Communication from the Commission to the Council and the European Parliament - Climate change - Towards an EU post-Kyoto strategy
Date: 1998-06-03
Institutions: European Commission
Subjects: EU environmental policy, UN convention, climate change, greenhouse gas, pollution control measures

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 03.06.1998 
COM(1998) 353 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

CLIMATE CHANGE- TOWARDS AN EU POST-KYOTO  STRATEGY 

Table of Contents 

Key issues 

- Strategy process 
- Implementation -  Sharing the responsibilities 
- Flexible Mechanisms 
-Monitoring 
- External dimension 
-Next steps 

1. Introduction 

1.1. The impact of Kyoto 
1.2. Developing a strategy process 

2. Elements of an EU implementation strategy 

2.1. Main criteria 
2.2. A comprehensive approach on policies and measures 

2.2.1. Gas by gas 
2.2.2. Sectors 

2.3. Key policy areas for implementation 
2.4. Flexible Mechanisms 

2.4.1. Participation of Member States and the Community in 
an international emissions trading regime 
2.4.2. Use of Joint Implementation and the Clean Development 
Mechanisms in meeting EC targets 
2.4.3. Conclusion on application of the flexible mechanisms 
within the Community 

2.5. Monitoring 

2.5.1. Monitoring in relation to compliance with commitments 
2.5.2. Monitoring in relation to the flexible mechanisms 

3. External dimension of the EU strategy 

3.1. International negotiations of flexible mechanisms 

3.1.1. Objective in Buenos Aires 
3.1.2. Eligibility to participate in an open, transparent and non 
discriminatory international trading system 
3.1.3. Step-by-step approach 
3.1.4. Supplemental 
3.1.5. How to make trading work environmentally and economically 
3.1.6. Compliance provisions for the flexible mechanisms 
3.1.7. International use of project-related instruments 

... 

(Joint implementation and the Clean Development Mechanism) 
with a view to achieving  commitments 

3.2. Strengthened international dialogue 

4. Next Steps 

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Key Issues 

Strategy  process 

Following  Kyoto,  the  European  Union  must  now  develop  a  post-Kyoto  strategy  to 
meet its Protocol commitments. The Commission does not yet have all the elements to 
put on the table a detailed implementation  strategy. This Communication, therefore,  is 
a first  analysis of how to shape such a strategy. 

A  comprehensive  strategy  will  need  to  take  into  account  all  the  provisions  in  the 
Protocol,  including  those  that  still  have  to be worked  out,  in particular  the  so-called 
flexible mechanisms. It will also have to incorporate into the analysis all sectors of the 
EU economy, the possible areas for action and the international  dimension. 

To  develop  this  strategy  the  Community  and  the  Member  States  need  to  start  an 
interactive process through which  a Community  framework  can be  established  to  co 
ordinate  their respective  actions,  exchange  data, track  progress  and  identify  areas  for 
action to meet commitments. An important first  step is agreeing on the most important 
criteria that the EU strategy must respect. 

Implementation  - Sharing the responsibilities 

The  Member  States  have  the  major  responsibility  for  meeting  the  Kyoto  reduction 
target.  The  Community,  as  a  signatory  of,  and  future  party  to,  the  Protocol,  has  the 
responsibility to ensure that Member States' actions are consistent with the Treaty and 
that  their  obligations  are  met  under  the  Protocol.  It  also  has  an  important  role  in 
complementing, reinforcing  and supporting Member States'  actions with common and 
co-ordinated policies and measures. 

A  possible  way  to  meet  the  target  would  be  to  develop  cost-effective  policies  and 
measures  across  all  sectors  and  gases  to  achieve  this  overall  objective.  Indicative 
targets  for  sectors and gases, derived from the combination  of the most  cost-effective 
policies  and  measures,  could  help  define  the  responsibility  for  a  sector  and  thereby 
provide a useful  yardstick to monitor progress and to mobilise political action. 

