• 

MR~ENT• 

._., •r tH:'-!'"SlDr-~r LI"'S s,...r-~ . l:H. ) 1\0:. C.l,l f1f\ .... r_Lr~ 

I o.- (o- C){ 

THE WHITE HOUSE 

WASHINGTON 

October 5, 199.7 

This is a decision memo on climate change. I am forw~rding it 

to you now because you may want to look it over before the . 

. White House Conference on Monday.· However, you should 

under no circumstances actually c!teck off a decision before 

t!te White House Omference is held, since thai Conference is 

intended to he a forum thai is still able to inform your policy · 

thinking. In addition, since the memo was just finished late · 

tonight, other relevant White·House staff,· like Erskine, Rahm, · 

John Podesta and John Hilley, haven't had a chance to comment 

on it yet. I also expect that you may want to have one more 

. 1 meeting on this subject before reaching a final decision. . . 

· Be(;4use of the late hour at which it was finished, and the fact 

/' ~hat it is not yet ripe for decision, Phil hasn't done a summary of . 

. · It yet. . 

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. ~ 

THE WHITE HOUSE 

WASHINGTON 

T;if ~RESiDE~T H~S SEEM. 

to -G-47 

· ·. · ~ . '\ October 4, 1997 

MEMORANDUM FOR THE ~IDENT . '~ . 

. 1J () .. FROM: GENE SPERLING 

KATHLEEN McGIN1Y 

DANIELTARULLO 

-Ji: (~( ~. . . 

. JIM STEINBERG 

TODD STERN 

\)~,f'\ ~' . 'v '~ . -( 

SUBJECT:· Climate Change Recommendations 

Together with principals, ·we have worked hard over the past several weeks to put 

together option~ for you on climate change. As we note below, we h~ve reached consens~s in 

many areas -- such as our general stance towards developing countries, and a preliminary 

. package of policies that we could embrace independently ofthe international negotiations. But 

reflecting the magnitudes of the lradeoffs involved in this issue, we have not been able to reach 

full Cabinet consensus on some fundamental aspects of our policy stance. ·This memorandum 

therefore presents three different plans, with their supporters and their pros and cons. 

The memorandum is organized into four sections: . . 

I. Summary of difficulties we face 

II. . Developing country policy 

III. Common components of all three options · 

IV. The three options 

I. .SUMMARY OF DIFFICULTIES 

As we have emphasized in preVious memos and meetings, the complexity of the issue is 

reflected in fou·r different constraints: . 

• 

• 

Environmental. ·This issue is the premier environmental challenge of our generation. The 

. environmental communicy is pushing for strong, early action to reduce greenhouse gas 

emissions. 

Diplomatic. Much of the world is calling for deep, early ~missions reductions. The 

European Union is proposing I 0-15 percent cuts from 1990 emissions levels by 20 I 0; 

Japan is proposing 0-5 percent cuts in the same period. . · 

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• Economic. Costs are substantially higher the earlier emissions. reductions are required. 

The cost of deep, early emissions reductions could be very large~ 

. • Business/Labor/Hill. Aggressive approaches would expose us to v._rell-financed 

campaigns -:- by major corporations and labor unions -- that demagogue our policies as 

excessively costly and as a large energy tax increase. 

In essence, the three different plans represent different views about the importance of the 

.first two constraints relative to the second two constraints: 

· • The first plan moves away from the 1990 target and substitutes a lower-cost approach for · 

achieving emissions reductions. This strategy emphasizes the third and fourth constraints. 

by allowing a more gradual adjustment period. 

• The second plan co~its the nation ~o 1990 by 2015 or 2020 -- while capping the 

economic cost. It tries to address all four constraints, but could be viewed as riot meeting 

any of them adequately.· 

• 'The third plan, which involves a commitment to 1990 levels by 20 I 0 or 2015 while 

capping the cost at a higher level than under the second plan, emphasizes the importance 

,of our environmental responsibilities and maXimizes our chances for (but does not in any 

·way guarantee) a successful agreement at Kyoto. 

II. DEVELOPING COUNTRY POLICY 

Given domestic political realities and the underlying environmental imperative, your 

advisers favor a tougher line on developing countries than we have taken to date. It is important 

.to emphasize that developing countries are unlikely to agree to even our current demands, let 

alone tougher ones, in the foreseeable future. Furthermore, we will get little (if any) support 

from other developed countries for our position: The position recommended by your advisers on 

this issue could very well endanger an agreement being signed this December in Kyoto . 

. In particular, your advisers favor pushing for a"Kyoto Mandate" this December. The 

··mandate Would set the terms for a new round of negotiations with respect to: 

\ 

• Binding emissions targets for key developing countries (China, India, etc.); and 

'-r, • A "graduation mechanism," under which countries automatically aSsume additional 

'It~~ . obligations as they develop. · 

~V" ~"'Developing country targets would be less stringent than those for developed countries~ht 

~,~~ts 2 

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· There is some disagreement among your advisers on exactly how to proceed as we seek 

. greater commitments from developing countries. 

