and Energy Package, 
emphasized the importance of staying firm to the final 
emissions target and recommended against the inclusion of 
price floors or ceilings in the carbon price.  End summary. 
 
------------------------------ 
Dinner with Commissioner Dimas 
------------------------------ 
 
¶2. (SBU) Commissioner Dimas opened the Senator's visit by 
hosting a dinner in honor of the Senator.  Dimas emphasized 
his support for the development of a cap and trade system in 
the United States, which he said could lead to a 
transatlantic carbon market and a global climate agreement in 
Copenhagen.  Dimas emphasized that both sides must identify 
"what we can achieve together," despite some contrarian 
voices.  Dimas noted Italian Prime Minister Berlusconi has 
complained that the EU is doing much more than the United 
States, and the EU should therefore push the United States to 
move farther.  However, Dimas said the focus should be on 
pragmatism, and that the EU "must be constructive vis-a-vis 
the United States." (Note: USEU has noticed a distinct shift 
in rhetoric from Dimas in the recent months, a shift that may 
be attributed to Dimas working to prove that he can be a 
constructive interlocutor.  See Ref A.  End note.) 
Ultimately, Dimas argued that any U.S. cap and trade system 
needs to be linked to ETS.  It is good for transatlantic 
business and a first step toward an OECD-wide carbon market. 
This will provide the impetus to pull in major emerging 
economies such as China and India. 
 
¶3. (SBU) Turning to Copenhagen, Dimas reiterated earlier 
comments that the realm of the "politically possible" must be 
taken into account, and that the United States and the EU 
will need to work together.  He said the road ahead will not 
be simple, and though most people focus on China and India, 
he believes that Russia and the Middle East countries will be 
very difficult.  However, despite calls from different 
 
BRUSSELS 00000592  002 OF 005 
 
 
countries, he explained that there cannot be a change from 
1990 as the reference year, as it already exists in the 
UNFCCC process.  Countries can calculate against another year 
for domestic purposes, but the final target needs to be set 
against 1990.  Dimas then explained that he believes the UN 
must improve the clean development mechanisms (CDMs) process, 
and that the majority should go to projects in the poorest 
countries.  By contrast, major emerging economies must first 
commit to domestic reductions in order to be eligible for 
assistance from the developed world. 
 
---------------------------- 
Discussions with Jos Delbeke 
---------------------------- 
 
¶4. (SBU) Jos Delbeke, the lead drafter of the ETS Directive, 
provided further details on the decisions the EU made for 
ETS, building upon the conversation the Senator had with 
Commissioner Dimas.  Delbeke stated his belief that the draft 
Waxman-Markey climate legislation is more comprehensive in 
areas covered than the EU's Climate and Energy Package.  On 
the Package, Delbeke explained that there are several areas 
where the Commission still needs to develop implementing 
rules, most notably on allocation of emissions allowances, 
particularly among the power sector and energy intensive 
industries.  He detailed that in Phase I of ETS, which ran 
from 2005-2007, the number of allowances available was off by 
1-2% but said that Phase II, which began in 2008 and runs 
through 2012, will not have that problem.  The Commission is 
much more confident in its numbers, and after the first year 
of Phase II, emissions in the EU are down. Despite the 
financial crisis, Delbeke argued that ETS was responsible for 
most of the reduction.  (Note: Several independent agencies 
have evaluated the EU's emissions reductions in 2008, and the 
majority believes that ETS had much less to do with the 
reductions than the economic downturn.  End note.) 
 
¶5. (SBU) Delbeke said that for the power sector, the 
Commission wanted 100% auctioning beginning in 2013, as there 
is a strong fear that free allowances would lead to windfall 
profits as were seen in Phase I of ETS.  However, during 
negotiations, Poland argued successfully that its strong 
dependence on coal (over 90% of electricity production) 
combined with the fact that the new Member States had not yet 
privatized their power sectors called for a phase in of 
auctioning of allowances.  To keep their economies afloat, 
the new Member States said that their companies "need 
windfall profits."  As such, several new Member States have 
the option to give away free allowances to their power sector 
beginning in 2013.  Delbeke believes, however, that there are 
good reasons to assume these Member States will not choose 
that route, as all revenues from auctions go to the Member 
States.  Despite the free allowance option, all new 
installations after 2008 will not qualify as an effort to 
stimulate modern investments in clean technology.  Money is 
therefore available to incentivize carbon capture and storage 
(CCS), and Poland for example, has volunteered to implement 
two CCS pilot projects.  Turning to nuclear, Delbeke 
explained that there is no nuclear policy at the EU level. 
Since there is a premium in ETS for the use of nuclear as a 
zero-carbon source of power, he expects many Member States 
will move in that direction, Germany included, despite its 
plans to phase out nuclear by 2020. 
 