As  regards  the  flexibility  arrangements,  such  an  approach  would  also  facilitate  the 
assignment  of the part  of the total  emissions that  can be  traded,  if it were  decided  to 
authorise  legal  entities  to  participate  in  emissions  trading.  In  any  event,  better 
integration  of climate change concerns  into  sectoral policies  is necessary  as has been 
highlighted in the Communication of the Commission on environmental integration to 
the Cardiff  summit. 

The  EU  needs  to  know,  therefore,  what  measures  the  Member  States  are  taking  to 
meet their targets and how. The Community can contribute to this  effort. 

Flexible mechanisms 

The flexible mechanisms can play an important role in meeting commitments at less 
cost, thereby  safeguarding  the competitiveness  of EU industry. The existence of the 
EU bubble does not prevent the Community from fully  participating in international 
emissions trading. Moreover, the particular Community dimension may justify  further 
rules or guidelines which should be adopted in respect of the internal market, state aid 
and  existing  environmental  legislation.  An  EC-wide  approach  to  emissions  trading 
could also facilitate the administrative implementation of the system and prevent new 
barriers to trade. 

At Buenos Aires, effort  should focus on the minimum requirements that any Party or 
private  entity  needs  to  fulfil  in  order  to  participate  in  international  trading.  These 
rules,  in particular  those  on  compliance,  should  be strict  enough  to  ensure that  the 
Protocol's  environmental  objectives  are  met,  and  simple  enough  not  to  be 
unnecessarily burdensome. As what is agreed internationally will determine what the 
Community  can do, the Community must  endeavour to influence  constructively  the 
rules and modalities of the flexible mechanisms. 

Lack of experience of multi-country emissions trading and uncertainties regarding the 
emissions of some gases and some sources plead for a step-by-step approach. It is also 
necessary to define  the Protocol's  use of the word  "supplemental"  in respect  to the 
contribution of the flexible mechanisms. 

Joint  Implementation  and  the  Clean  Development  Mechanism  can  both  make  a 
valuable contribution  to the  achievement  of Community  targets, but  their  rules and 
modalities  should be coherent with those for  emissions trading, at both  Community 
and international levels, as well as ensure their environmental  effectiveness. 

Monitoring 

The  EC  monitoring  mechanism  needs  to  be  reinforced  so  that  it  can  provide  a 
framework  for tracking progress, for regular assessment  and peer review in order to 
ensure  the  EU  is  meeting  its  commitments,  and  for  the  use  of  the  flexible 
mechanisms. Such a mechanism will require much greater Community involvement, 
in view of the need to respect the Community's own target and in view of the need to 
ensure a level playing field within the Community. 

External dimension 

The EU needs to strengthen its dialogue with other parties in order to ensure that the 
protocol  is ratified.  The development  of  an EU position  on the participation  of the 
developing countries and possible voluntary commitments by the most advanced will 
be of particular importance. 

Next Steps 

A number of key questions need to be resolved if an effective EU post-Kyoto strategy 
is to be put in place. 

The Council is therefore requested to: 

•  endorse the main criteria for assessing an EU climate change strategy; 

•  examine whether indicative sectoral targets at Community level should have 

a significant role in a post-Kyoto strategy; 

•  endorse the areas highlighted in this Communication as those where action is 
needed and to adopt the necessary Community measures, starting with those 
already proposed by the Commission, and recognising the need for adoption 
of national measures; 

•  endorse the introduction of the flexible mechanisms in a step-by-step and co 

ordinated way within the Community; 

•  endorse  the  objective  of the gradual  inclusion  of private  entities  over time, 
and that, as national use of the flexible mechanisms will have to respect the 
Community  law, it would be desirable  to have a Community  framework  to 
safeguard the internal market; 

•  agree that the definition  of supplemental will have implications  for the cost-

effectiveness of the overall EU strategy; 

•  endorse  the  need  for  a  considerable  strengthening  of  the  Community's 
monitoring system both for tracking progress on implementation  and with a 
view to implementing the flexible mechanisms; 

•  endorse  the  orientations  outlined  in  this  Communication  concerning  the 
external  dimension  of the EU strategy  as a basis  for the formulation  of the 
EU's negotiating position in Buenos Aires; 

•  endorse  the  priorities  set  out in this  document  for  a strengthened  dialogue 

with third countries. 