• 

• 

Under the "two-step approach," which is favored by the State Department, Energy .. 

Departmentand your environmental team, we would try to reach agreement among 

developed countries in Kyoto, but not seek to implement that agreement until 

negotiations with respect to developing country commitments are complete (several 

years, at a minimum). One possibility would be for you to issue an authoritative 

statement that we would not submit a treaty for ratification until the Kyoto Mandate was 

met. Another possibility would be to take a formal reservation to any agreement in 

Kyoto for the same purpose: 

Underthe "one-step approach,'~ which is favored-by some on the economicsteam, we . 

would decline to adopt an agreement in Kyoto, and not adopt any new agreement with 

respect to developed COuntry commitments until developing COUntry commitments are 

agreed as well. . 

The two-step approach offers the possibility of maintaining momentum in the 

international negotiation$ (although even this approach will provoke a negative reaction abroad 

and c"ould preclude an agreement in Kyoto). The cost is that we will have comrriitted to a target 

and timetable before we know what we'll get from developing countries. It is unclear how the 

Senate would reactto such a strategY. 

Our best approach may be to maintain some ambiguity about our precise intentions: to 

emphasize that we won't bring l?ack a treaty without real co.l111Iiitments from the developing 

countries. Since we don't know precisely how other countries will react to the one-step or twostep approach, it may be best to emphasize the generai point -- and to maintain some flexibility 

for our negotiators in Kyoto. 

Regardless of our approach, however, demanding binding targets from key developing 

countries implies that we will not be ratifying any international climate agreement for at least 

several years. Furthermore, insisting on a Kyoto Mandate may produce an extremely negative 

reaction abroad, and that reaction could preclude anyagreement in Kyoto even under the twostep approach. 

· ·III. COMMON COMPONENTS OF ALL THREE PLANS ··· 

In addition to toughening our stance on developing countries, your advisers agree that the 

following policy components should form part of any plan on climat~ change: 

1. Tax cuts 

There is much interest in a Climate Change Tax Plan package of tax cuts in the near term 

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... 

···~:.&;. . Ct· . : . 

to spur energy efficiency and lower-carbon technologies. But there are two critical questions 

• about such a tax package: ·· 

• An overall strategic question, give11. the budget agreement, is whether we want to offer tax 

cuts in any area. A potential danger with proposing a Climate Change Tax Plan -- . 

emphasized in particular by Secretary Rubin -- is that we could open up a bidding war 

over tax cuts generally. If we decide to include tax cuts in our FY 1999 budget anyway, 

this is clearly less of a problem. 

• A specific question, if we decide to offer a tax cut package, is how best to design the 

package. Treasury is working with DOE, EPA, and other agencies to puttogether a 

package oftax cuts amotinting to perhaps $1.5 billion per year. But accordint to Treasury. 

staff,_ the options are unlikely to produce carbon reductions for less than $1 00 per ton. 

Someofthe prelimin~ ideas include: tax subsidies to convert coal-fired power plants to 

gas; extension of the existing tax incentive for wind a.D.d "closed loop'' biomass energy; tax 

credits for purchases of "superstar" energy~efficient devices and fuel-efficient cars; investment 

credits for en~rgy-effici~rit buildings; and an expanded research tax credit for energy-efficiency 

research. The package will be further developed and refined over the next week. The goal is to 

be prepared in case you want to announce the broad outlines of a tax cut plan when you 

announce our overall policy package later this month. 

2. Federal R&D effort 

Your advisers support an aggressive Federal technology and R&D _effort, including an 

additional $500 million per year starting in FY 1999 and ramping up to an additional $1 billion 

by FY 2003. The Department ofEnergy's 5-Labs study, the Department of Energy's 11-Nation. 

Labs draft study, and the recent report from the President's Committee of Advisors on Science 

and Technology (PCAST) have all studied potential technologies that could help to reduce the 

· cost of carbon emissions reductions. · 

The effort would focus on promising areas including: 

• · Energy efficient equipment (e.g., a public service campaign to attract attention to the 

"Energy Star" label); 

• 21st Century Housing (streamline federal, state, and local building and utility regulations 

in ways that encourage innovation in construction); 

• Expanded Partnership for the Next Generation Vehicle (expand work on the next 

generation vehicle technologies including fuel cells; and exp~d PNGV to include iight 

trucks/sport -utility vehicles); 

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. . . 

• . PNGV for Heavy Trucks (partnership Wi.th engine manufacturers to double the efficiency · 

of heavy-duty trucks for civilian and military applications); 

• Industries ofthe Future (enhance industry/government research partnerships in areas such 

as chemicals, aluminum, forest products and steel manufacturing techllologies); and 

• Renewables R&D (expand research partnerships in key renewable technologies such as · 

. wind, photovoltaics, geothermal, biomass and hydropower to accelerate cost reductions). 

