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DE RUEHBS #0708/01 1391452
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R 191452Z MAY 09
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 BRUSSELS 000708 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG EUN EWWT KGHG SENV TPHY TRGY
TSPL 
SUBJECT: EU OFFICIALS VIEW OFFSETS AS POSSIBLE OBSTACLE TO 
LINKING CARBON MARKETS 
 
REF: BRUSSELS 259 
 
¶1. (SBU) Summary:  EU Commission officials, EU Parliament 
officials, NGOs, and industry are looking to the United 
States for development of a comprehensive cap and trade 
program that can benefit from the EU's experience with its 
own Emissions Trading Scheme (ETS).  The use of carbon 
offsets in the system is of particular interest, because 
several European officials believe a transatlantic divergence 
on how offsets are applied could be the largest obstacle to 
linking systems in the future.  Knowing that the United 
States will likely lead on the issue of climate change in 
talks leading up to Copenhagen in December, the EU is glad to 
share its experiences with offsets and the lessons it learned 
with ETS.  Several key themes emerged in conversations: 
 
     -- most European officials anticipate some form of 
transatlantic carbon market in the future, and some in DG 
Environment consider this step to be more important possibly 
even than an agreement in Copenhagen; 
 
     -- the U.S. focus on the use of domestic agriculture and 
forestry offsets could prove to be a contentious issue when 
engaging with the EU and ETS; and 
 
     -- any offset program must be tapered and balanced; that 
is, the total number of offsets permitted must not represent 
too large a portion of the emissions cap, and this proportion 
should decrease over time.  End Summary. 
 
-------------------------------------- 
Linking the U.S. and EU Carbon Markets 
-------------------------------------- 
 
¶2. (SBU) Damien Meadows, Deputy Head of Unit in DG 
Environment and one of the architects of the EU's Emissions 
Trading Scheme (ETS) Revision Directive, says that the 
European Union's main climate goal, possibly more important 
than an agreement in Copenhagen, is the creation of a global 
carbon market, beginning with an OECD-wide market and 
eventually expanding to include major emerging economies (see 
reftel).  Recognizing this will take some time, Meadows 
thinks that the first step in the process should be to link 
ETS with a U.S. system expecting Japan and others to follow 
our lead.  A key aspect of linking cap and trade systems is 
establishing consistency in the application of carbon 
offsets-emissions credits received normally through financial 
support of projects to reduce emissions, either domestically 
or in third countries. 
 
¶3. (SBU) Meadows recommends a working group between 
implementing experts in DG Environment and the U.S. 
Environmental Protection Agency (EPA) to coordinate work on 
clean development mechanisms (CDMs) and sector-based 
crediting approaches to minimize future divergence.  Tomas 
Wyns, policy officer for the Climate Action Network, agrees 
that linking the two systems will be an important issue, but 
thinks that offsets present a challenge.  Unlike the EU, 
which is pressing for a transatlantic market as soon as 
possible, Wyns does not think that linking needs to be 
rushed; it is more important and less expensive if the market 
works correctly. 
 
¶4. (SBU) To link the U.S. and EU systems, Meadows believes 
that it will be necessary for U.S. and EU regulators to 
accept offsets permitted under the other's schemes. 
According to Meadows, the United States' focus on the use of 
domestic offsets should be modified to be more open to 
projects in developing countries while the EU should be more 
critical of the projects it accepts.  Meadows recommends a 
flexible system that will allow for adjustments as the U.S. 
government discovers what works and what does not.  Henrik 
Hasselknippe, global carbon market analyst for Point Carbon, 
noted that if there is heavy reliance on forestry or 
agricultural offsets in the U.S. system, neither of which the 
EU has accepted, the divergence will be difficult to overcome. 
 