The key milestones as regards the construction of an EU climate change strategy: 

•  end  1998, Member States provide information on their strategies and what they 

expect from the Community; 

•  first  half 1999, second Communication on an EU climate strategy. 

1. 

Introduction 

In October  1997 the Commission presented a Communication  'Climate  Change-  The 
EU Approach  to Kyoto^ which underpinned  the European Union's  (EU) negotiating 
position  in Kyoto. The  analysis  showed  that  a reduction  of  a basket  of  three  gases 
carbon  dioxide  (C02);  methane  (CH4)  and  nitrous  oxide  (N20)  by  15% by  2010 
compared  to  1990 was technically  feasible  and  economically  manageable  provided 
other industrialised countries made comparable efforts. 

The  October  1997 Communication  indicated  that  following  Kyoto  the  Commission 
would  develop  a  more  detailed  climate  change  strategy  on  the  basis  of  a 
comprehensive  analysis  of  the  relevant  elements.  The  present  Communication 
contributes  to  laying  the basis  for  the  development  of  an  effective  climate  change 
strategy.  Taking  into  account  the  Kyoto  Protocol,  it  addresses  the  most  important 
elements  of  an  EU  implementation  strategy  and  the  external  dimension  of  the EU 
strategy. 

1.1 

The impact of Kyoto 

The EU succeeded in meeting a number of its negotiating goals at Kyoto, in particular 
the acceptance  of legally-binding  targets by the EU's main competitors  and trading 
partners  similar  to  the  EU's  own  commitment.  This  ensured  that  Community 
competitiveness,  a  major  concern,  was  safeguarded.  However,  in  a  number  of 
important respects the final text of the Protocol^ that was agreed at Kyoto included a 
number of provisions, especially the so-called  flexible  mechanisms, which were not 
an integral part of the EU's approach at Kyoto. All these elements and their possible 
implications  need  to  be  incorporated  into  an  EU  post-Kyoto  strategy.  Those  that 
deserve particular attention are: 

*  The European Community's (EC) and Member States' emission reduction targets, 
as well as those of the other industrialised  countries are legally binding under the 
Protocol  whereas  under  the  United  Nations  Framework  Convention  on  Climate 
Change (UNFCCC) there was no legal obligation  on parties to  actually  realise a 
return to 1990 levels of emissions3. 

•  The EC's  and its Member  States'  commitments  are extended  to  a basket  of six 
gases instead of three. The three additional gases (industrial) are hydrofluorcarbons 
(HFCs),  perfluorcarbons  (PFCs)  and  sulphur  hexafluoride  (SF6 ).  The  emission 
reductions  of these three gases can be measured  against  either  a  1990 or  a  1995 
baseline.  The  Protocol  also  has provisions  for  the  inclusion  of  sinks,  albeit  still 
controversial  and needing  further  detailed  study, which would  in principle  allow 

1  COM(97) 481 final of 01.10.1997 
2  See Commission  Staff Working Paper « An Analysis of the Kyoto Protocol » - Sec(1998) 467 of 
13.03.98 
3 The EC , however, made a commitment, albeit not a legal one, to stabilise C02  emissions in the EC 
as a whole by the year 2000 at  1990 levels. This went beyond commitments under the UNFCCC. 

the inclusion of the intake of carbon by forests and agricultural soils in calculating 
emission reductions of parties. 

.  The EC and the Member States have commitments to reduce this six-gas basket by 
8%  from  1990  levels  in  the  period  2008-2012  rather  than  by  a fixed date  (i.e. 
2010). In addition, demonstrable progress has to be made by the year 2005. 