·~··· ....... ·· 

. DOE and EPA believe that such a package could have a substantial effect on carbon 

ssion~ by 2010. Others believe that the_packa~e will be ?eneficial, but that its results will 

.manifest themselves over a longerpenod oftime. : . -

3. Federal procurement system 

The federal government spends more than $7 billion per year on energy. While Federal 

energy consumption is a tiny fraction of the total U.S. energy consumption, we are still the ·. 

· • ination's single largest consume~ of ener. . Significant strides have already .. been rna. ~e during the 

~ pas eca e·~- energy consumptJ.on per square foot m federal buildmgs, for mstance, IS down by . 

15 percent.from the 1985 level, and eriergy use in federal vehicles (both civilian and military) is 

· _.down about 27 percent from 1985. We can still do rriore, for example by expanding the use of 

, "Svc- · , Energy Savings Performance Contracts, reinventing federal procurement, tak.!ng a "sustainable 

~'f... design" approach to federal facilities, and developing more efficient military propulsion systems. 

~~~~ (This effort could include a 6-12 month review of existing Executive Orders on purchases and a 

~/' \directive to federal agencies to prepare greenhouse gas reductions plans. 

· 4. Industry out-reach 

"'v Several industries have approached us recently to offer cooperation in reducing · 

greenhouse gases. Steel, for example, believes it could reduce emissions 10 percent below 1990 

levels by 201 0 with a sectoral plan. The cement industry believes it can significantly reduce 

. . . 

Your advisers recOmmend that you ask leading industrial sectors to prepare greellhouse 

gas reduction plans over the next 6-12 months. these plans could help inforin our domestic 

implementation strategies, including the design of our domestic emissions trading program. 

It could also help build a constituency for aCtion among moderate business groups. 

5. 5-Year Science Reviews 

· \'v ·Under the existing climate treaty, the Intergovernmental Panel on Climate Change is 

charged with reviewing the state of the science every five years'. Several corpor~te and 

Congressional leaders have suggested supplementing these reviews with additional studies by the 

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··~·.· National Academy of Sciences or your Committee of Advisors on Science and Technology .. 

(PCAST), on a similar 5-year cycle. 

6. Emphasize long-term goal of stabilizing concentrations 

. - ' ' 

The goal of the existing climate treaty is "to stabilize concentrations of greenho-use 

gases in the atmosphere at levels that avoid dangerous anthropogeriic interference with the 

· ~limate system." However, the Parties to the climate treaty have never defined precisely what 

~~levels ~re dangerous: Support for_· a spe~i?c, long-term. ~oal would _be w~ll-received in both 

-~ ~ the busmess and envrronrnental commuruties. Many busmess constituencies have advocated -

~ focus on the long-term goal, to assist with planning. Environmental constituencies believe · 

. · such a focus would help educate the public. . . . -· . .. · · · · . · 

Your advisers believe the United States should announce support for a specific, long-term 

al. The task of defining the goal (e.g.; to keep concentrations of greenhouse gases from ·. 

~ificantly exceeding ~ce pre-industrial levels, or roughly_ 55~ ppm) ~ould be ~signed to the. 

at1onal Academy ofSc1enc~s as part of the first five-year screntific review mentiOned above. 

7. Global Environmental Facility. 

. . 

. · . The United States is significarttly in arrears to the Global Environmental Facility, whi~h 

'A<~ §· sists developing countries in reduciiJg greenhouse gas emissions. (Of the $430 million pledged 

.. V>t). for FY93-FY97, we have been able to contribute roughly $185 million.) These arrears reduce 

leverage with developing countries in negotiations under the climate treaty. ·. ' . ' 

' . - ' 

. · Your advisers recommend you reemphasize your strong commitment to the Global 

"v' ~· 

-~-

I.~onment FaCility and s~pport cleariri~_U.S. arrears at the earliest pract~cal_ da-te. · 

dmg for the Global Environment Facthty should be pursued as a top pnonty. · ' ' 

8. Bilateral dialogues 

We are pursuing bilateral dialogues with key developing countries (including China, 

Brazil .and India) to promote clean energy~ Often, interest in energy efficiency and renewable 

energy is greater in these settings than in the politicized, multilateral setting of the Climate 

Convention. Discussions focus on regulatory structures for clean energy development,. 

technical assistance, export credit and related items. 

You or members of your Cabinet will sign several agreements of this type during your 

upcoming trip to Latin America. Work is underway in' this area in connection with the Jiang 

Zemin state visit later this month: Your advisers recommend that we pursue these dialogues 

ith increased effort in the years ahead. 

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. f 

9. Other possibilities 

Other possible elements, which have not yet been full ve e a renewable 

portfolio standard and other carbon-reducing policies · electricity deregulation National 

·Environmental Policy Act (NEPA) guidance with respect o g ee . enuss10ns; 

common energy~fficiency guidelines for export credit agencies; a corporate greenhouse gas 

·reporting system modeled after Toxic Release Inventory; and streamlined standards to improve 

energy efficiency, where appropriate . 