---------------------------------- 
Domestic vs. International Offsets 
---------------------------------- 
 
¶5. (SBU) A key point highlighted by most officials is the 
difference in importance given to domestic offsets in U.S. 
draft legislation and the EU scheme.  Meadows explained that 
unlike U.S. companies, European firms generally have not 
expressed interest in domestic offsets.  Also, the EU has 
preferred to avoid uncertainty related to measuring domestic 
agricultural offsets, finding it cheaper to fund CDM projects 
 
BRUSSELS 00000708  002 OF 003 
 
 
in developing countries.  Europeans have observed that U.S. 
farmers believe that agricultural offsets will benefit them, 
but Meadows cautions the United States to consider what might 
happen if the system turns around, and agriculture becomes a 
source rather than a sink, for example during a drought. 
Under this scenario, he questioned if farmers would then be 
required to pay into the system.   The EU does not consider 
agricultural offsets to be cost-effective, given the 
technical and administrative burden required to make precise 
emissions measurements on small farms.  However, Meadows 
recognizes that the United States has more industrial, 
large-scale farms where measurement is much easier and where 
accounting for methane emissions is currently under way. 
Despite this difference, Meadows suggests that the United 
States use policies already in place, such as linking current 
farming subsidies to better practices, instead of offering 
offsets. 
 
---------------- 
Forestry Offsets 
---------------- 
 
¶6. (SBU) There is no clear consensus in Europe as to how to 
address forestry.  The EU has encountered a great deal of 
pressure to allow forestry credits to be used as offsets, 
which it has thus far resisted.  Meadows points out the total 
number of available forestry credits dwarfs the ETS emissions 
cap, and because prices for forestry projects are cheap, 
which can lead to windfalls and speculation, both of which 
distort the market.  Kavita Ahluwalia, Parliamentary 
Assistant to Member of European Parliament (MEP) Avril Doyle 
(Ire, EPP-ED), mentioned that MEP Doyle generally is opposed 
to forestry offsets.  However, since deforestation is a big 
problem, she believes that perhaps a small number of credits 
in the U.S.  system would not be an issue.  By contrast, 
Tomas Wyns argued that the best method is to use a 
market-linked approach and invest auction money in 
reforestation, instead of providing credits. 
 
--------------------------------------------- ----- 
What Europeans Want in a U.S. Cap and Trade System 
--------------------------------------------- ----- 
 
¶7. (SBU) The EU will be looking to the United States for 
leadership on the climate issue.  Although Meadows finds much 
in the current proposal by Congressmen Waxman and Markey 
laudable, he is concerned about the large number of offsets 
available, and thinks it would be better if the United States 
reduces the amount over time.  Despite that criticism, 
Meadows said the Commission is taking some cues from the 
draft bill, explaining that as the EU moves toward ETS' Phase 
III beginning in 2013, it is considering discounting CDM 
projects on a 5:4 ratio, as proposed in the draft.  Meadows 
also said that the EU might rule out what it considers to be 
"inappropriate" projects; for example, if China does not 
ratify a global climate agreement, it will not be granted any 
more CDM projects. 
 
¶8. (SBU) In crafting a U.S. cap and trade system, Vicky 
Pollard of DG Environment warns that the United States cannot 
just use sticks to press companies into compliance.  CDM 
projects will be seen as carrots and welcomed by businesses 
struggling to upgrade their equipment.  However, Pollard 
cautioned that the United States and the EU must be careful 
in developing their respective CDM programs to be sure that 
developing countries do not take advantage of loopholes.  For 
example, Pollard explained that Nigeria has slowed its 
domestic CO2 emissions legislation so it will be chosen for 
more CDM projects.  She believes that such unintended 
consequences will be more likely if the United States does 
not craft legislation carefully. 
 
¶9. (SBU) Several European officials argue that a successful 
offset program should be graduated and balanced, with more 
offset credits allowed at the beginning, slowly lowering the 
total amount allowed.  Hasselknippe cautions against allowing 
too many credits at the beginning and cited the example where 
the EU has allowed too many offsets, driving down the carbon 
price.  Though the draft Waxman-Markey bill limits the value 
of offsets by offering only an 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.  He also believes that the Waxman-Markey 
proposal is too generous on offsets and those numbers will be 
impossible to find in the United States. 
 
¶10. (SBU) Wyns stated that the United States must find a 
balance between what is feasible and what is necessary. 
 
BRUSSELS 00000708  003 OF 003 
 
 
"Offsets can play a valuable role" in striking this balance, 
by allowing for flexibility to achieve the cap target. 
Although there are lessons to learn from the EU experience, 
Wyns says the "best way to learn is by starting a system" 
because the economic and environmental realities in the 
United States are inherently different from those in Europe 
and will naturally achieve different results. 
 
MURRAY 
.