•  A key provision of the Protocol for the EU is Article 4, usually referred to as the 
EC  bubble,  which  allows  the  EC  and  the  Member  States  to  fulfil  their 
commitments  jointly  through  a  differentiated  commitment  between  Members 
States (burden sharing). The terms of this burden sharing has to be communicated 
at  ratification  and  is  effectively  frozen  for  the  first  commitment  period  (2008-
2012). Both the EC and the Member States have legally binding targets and share 
the responsibility for meeting these targets. Providing these targets are met the EC 
will be  in  compliance.  In the  event  of Member  States  failure  to meet  their  total 
combined obligations this would bring the EC into non-compliance. In this context, 
the  EC  should  play  an  important  role  in  providing  the  framework  for 
implementation  and thereby facilitate  the achievement of EC and Member States' 
targets. 

•  There are provisions in the Protocol on a number of so-called flexible mechanisms 
- emissions trading, Joint Implementation among Annex I countries and the Clean 
Development Mechanism - details of which still have to be worked out but which 
could play an important role in meeting the targets agreed in Kyoto. 

•  The  Protocol  also  provides  for  reinforced  reporting  requirements  and  the 
development  of  a  strict  compliance  regime  which,  given  the  interaction  that  is 
required between the EC and the Member States, will have an important  influence 
on the development of an EU strategy. 

1.2 

Developing a strategy process 

This Communication aims to set out an inter-active process for an overall post-Kyoto 
strategy  within  which  both  the  Member  States  and  Community  can  meet  their 
commitments  under  the  Kyoto  Protocol  in  a co-ordinated  and  effective  manner.  In 
implementation  the  EC  should  set  the framework to  ensure  that  national  and  EC 
actions  are mutually  reinforcing  to achieve an effective  response to climate change. 
This  process  needs  to  cover  both  internal  policies  and  measures  and  international 
flexible mechanisms since both will contribute to meeting targets. 

In operational terms this process means that within a Community  framework: 

• 

the Member States must provide detailed information  to the Commission on how 
they  intend  to  meet  their  individual  obligations  and  the  contribution  that  they 
expect from the Community; 

• 

• 

the  Commission  should  take  forward  on-going  analyses^  in  co-operation  with 
Member  States  in  order  to  update  and  to  expand  the  findings  of  recent 
Communications on policy issues related to climate change; 
the  Community  should  agree  on  developing  a  common  EU  view  on  both  the 
international and domestic dimension of a number of important outstanding issues, 
in particular the flexible mechanisms and sinks; 

•  monitoring emissions actively with a view to ensure that all actors in the EU are 

on track to meet their commitments. 

On the basis of all these elements the Commission will develop, in co-operation with 
all the actors, a comprehensive climate change strategy that needs to be agreed upon 
before ratification of the Protocol. At the heart of this strategy is the rapid adoption of 
existing Commission  proposals that contribute to meeting the targets  as well  as the 
development of new policies and measures. 

2. 

Elements of an EU implementation strategy 

2.1  Main criteria 

A  comprehensive  post-Kyoto  EU  climate  change  strategy  needs  to  meet  some 
important criteria. These are: 

Environmental effectiveness.  An essential requirement would be whether the strategy 
can  deliver  the  legally  binding  reduction  targets  of  the  Member  States  and  the 
Community  by  the  agreed  date.  It  would  also  have  to  deliver  some  demonstrable 
progress by 2005  and take account  of post 2012 when  further  substantive  emission 
reductions  will  be  necessary.  In  view  of  the  global  nature  of  the  problem, 
environmental  effectiveness  depends also on the participation of other countries that 
have signed up for binding targets. 

Cost-effectiveness.  This element is important for economic and political acceptability 
of a strategy. A cost-effectiveness  analysis should identify  low cost measures and take 
account of secondary environmental benefits, such as reductions in local and regional 
pollution, other benefits (employment) and the long-term costs and benefits of climate 
mitigation  action.  Administrative  costs  of  implementing  measures  should  also  be 
factored in. 

Equity and political acceptability.  The burden sharing of the EC target is designed to 
ensure  that  all  Member  States  have  an  equitable  share  of  the  overall  EU  effort. 
Account  will  also have to be taken of the fact  that  some sectors and regions  of the 
Community may have to cope with significant changes as a result. 