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IV. THREE OPTIONS 

PACKAGE I 

OVERALL STRATEGY 

• · . The lbng-term goal of the treaty is to stabilize concentrations of greenhouse gases in the 

atmosphere at a level that will prevent dangerous anthropogenic interference with the· 

climate system. This goal could be achieved with, concentrations at or somewhat above a 

doubling of pre-industrial levels in the next one hundred years. 

• The strategy here is to propose-the least-cost approach, both in terms.oftiming and 

developing countries, to stabilizing concentrations over the long run. The logic is that 

only by proceeding in this least-cost approach could we gefdomestic agreement to 

undertake a serio~ climate change policy. . 

TARGETS AND TIMETABLES 

• Concentrations can be stabilized through the following targets and timetables: . . . . . . 

.. 

• 

• 

Reduce emissions growth in the United States in the near terin (for example, 

growth from2000-2010 less than growth o-ver 1990~2000); then · 

Eliminate emissions growth in developed countries I 0 to 20 years after treaty is 

signed (e.g., 20 I 0-2020); then 

Reduce emissions levels in. developed countries gradually to reach -_ and thed to 

decline below- 1990 levels in later years to be decided,-stabilizing 

concentrations .. 

This timetable begins effective action soon to establish Presidential leadership . 

The schedule of reducing emissions and emissions growth is determined by the degree of 

~co nomic cost that is ~cceptable~ coupled with the rate of improvement in emissionsreduction technologies that results from increases in carbon prices. 

As in the second plan (see below), there would be periodic review of the underlying 

sci~nce; the data on the path of emissions, and the economic impact, to allow for 

adjustments in the policy . 

. CI. ns.ist o~ ~e ~urrent U.S: ~exibilit~ ~ositions of international trading, ~ultiple m~lti-year ·- _ targets, JOtnt ImplementatiOn (subsidies of non-carbon energy sources m developmg _ 

· ·. countries), banking, and borrowing. . · · . · 

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I 

I· 

DEVELOPING COUNTRIES 

• The goal is the least-cost global approach to stabilization of carbon concentrations in the 

atmosphere. 

• Negotiate and begin a new Kyoto Mandate, requiring developing country .participation (in · 

stages), starting with more-advanced (Annex B) developing countries, with graduation as 

countries develop. Developing .countries commit to reduce the rate of growth of 

emissions consistent with stabilizing carbon concentrations and continued economic 

growth, with ceilings on costs. 

• One-step: the U.S. will not initial agr~ement until Annex B countries have binding· 

commitments. 

DOMESTIC IMPLEMENTATION 

c• Develop a tradable permits system, with auction of all permits (rather than 

· grandfathering), in the near term; impose the system at a level of emissions.near the 

baseline (for example, with an implied permit price of perhaps $10 per ton). The system 

could take effect while the Kyoto Mandate was negotiated, to empha5ize U.S. leadership· 

and credibility; or it could be postponed until the treaty was ratified, as an incentive for 

developing-country compliance. (A carbon tax, if feasible, would be an alternative 

method of implementation) 

• Change the number of permits in small, gradual, predetermined steps, based on economic 

cost and aggressive technological progress (with the implied permitprice rising to 

perhaps $22 per ton or more by 20 15). As in the second plan below, review domestic · 

implementation system periodically. 

• A portion of funds raised would be used for cost-effective technology research and 

diffusion programs, including basic research. The bulk would be available for a range of 

. domestic priorities (tax relieffor individuals; business investment incentives; the solution 

to the fiscal effects of the demographic imbalance; infrastructure; etc.) chosen to make 

the program attractive. 

• Begin a series of voluntary industry programs to develop-plans to meet the targets. 

• Provide for banking and borrowing to deal with short-term fluctuations. Borrowed 

. . permits would be issued at a premiuin cost, and banked permits could be resold later at 

higher prices. . . . 

· • Provide economic growth instirance or a cost cap on permits that would allow the sale of 

· additional permits. The price would be set consistent with our estimate of the acceptable 

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. . 

economic cost, and,wotiid be high enough to encourage emissions-efficient investment 

choices in the near term .. (If the cost cap were in effect over an extended period, the 

. target would not be met.) . 

· • These policies are market-oriented. Therewould be no inefficient, command-and~control 

regulations used to reduce emissions. 

•. Include coinmon components listed above. 

SUPPORTERS 

Larry Sllllimers, Janet Yellen, FrankRaines, Secretary Daley, and Secretary Herman. 

PROS 

. . 

• The principal benefit of this approach is· that it reduces ~he cost of beginning :to address 

climate change by allowing more time for the economy to adjuSt gradually to the new 

constraints being placed on it. 

• Business and labor groups .would support this approach. 

• The approach would also be strongly supported by leading economists, such as William 

Nordhaus of Yale. It is consistent with the economics consensus on the least..:cost path to 

the environmental goal of stabilizing concentrations in the very long run. 