¶6. (SBU) When asked about offsets, Delbeke said that there 
should be a move away from CDMs for emerging economies.  He 
argued that there needs to be a distinction between 
developing countries.  CDMs should continue in least 
developed countries (LDCs) and small island developing states 
(SIDS), but developed countries should move to a sectoral 
crediting mechanism for the major emerging economies as a 
stepping stone to a carbon market.  At the least, CDMs should 
not be offered to these countries if they do not sign up to a 
global climate agreement.  However, Delbeke said that we 
should not look only internationally for offsets, and that 
many efforts should be undertaken domestically.  Noting the 
large number of domestic offsets proposed in the draft 
Waxman-Markey cap and trade bill (50%), Delbeke said that 
domestic offsets will be allowed in the EU beginning in 2013, 
but there are no specific definitions at the moment.  There 
will therefore be an opportunity to discuss if the domestic 
offset provision remains in the final Congressional 
legislation. 
 
----------------------------- 
Discussions with Point Carbon 
----------------------------- 
 
BRUSSELS 00000592  003 OF 005 
 
 
 
¶7. (SBU) Henrik Hasselknippe, Point Carbon's Global Head of 
Carbon Market Analysis, discussed allocation of carbon 
credits and carbon offsets, both in the EU and the United 
States.  With some exceptions, the EU is planning to move to 
100% auctioning of carbon credits by 2020.  The EU would like 
to see one centralized auction, managed by one institution, 
but in reality, there could be up to 27 separate national 
auctions in addition to a centrally run auction.  According 
to Hasselknippe, the legislative process for determining 
emissions targets and specific sectors should be separated 
from the administrative process of distributing allowances to 
ensure that the environmental goals of the legislation are 
not minimized by debates over how to auction or distribute 
allowances.  When asked about whether other contributors to 
global warming, such as hydrofluorocarbons (HFCs) and black 
carbon, should be under a separate scheme, Hasselknippe 
expressed his belief that it would be best to have them 
included in the same cap and trade system. 
 
¶8. (SBU) Turning to offsets, Hasselknippe said that the EU 
allowed too many offsets in Phase II, driving the price of 
carbon allowances down.  Although the Waxman proposal offers 
80% credit for offsets purchased, Hasselknippe believes it 
would be easier to impose limits on the total number of 
allowed offsets and let the market set a price.  Along the 
same lines, he pointed out that Waxman's proposal is generous 
on offsets (2 billion total allowed, 50% domestic) and he 
argued that those numbers will be impossible to achieve in 
the United States.  When asked about forestry offsets, he 
claimed that they are difficult to verify in contrast to the 
installation of new technologies.  Hasselknippe pointed out 
that if there is heavy reliance on forestry offsets in the 
U.S. system, it will be hard to link with the EU system. 
Responding to the possible inclusion of domestic agriculture 
offsets, Hasselknippe pointed out that the EU has yet to 
accept anything like that as an offset, which could create 
problems for linking the two systems. 
 
--------------------------------------- 
Discussions with Commissioner Verheugen 
--------------------------------------- 
 
¶9. (SBU) Commissioner Verheugen described the approach the EU 
took to protect energy-intensive industries from carbon 
leakage.  Overall, Verheugen argued, in the present economic 
crisis it is important to combine short-trm measures with 
long-term objectives.  The crisis can be used as an 
opportunity to convert to a low-carbon economy through the 
use of recovery funds to improve infrastructure and energy 
efficiency.  However, Verheugen was quick o add that, we 
must be sure to protect energyintensive industries from 
international compettion when environmental regulation is 
introdued.  Therefore in its ETS, the EU found a solution 
where certain sectors can receive free allowances, 
specifically steel and aluminum; chemicals; glass and 
ceramics; cement and lime; and paper and pulp.  The full list 
will be decided by the end of 2009, and industries not on the 
list will be able to present their cases for why they believe 
they are at risk for carbon leakage.  Although Verheugen and 
DG Enterprise pushed for all companies in these industries to 
receive 100% free allowances, the final legislative decision 
only provides the best 10% of companies in a sector by 
emissions with 100% free allowances.  The best 10% is 
determined by a benchmarking process through analysis of 
commercially and publicly available data.  Those companies 
that do not meet the best 10% benchmark will be required to 
purchase some of their allowances.  (Note: Several officials 
throughout the visit noted the high administrative burden 
associated with the benchmarking scheme.  For example, there 
could be up to 60-70 benchmarks depending on production 
processes, with chemicals alone requiring over 40.  End note.) 
 
¶10. (SBU) In addition to the EU's treatment of 
energy-intensive industries, Verheugen took advantage of the 
meeting to promote the inclusion of energy and climate in the 
Transatlantic Economic Council (TEC).  Verheugen was quick to 
note the importance of using the TEC to harmonize regulation, 
and he said that he hopes that Congress can play a larger 
role in the TEC under the Obama Administration.  He argued 
that as the EU and United States develop environmental 
legislation, the new Energy and Climate Change rubric under 
TEC can be used so "we write rules together."  (Note: A new 
Lighthouse project for Energy and Climate Change in the TEC 
was proposed by the U.S. side in 2008.  It appears set to be 
adopted this year, and is focused on innovation and 
regulation of key sectors for addressing energy and climate 
 
BRUSSELS 00000592  004 OF 005 
 
 
change, including biofuels, CCS, energy efficiency, 
automobile emission standards, and air traffic management as 
a way to reduce aviation emissions.  End note.) 
 