4  The  Commission  expects to have  at the end of June  1998 new  consolidated  data  of greenhouse  gas 
emissions  for  1990-95, consistent projections  for  2000  and  2010  and  the results  of  several  modelling 
exercises. These will provide a check on the business-as-usual baseline and what could happen if there 
are no new efforts.  The results will permit the development  of a more robust and authoritative view of 
the policy packages and the economic implications of previous Communications. 

Adaptability.  New  and unforeseen  developments  can modify  policy  assessment  and 
progress  towards  targets, and hence  adaptability  of the policy response  needs  to be 
built into the strategy. 

Inclusiveness.  All economic sectors and political players have a shared responsibility 
in  meeting  climate  change  goals  and  should  contribute  to  meeting  targets.  Since 
sectors have very different  structures this means a broad range of targeted instruments 
is needed. 

Consistency.  The principle  of integrating  sustainability  into EC policies will  ensure 
that EU climate change strategy is consistent with these policies and the instruments 
used to implement them. 

Domestic  action.  Domestic  policies  and  measures,  comprising  national  and  EC 
common and co-ordinated polices and measures, should be the major  means for the 
Community to achieve its reduction target of-8%  by 2008-2012 compared to  1990. 
The Council confirmed this line at the March 1998 Environment Council. 

Community role in strategy process 

In line with the subsidiarity principle action to address climate change should be taken 
at the appropriate level. Member States have a major role since they are individually 
responsible  for  their  own  targets  within  the  agreed  burden  sharing  which  must  be 
notified  at  ratification  of  the  protocol  by  the  EC.  However,  the  fact  that  the 
Community  has  a target,  the integration  of the European  economy  and  the need  to 
ensure  a  level  playing field requires  that  actions  are  also  taken  at  the  Community 
level. The Community needs to: 

•  provide  a coherent  strategic  Community  framework  within  which  the  EU post-

Kyoto strategy can be shaped and agreed; 

•  put  in  place  Community  common  and  co-ordinated  measures  that  support  and 

complement the initiatives of Member States; 

•  exchange  of  experience  and  co-ordination  of  policy  actions  undertaken  by  the 

Member States and at Community level; 

•  ensure a coherent approach to the use of all instruments, in particular the  flexible 

mechanisms and their compatibility with the internal market; 

•  monitor pro-actively and report back on progress and lack of progress in meeting 

targets by Member States, sectors and stakeholders. 

The Council is requested to endorse these main criteria for assessing an EU 
climate change strategy. 

2.2 

A comprehensive  approach on policies and measures 

The Commission is developing analysis, based on common assumptions about growth 
rates of emissions and existing policies and measures, to determine the effort  required 
to move  from  the business-as-usual  scenario  to the  allowed  level  of  emissions  in  the 
Protocol. This analysis  is being updated to include the three new  industrial  gases  and 
more  recent  information  on  CH4  and  N20.  According  to  initial  Commission  analysis 
the effort  required  to meet the EC reduction  objective  under the Protocol  is  estimated 
to be around 550 to 600 Mtonnes of C02  equivalent.5 

It is essential that the EU strategy be based on a comprehensive  assessment  of how to 
achieve  this  effort  on  time.  This  assessment  will  have  to  cover  all  elements  in  the 
Kyoto Protocol -  the level of targets, the six gases, sinks and the flexible mechanisms. 
It  will  need  to  cover  all  sectors  of  the  economy  and  examine  the  policy  options 
available  to  both  the  Member  States  and  the  EC.  In  this  respect  the  May  Energy 
Council  has  recognised  that  it  is  necessary  to  prepare  a  shared  analysis  of  the 
economic  impact  of  greenhouse  gas  emission  reductions  and  to  assess  the  scope  for 
cost-effective  emission reductions relating to the production and use of energy. 

2.2.1  Gas by gas 

A  gas  by  gas  analysis  is  useful  for  selecting  policy  options  and  in  fact  a number  of 
Member  States  have  used  this  approach  in  developing  their  own  climate  change 
strategies. A brief review is given below of the policy options available. 