CONS 

• This approach would be· completely unacceptable to the environmental and international 

corru::nunities. We could respond that if the emissions path it envisionsis met, it would 

stabilize concentrations and thll.s produce the same climate benefits as other paths that are 

substantially more ecOnomically costly .. 

• 

• 

• 

This option depends on steep -- and possibly implausible -- emissions reductions in 

distant decades to achieve our environmental goals. 

It would be awkward to reconcile this approach with previous statements made by both -

you and the Vice President. We could resporid that we are starting over with a new 

Kyoto Mandate, and that part of that mandate will be to achieve environmental goals 

through the least-cost approach. 

- . 

- ere is no chance of an international agreement in Kyoto or the near future with this 

oposal. But if an agreement is reached that incorporates this approach, it may be much 

asier to ratify. · · . . 

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I

'. 

- ·: .. : 

I 

PACKAGE2 

OVERALL STRATEGY 

.. 

Thi-s approach involves a hybrid plan that includes a commitment to reduce emissions to 

1990 levels by 20 L5 or 2020 with a safety valve to cap economic costs . 

. The approach begins with the tax cuts, R&D, and o~her initial steps in the common 

comp_onents section above, before the permit system becomes effective. 

The safety valve would ensure that permit prices could never rise above some cdling, by 

allowing the U.S. Government to sell an open-ended number of additional permits at that 

pnce. This approach thus allows you to set an ambitious goal for the country while -

insuring that the costs are not excessive. But with a relatively low ceiling price,the 

· overwhelming majority of economists will Claim that we·could not possibly avoid having 

. to trigger the safety valve and thus fail to meet the stated goal of 1990 by 2015 or 2020. 

Opponents could attack the approach as ·lacking in credibility. 

TARGET AND TIMETABLE 

• _ 1990 by 2015 or :1990 by 2020, with a safety valve{explained below). The purpose of 

the safety valve is to allow us to adopt a relatively aggressive target and timetable, with 

· ·. the understanding that we will only meet it if possible to do so at reasonable cost. 

• Ari issue that needs to be resolved is how the safety ·valve would be handled in the 

international negotiations, if at all. 

• Additional reductions (to be determined) after 2015 or 2020. 

• Support international trading and joint implementation. 

DEVELOPING COUNTRY 

.. Kyoto Mandate for negotiations, with a goal for them to be completed by 1999. '. 

DOMESTIC IMPLEMENTATION 

Initial actions 

• Common components plan. Emphasize tax cuts and R&D to build corporate support. 

• Emphasize commitment to market-o~iented policy tools .to reduce emissions . 

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~------,--------------------------------------:-------;---~-------

_ ....... 

• A void decisions about grandfathering vs. audio~s. Instead appoint commission to 

suggest structure of domestic emissions trading program --·auctioning with tax cuts, or · 

grandfathering with an excess profits tax. 

--The commission would work Withindustry groups to evaluate their vision ofth~ 

trading system. 

'--The commission would also study possible adjustment progranl.s for areas and sectors 

that will bear a disproportionate burden from emissions reductions. 

--One possibility would be to give the commission's .recommendations base-closing . 

legislative treatment, although there may be concerns about such a mechanism given the 

scope and importance of the commission's work. 

--Deadline for commission to report would be early 1999 or 12 months following treaty~ 

Domestic emissions trading program (with safety valve) starts in 2005 

..:_Commission decides on structure of permit program. . · 

-- The permit requirements between 2005 and the first review in 2008 could be set 

slightly below business-as-usual levels. 

-"' Ceiling on permit price, as defined below, to cap economic costs 

Safety valve (ceiling on price) in permit trading system 

-~The tradeable permit system would include a safety valve: the U.S. government would 

stand ready to sell a potentially Unlimited nlun.ber of permits at a given price, ensuring 

that the permit price could not rise above that level. This safety valve is absolutely . 

essential to the domestic viability of this approach. 

--The pfice wotildstart at $10 per ton in 2005and rise in real terms by $1-$2 per year 

(0.25-0.5 cents per gallon) until it reaches $30 per tori in 2015 or 2020 .. 

-- If any funds are raised from the safety valve mechanism, they could be devoted to 

further emissions reductions -- additional tax cuts for families, for carbon-reducing 

investments by businesses or families, tax cuts for R&D, Federal investments in R&D or 

energy-efficiency, 0(_ for investments in carbon-reducing efforts in other countries. 

5-Year review process . . ' . . . . . . . . - - . 

• The Clean Air Act requires EPA to undertake a regular 5-year review of ai.r quality 

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standards, and other statUtes require similar reviews. Similarly, ever}' five years, a 

commission -- which builds on the implementation commission above --would review 

progress on emissions reductions, and how the economy was responding. It would then 

make recommendations to the President and Congress about how to adjust the policy 