----------------------------------- 
Roundtable with European Parliament 
----------------------------------- 
 
¶11. (SBU) MEP Avril Doyle (Ireland, Center-Right EPP-ED 
group), who guided ETS through the European Parliament, 
highlighted the difficulties Senator Bingaman would likely 
face during U.S. climate legislation negotiations.  MEP Doyle 
was joined by MEP Giles Chichester (UK, EPP-ED), EPP-ED 
Spokesperson in the Industry and Energy Committee, and MEP 
Anders Wijkman (Sweden, EPP-ED), who led the Renewables 
Directive in the Environment Committee.  While explaining 
that the EU "is not going to tell (the U.S.) what to do," Ms. 
Doyle made clear that if the Parliament "can help from (its) 
experience," it will do so.  She requested that Senator 
Bingaman ensure that a future U.S. cap and trade system would 
be able to link with ETS.  She said such an interconnected 
EU-U.S. system, with the EU and the United States "singing 
from the same hymn sheet" would be "irresistible" to the rest 
of the world and would facilitate the conclusion of an 
agreement in Copenhagen in December. (See Ref B.) 
 
¶12. (SBU) Doyle echoed sentiments heard earlier in the day 
that EU measures to prevent carbon leakage could apply to 85% 
of EU industry, but only in case no global climate agreement 
is achieved.  Responding to comments that U.S. coal states 
were calling for a two-tier bill to take into account their 
specific situation, Doyle explained that the Eastern EU 
member states, which also rely heavily on coal, were fully 
covered by the EU ETS but had until 2027 to introduce 100% 
auctioning of emission allowances.  She predicted that most 
of these states would not wait until 2025 but would introduce 
full auctioning at an earlier stage, to use the auctioning 
revenues for investment in green technologies. 
 
¶13. (SBU) Both Wijkman and Doyle explained that the 
possibility under the EU ETS to use offsets for up to 50% of 
internal CO2 emission reductions had been quite 
controversial, because there were many uncertainties 
regarding the effectiveness and quality of these offsets. 
Doyle said that the UN should be able to rapidly develop 
rules for quality proofing of CDM projects to ensure only 
"gold standard" projects can be used as offsets.  She asked 
Senator Bingaman to consider introducing an "enabling clause" 
into the U.S. legislation to allow U.S. industry to make use 
of such quality-proofed offsets.  Doyle and Wijkman advised 
the Senator against introducing price floors or ceilings on 
the price of carbon, as it would seriously limit the 
possibilities for linking the EU and U.S. systems. 
Addressing the possibility that the United States will 
include domestic agriculture offsets in its legislation, 
Doyle explained that in the EU, the "non-trading" sectors 
such as agriculture, transport, waste, and heating/cooling of 
buildings were excluded from ETS, and therefore could not 
participate in any offset projects under current EU 
legislation. 
 
---------------------- 
EU Institutions Dinner 
---------------------- 
 
¶14. (SBU) In a dinner hosted by USEU MinCouns, Senator 
Bingaman had the opportunity to engage with four senior EU 
officials knowledgeable in the ETS legislative process. 
Philippe Leglise-Costa, Deputy Permanent Representative of 
France to the EU and lead mediator on the Climate and Energy 
Package, led the conversation, providing a very candid 
perspective.  Leglise-Costa was joined by Jaroslaw Pietras, 
Director General for Environment in the EU Council 
Secretariat; Nancy Kontou, Head of Cabinet for Commissioner 
Dimas; and Jonathan Evans, British MEP and Chairman of the 
Committee for Relations with the United States. 
Leglise-Costa focused on two key points in the development of 
any cap and trade legislation: emissions targets and carbon 
prices.  With regard to emissions targets, he argued that it 
is imperative that the legislation be firm as to the exact 
target and the date it comes into effect.  Any flexibility 
allows for gaming of the system.  On carbon prices, he said 
there needs to be some way to deal with extreme volatility, 
but the introduction of price ceilings or floors is not the 
way to go.  The market will handle itself, and the addition 
of bureaucracy will only serve to increase uncertainty. 
 
 
BRUSSELS 00000592  005 OF 005 
 
 
------- 
Comment 
------- 
 
¶15. (SBU) Senator Bingaman's visit to Brussels was 
exceptionally well received by the EU interlocutors.  The EU 
is proud of its Climate and Energy Package, and specifically 
proud of ETS.  As such, the opportunity to provide insights 
and recommendations to a key U.S. Senator has helped to 
advance U.S.-EU relations. 
 
MURRAY 
.