Carbon dioxide 

C02 is by  far  the most  important  and most  studied  greenhouse  gas. Emissions  of this 
gas  account  for  approximately  80%  of  the  impact  when  the  gases  in  the  basket  are 
weighted  according  to their  Global  Warming  Potential  (GWP)  and  are mostly  linked 
to energy use and production of fossil  fuels. An extensive analysis of the policy  issues 
related to C02 emissions has been offered  in the Communication on Climate Change  -
The EU Approach for Kyoto. 

Sinks 

The  Kyoto  Protocol  specifies  that  sinks  including  forests  and  agricultural  soils  can 
count  towards meeting  the target.  In the first commitment  period  removal  of  C02  by 
sinks  is  limited  to  afforestation,  reforestation  and  deforestation.  Working  in  this 
direction is the proposed regulation on rural development in the framework  of Agenda 
2000  which  explicitly  recognises  that  forestry  measures  should  take  into  account 
climate  change.  However,  in  order  to  have  a  sound  basis  for  establishing  precise 
methods  for  the quantification  and verification  of sinks, a number  of scientific  issues 
have  to  be  addressed.  Further  work  of  the  Inter-governmental  Panel  on  Climate 

5  The use of C02 equivalent makes the greenhouse gases in the basket comparable by using the global 
warming potential (GWP) of each gas. The GWP gives an indication of the radiative potential of each 
gas. C02has a GWP of  1  whereas over a  100 year time span the GWPs for methane and nitrous oxide 
are 21 and 310 respectively ; 

Change  (IPCC)  is  therefore  needed  to  define  the  categories  covered  by  the  Protocol 
and additional categories. Once results are available it would then be possible to come 
forward  with  further  measures  on  sinks. The EC's  research programme,  Environment 
and  Climate,  is  contributing  significantly  to  the  international  research  efforts  on 
which  the  IPCC ' s results,  conclusions  and  assessments  are  made.  In  the  Fifth  RTD 
Framework  Programme,  research  on  the  carbon  cycle  and  respectively  on  the 
methodologies and verifying  of sinks will be continued and further  intensified. 

Methane 

The  Communication  -Strategy  Paper  for  Reducing  Methane  Emissions  (COM  (96) 
557  and  the  pre-Kyoto  strategy  Communication  identified  the  main  sources  of  EC 
methane emissions  from  agriculture: livestock digestive processes and manure (45%), 
waste: landfill  (32%) and energy: coal production  and natural  gas distribution  (23%). 
Also  a number of options were set out to reduce methane emissions, the second  most 
important  greenhouse  gas. Methane  emissions  are  expected  to  decrease  significantly 
by 2010 due to on-going initiatives, mainly at Member State level, in the waste sector, 
the decline  of the coal  industry  and  agricultural  developments.  Additional  reductions 
seem to be possible at low cost, depending on the sector, through: 
• 

the  reduction  of  bio-degradable  waste  in  landfill  and  methane  recovery  from 
landfill  sites; 
reductions in gas emissions from natural gas pipelines; 
environmentally sound animal manure management. 

• 
• 

Nitrous  Oxide 

This  gas  is produced  mainly  from  industrial  processes  such  as nitric  and  adipic  acid 
production  and  the  use  of  fertilisers  in  agriculture,  however  the  growing  use  of 
catalytic  converters  in  vehicles  and  in  fossil  fuel  combustion  processes  also  make  a 
contribution.  A  number  of  low  cost  reduction  options,  particularly  in  the  industrial 
sector,  were  identified  in  the  pre-Kyoto  strategy  Communication.  A  cost-effective 
reduction  potential  of up to  100 Mtonnes  of  C02  equivalent  seems  to be  available  in 
chemical processes, mainly in nitric and adipic acid production. 

Industrial  gases 

The three industrial  gases included  in the Kyoto  Protocol  have very  large  GWPs  and 
long  atmospheric  lifetimes.  Their  potential  climate  impact  and  their  inclusion  in  the 
basket  of  gases  at  Kyoto  makes  it  important  to  address  policy  options  in  an  EU 
strategy. Existing data on EC emissions for  1990/95 and for projections  for 2010 need 
to be treated with care since sources are not always consistent  in their methodologies. 
Nevertheless,  all  business-as-usual  projections  show  an  increase  in  both  HFCs  and 
SF6  and a decline in PFCs. 