stance toward climate change. 

• lhe commission to report on domestic implementation (mentio~ed above) would be the 

. first of these commissions. The first report would thus occur iri 1999 or 12 months 

folloWing the treaty. The second report would be in 2004, and the third in 2009. The · · 

third commission reportwould be able to evaluate the operation of the domestic perrhit 

. system after four years of experience (since the permit system Will begin in 2005). 

SUPPORTERS 

Gene Sperling and Katie McGintY constructed this compromise plan, as requested by Erskine. 

They worked closely with Todd Stern in developing a package that the three of them support 

with one· difference. Gene supports a 1990 by 2020 timetable, while Katie supports the .1990 

by 2015'timetable~ 

.Gene feels that the 2020 date is important for three. reasons: 

1. It boosts the credibility of the relatively low price ceiling in the plan, by allowing more time . 

for the economy to adjust before the timetable binds and thus raising the probability that the 

safety valve would not have to be invoked; 

2. It attenuates corporate and union opposition to the plan; and 

3. It allows tis some room to bargain from at the international negotiations in-Kyoto and 

beyond. , . 

Katie feels that the 2015 date is important for three reasons: 

1. Your announcement of any date after 2015 would pose unacceptable risks of immediately 

cratering the Kyoto negotiations . 

. With any date lat~r th~ 2015, there is iittle or no chance that we will be able to convince . 

the international comrimnity to accept other components of our position (e.g., joint 

implementation, Annex I international trading, the safety valve, and our developing country 

stance). 

3. A 2015 timetable offers at least some possibility of support from moderate environmental 

. groups-- especially if we also commit to some reductions, even small ones, from 1990 levels 

by 2020. 

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· . Secretary Pena and Secretary Slater both support the package .. Todd Stem supports it with a 

199Q by 2015 timetable. 

Dan Tarullo supports a hybrid of Package 1 and Package 2. As in Package 1, he supports starting 

the domestic implementation package immediately upon agreeing_ to a treaty, not in 2005. He 

also believes strongly iri auctioning permits or some other mechanism of raising revenue, rather 

than gra:ndfathering permits. But he believes that we can commit to 1990 levels by 2020, with 

. the explicit acknowledgment that the uncertainties of technological development and diffusion, 

. as well as consumer.behavior. He favors a reassessment in 2007 to see if the targets and 

timetables need to be adjusted. 

. . . . . 

Your economic team urges that if you choose this option, you should chooseth.e 2020 timetable 

and emphasize that you will not use command-and-control regulations to avoid invoking the 

safety valve. They would also urge a careful analysisofthe best level for the trigger price. 

NOTES 

The ftnidamental strategy here is fo.ur-fold: 

• First, we will focus our entire policy efforts up to 2005 on tax cuts, R&D efforts, Federal 

energy efficiency improvements, and the other components of the policy package listed in · 

Section III of the memo. 

• Second, the permit system would start in 2005 -- so that the debate over energy price . 

increases explicitly pertain only to 2005 and beyond .. At the same time, environmental 

groups will appreciate that the permit system begins within the next 10 years. 

• Third, the plan puts a ceiling· on the permit pri~e to limit the economic downside and· 

stunt opposition attacks about the economic costs involved. 

• Finally, the plan still gives the nation a goal of reaching 1990 emission levels by 2015 or 

2020 -- a goal that is subject to a cost cap, but is more bind,ing than the non-binding aim 

agreed ·at Rio. 

The main problem with this option is that ifmay be harshly criticized as promising more 

than the implementation plan can deliver~ Current models almost uniformly suggest that. we 

would not be able to meet our target and timetable at a price below $30 - i:e., that we could not 

avoid triggering the safety valve~ To put the point another way, this approach willlimitthe 

·permit price to $10 to $30 per ton ($15 to $45 billion year), But economic models_ almost 

uniformly suggest that perinit prices would have to be substantially higher to achieve 1990. 

emissions levels iri 2015 or 2020. Therefore we could be attacked on our credibility-- that our 

plan did not contain enough restraint to meet its stated emissions reduction goal. 

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I 

I 

Those who support this option believe that the answer to the credibility argument is not a 

fight over economic models. Rather, they argue that in the face of incredible uncertainty over 

events twenty years away, it is best to put forward a sound-- even ifhighly optimistic_:._ plan for 

the nation. In particular, we should not unnecessarily impose economichardship\vhen 

technological breakthroughs, new scientific understandings or successful international trading 

could lower costs: If we take on the economic model debate directly, we Will almost certainly 

lose. The best tact is to emphasize the uncertainty, and to note that future administrations 

. and Congresses will assess new information every 5 years and make appropriate adjustments. 

We could get some outside validation for our emphasis on uncertainty from those who believe . 