HFCs  were  developed  largely  as  alternatives  to  ozone-depeleting  substances  (CFCs) 
banned  under  the  Montreal  Protocol.  PFC  emissions  are  mainly  a  by-product  of 
aluminium  smelting but the semi-conductor,  steel, cement  and  fluorine  industries  and 
incineration  plants  also  contribute.  SF6  emissions  arise  mainly  from  its  use  in  high 

voltage  equipment  but  magnesium  production  and  a  number  of  specialised  uses  in 
some Member States also contribute. 

Limitation  and  reduction  of  emissions  of  these  industrial  gases  should  be  taken  at 
Community  level  in  order  to  ensure  a  harmonised  approach.  Work  is  underway  to 
improve  data  and  further  analyse possible  options  in co-operation  with  industry,  as  a 
significant  reduction at low cost seems to be possible in the perspective of 2010. 

2.2.2  Sectors 

In order to develop appropriate policy responses it is important to complement the gas 
by gas approach with an assessment of the sources of the various greenhouse gases by 
sector  or economic  activity  and the potential  contribution  they  can make  to meet  the 
targets. The following broad categories can be distinguished: 

Transport 

Transport  accounts  for  around  20%  of  total  EU  emissions  in  1990.  Analysis  shows 
that  in the absence  of new policy  measures  it is the  sector with the greatest  potential 
for growth in C02 emissions up to 2010. Emissions of N20  due to catalytic  converters 
and  HFC  emissions  from  on-vehicle  air  conditioning  are  also  expected  to  grow 
strongly over this period. 

Energy 

Energy use and production is by far the most important  source of total greenhouse gas 
emissions, representing around 80% of  1990 EU emissions. The most important gas is 
C02 coming from fossil  fuel production and use. Around a third of total EU emissions 
of  C02  originates  from  electricity  and  heat  production.  Other  greenhouse  gas 
emissions notably methane emissions from coal production  and natural  gas leaks  and 
nitrous oxide emissions due to fuel  combustion contributed around 5% of total energy 
related  emissions  in  1990. Energy is used by other  sectors  such as transport,  industry 
and  the  domestic  sector,  and  for  that  reason  energy  related  emissions  need  to  be 
attributed to these sectors. 

Industry 

Energy  related  emissions  of  industry  in  1990  amounted  to  around  18%  and  with 
improvements  in  efficiency  these  emissions  are  expected  to  fall  slightly  under  the 
business-as-usual  scenario  up to 2010. If one takes  into  account  the emissions  of  the 
three new gases which are mainly done by industry, industry's  share of EU  emissions 
is  increased  by  about  one  percentage  point  in  1990.  These  new  gases  deserve 
increased  use  and  their  long  atmospheric 
particular  attention,  because  of  their 
lifetime. 

10 

Domestic  and tertiary sectors 

The domestic and tertiary  sectors account  for  approximately the same share of energy 
related  greenhouse  gases  as  the  industrial  sector  in  1990.  However,  the  overall 
contribution  of this  sector  is  around  20% because  of  significant  methane  emissions 
from  municipal  waste.  This  sector's  emissions  are  expected  to  increase  under  the 
business-as-usual  scenario by 2010. 

Agriculture 

Agriculture  is responsible  for  around  8% of the total EU emissions  of the three  main 
greenhouse  gases (C02,  CH4 and N20).6  but  accounts  for  less than 2 % of the  energy 
related  emissions.  Agriculture  is  the  main  source  of  methane  emissions  and  nitrous 
oxide  emissions  (respectively,  45  %  in  1990  and  40.3  %  of  EU  emissions  of  these 
gases7). Agriculture  and  forestry  may also play a positive role by replacing fossil  fuel 
by biomass and by removing in particular C02 through sinks. 