that international trading is possible, from those who believe that economic models tend to 

exaggerate the costs of meeting environmental goals, and from those who believe that 

technological development and diffusion could respond strongly to even a limited price signaL ' . . 

· The safety valve idea could also receive outside validation: similar ideas have been embraced by · 

Resources for the Future and Brookings, although they may not agree with our trigger price. 

Another key aspect of defending this plan is to emphasize that we are not supporting 

using command-and...:control measures if the ceiling price does not produce the full reductions 

needed to hit the emissions target. Specifically, wheri asked about whether setting an optimistic· · 

.target with the ceiling price would mean that higher energy taxes or command-and-control 

.regulations in the future, we should state that we are against such measures and that we would 

assume that future Congresses would also oppose such measures. Without this guarantee, 

opponents may feel threatened instead of comforted by our reasonable ceiling. · Furthermore, we 

would point out that such scenarios would not take place for adecade, and tJ"lat we would not 

expect future Congresses to support such command and control alternatives as well. 

With this posture, we would be arguing that we are committed to reaching 1990 levels by 

20i5 or 2020 --but J)Ot at any cost. We would not expect future administrations or Congresses 

to allow the costs ·of complying with the treaty to become extreme or excessive. We would also 

note that the 5-year reviews would allow us to adjust our policy stance as more information 

becomes available. Finally, it is important to note that we would still taking real steps to reduce . . 

emissions even if the safety valve is triggered. Indeed, the policy steps under this approach if the 

safety valve were triggered are equivalent to those proposed und~r Plan 3. Even with the cap, the 

·cost to polluting would be higher than today, and thus we would divert emissions from the 

business-as-usual path. We would also start the emissions trading program by the relatively 

early date of2005, which shouldhelp to address some of the concerns environmental groups may 

have with this approach. 

PROS 

.. 

·-

Seeks to hit a middle ground -:- still proclaims a target and timetable, but only at 

reasonable economic cost. With a target of 1990 by 2015 or 2020 -:- tempered by the 

·safety valve, but still stronger than our Rio comffiitment -- we w·ould have a chance of 

remaining "in the game' in the international and environmental communities. By 

limiting the economic costs, we could avoid undue disruption to the economy and stunt 

potential attacks. 

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• Permit system starts in 2005, so that we begin to deflect from business-as-usual path 

within·a decade .. The early start date would also help utilities to integrate their planning 

for reductions ofNOX (under EPA's recent clean air rule) and carbon emis.sions. 

• Consistent with our language of "binding but realistic" and "reducing erilissions while 

we grow the economy." 

• Starting with only tax cuts and R&D for 7 years, and not beginning the permit system 

until 2005, may make it harder for the Administration to be demagogued on tax increases .. 

CONS 

• Risks splitting the loaf and pleasing no one: 

-~ Business groups may still demagogue the plan, arguing for example that $20 per ton is. 

approximately the· same size as the BTU tax proposed in 1993. If we decide that the plan 

would be revenue-neutral, we could respond with that point, and note that it would not 

become effective for several years. 

---Business groups could also charge that the combination of a relatively tight target and . 

timetable with a low trigger price would imply that command-and-control regulations 

would be used to fill the gap. We could respond by emphasizing our commitment to 

market-based solutions. 

-- Many environmental groups will oppose, arguing that the 2015 or 2020 date is too late 

and that the safety valve undermines our environmental commitment. We could respond 

that on their optimistic predictions about new technologies, the safety valve would not be 

needed. We could also respond that our policy is a politically reali~tic way of addressing 

the climate change problem. Some more moderate groups may support the package, 

GSpecially in light of the 2005 start for the permit system and if the package includes 

further reductions beyond 2015 or 2020. Although environmental groups are calling for 

reductions below 1990 levels by 2010, a relevant threshold for many of them is 

reductions below 1990 levels at least by 2020: 

• Mainstream models almost uniformly suggest that without woddwide international 

trading, there is little likelihood that we could avoid triggering the safety v3.lve at $30 per 

ton. Some of your advisers could be forced to admit that the overwhelming weight of 

conventional economic analysis suggests that the safety valve would be triggered. 

• Will seriously complicate international negotiations. In combination, the 2015 or 2020 

date, our domestic cost cap and our insistence that developing countries do more will be 

perceived as lack of U.S. leadership. 

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·PACKAGE3 · 

OVERALL_ STRATEGY 

• This package is similar to Package 2 in containing a safety valve, but it involves steeper 

emissions reductions and higher economic costs than tinder Package 2. In this sense, it 

conforms mosfclosely to the first two constraints noted in the first section above 

( environme~tal and international). It involves less dramatic reductions than those 

proposed by the EU or Japan, but has some chance of being accepted internationally. 

Despite provisions that cap the permit price at about $50 per ton, this package would 

likely be strongly opposed by much of the U.S .. business comrriunity. And as above, the 

cost cap comes with a real risk: it implies that we could fail to reduce emissions to 1990 

levels by 2010 or 2015. 

TARGET AND TIMETABLE 

• 1990 levels by 2010 with safety valve or 1990 levels by 2015 with safety valve . 

• Further reductions at a later date. 

• Th~ permit price would be capped at roughly $50 per ton by allowing the U.S. 

· Government to sell an unlimited number of additional permits at that price. 

• .Require adequate provisions for international emissions trading, joint implementation and 

brullcing. · 

DEVELOPING COUNTRIES 

• Two-step approach as outlined above. ·Kyoto Mandate for negotiations, with a goal for 

them to be completed by 1999. 

DOMESTIC IMPLEMENTATION 

• Domestic permit trading system, with a safety valve that ensures a ceiling of about $50 

on the permit price. 

- • Common components plan. Emphasize tax cuts and R&D in near ten;n to build co.rporate 

support.· 

SUPPORTERS, 

Carol Browner, Secretary Babbitt, and Brian Atwood support the plan -- but only with the 1990 

-by· 20 1 0 timetable. 

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Jim Steinberg supports this package, emphasizing the importance of a credible trigger price (one . 

set high enough that it could be defended as a reasonable estimate of the cost of meeting the 

target). 

· Jack Gibbons supports this approach, but emphasizes the importance of a significant reduction in · 

the 2020-2030 timefrarne linked to a long-term stabilization goal. 

· Strohe Talbott supports this general approach. He could also be supportive of Plan 2. Secretary 

Glickrrian supports this package, but is also willing to support Plari 2. 

PROS 

• Kyoto agreement perhaps possible {especially if 1990 by 201 0), although not guaranteed 

-- especially given the safety valve and our position with respect to developing countries. 

• Some support from environmental· groups (especially if 1990 by 201 0), although some 

will consider the emissions reductions to be too weak and the safety valve to be 

problematic. 

• Stronger start in addressing envirotml.ental problem limits need to depend on steep '-- and 

. argtiably implauSible.:..:.. emissions reductions in distant decades to reach environmental 

goals. 

CONS 

• The commitment would be attacked as the largest energy tax hike in history -- costing 

$75 billion per year. Despite the safety valve, many would charge that a commitment of 

this nature-could have substantially adverse effects on the economy.· 

• Strong corporate opposition -- especially if 1990 by 2010 -- for not allowing enough time 

for the economy to adjust. 

• Relative to the $30 ceiling in Plan 2, this plan would produce greater economic 

dislocation and more pOWerful ammunition for opponents that want to attack the 

economic costs of the plan. 

• The ceiling poses many of the same tensions as in Plan 2. A $50 ceiling may prove 

inadequate to meet a target of1990 by 2010. 

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/ ·i 

DRAFT #2: October 14, 1997 

MEMORANDUM FOR THE PRESIDENT 

FROM:· 

SUBJECT: 

.GENE SPERLING 

KATHLEEN McGINTY. 

DANIEL TARULLO 

JIM STEINBERG 

TODD STERN 

Climate change decision memorandum 

This memorandum follows up on our earlier climate change memoranda and meetings with 

you. It requests specific decisions from you on various elements of our overall climate change 

policy. Your responses will allow us to put together a climate change policy package that you 

could then announce in approximately a week, while the penultimate negotiations take place in . · 

Bonn. · 

I. Target, timetable, and safety valve 

The most difficult decision you must make involves the target and timetable, and 

whether to include a ceiling price as part of our proposal. ·We believe that you are well aware 

of the pros and cons of different courses of actions. 

·· Beginning date for pennit system 

· Your ·advisers -- including Gene, Katie, and Todd -- generally support starting the 

permit system in 2005. The frrst few years of the permit system-- before any internationally 

binding obligation would take hold -- could involve auctioning or grandfathering enough 

.permits for the permit price to be relatively low. (If the ~ifference between the number of 

permits in a given year and the business-as-usual emissions level is.small enough, the permit 

price will remain low. The flipside of obtaining that low price, however, is that the deflection 

from business-,as-usual would have to start small.) As discussed below, we could also impose 

· a ceiling price on the permit system for the first few years of its operation. 

The benefit of an early start is that it allows time for the system to become operational 

in the run-up to the internationally binding goal, and begins to deflect emissions from the 

business-as-usual path. The cost is that in order to affect emissions, it moves forward the time 

at which energy prices will rise from their business-as-usual path. · 

--'----- Approve starting the permit system in 2005 

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