Conclusion 

The above analysis indicates that greenhouse gas emissions are linked to a vast variety 
of  economic  activities.  Any  successful  policy  strategy  therefore,  will  have  to  be 
comprehensive  and for that reason, will have to involve the stakeholders belonging  to 
different  economic  sectors.  In  this  context,  a  rational  approach  would  consist  of 
identifying  throughout the economy a range of cost-effective  policy measures. On this 
basis  it  would  then  be  possible  to  identify  indicative  emission  objectives  for 
the 
sectors mentioned above. 

The  elaboration  of  such  indicative  sectoral  targets  would  have  some  attractive 
features.  Firstly,  it  would  allow  the  mobilisation  of  political  action  by  defining  the 
respective  responsibilities  of  and  expectations  towards  the  major  economic  sectors. 
Secondly,  the  setting  of  indicative  sectoral  targets  would  undoubtedly  make  the 
monitoring  of  progress  more  effective  and  could  therefore  become  an  additional 
anchorpoint  within  a  reinforced  monitoring  system  (see  section  2.5).  And  thirdly, 
sectoral  objectives  could  also be  a useful  element  in  an  emissions  trading  system,  in 
particular  in  view  of  allocating  initial  emission  allowances  to  legal  entities  (see 
section 2.4). 

However, the use of sectoral targets also represents some drawbacks. They may play a 
useful  function  in  the  policy  setting  only  in  as  far  as  they  are  set  and  regularly 
reviewed  on  the  basis  of  cost-effectiveness  considerations.  In  view  of  the  fact  that 
Member  States  may  have  their  own  national  sectoral  targets  and  strategies,  any 
indicative sectoral targets at Community level would have to be made consistent  with 

6  Data expressed in C02  equivalents by taking into account the Global Warming Power for  100 years. 
Source: EUROSTAT. "Statistics in focus" based on European Environment Agency data related to the 
draft  EU Communication to the UNFCCC,  1998. 
7  EUROSTAT. "Statistics in focus" based on European Environment Agency data related to the  draft 
EU Communication to the UNFCCC, 1998. 

11 

them.  Account  will  also  have  to  be  taken  of  the  internal  burden  sharing  of  the  EC 
target.  For  all  those  reasons,  more  attention  needs  to  be  given  to  the  question  of 
whether  indicative  sectoral  targets  should  play  a  significant  role  in  the  future 
Community  strategy. 

The Council is requested  to examine whether  indicative  sectoral  targets  at 
Community level should have a significant  role in a post-Kyoto strategy. 

2.3 Key policy areas for  implementation 

In  addressing  climate  change  there  are  a  wide  range  of  policies  and  measures  that 
have been developed  at both national  and Community  level which depend  on a broad 
range  of  instruments  The  pre-Kyoto  Communication  and  some  recent  strategy 
documents, notably  in the energy and transport  areas, indicate  a mix  of  cost-effective 
policies and measures and a broad range of policy instruments  for  achieving  emission 
reductions. 

In  their  past  national  climate  strategies  Member  States  have  already  identified  a 
number of areas for action, as well as ways to implement Community measures. In the 
framework  of  subsidiarity,  burden  sharing  and the emphasis  on domestic  action  most 
of  which  presently  is  done  by  member  States;  national  measures,  reflecting  the 
different  situations of Member States, will be to the fore in the development  of a post-
Kyoto  strategy. 

The  EC  has  to  ensure  that  measures  being  taken  at  both  the  Member  State  and 
Community  level  are consistent  with other  Community  policies  and that  they  respect 
the  Treaty.  Further  analysis  within  an  agreed  framework  will  help  to  refine  existing 
options  and  to  identify  others  for  implementation,  particularly  for  the medium  term, 
and to determine what is best done at national and Community levels respectively. 

The Community, being responsible under the Kyoto-Protocol  for the fulfilment  of the 
reduction obligation  it has subscribed to,  needs to establish instruments which  ensure 
that the overall reduction  is effectively  achieved. If instruments in the area of external 
trade,  agriculture  or  affecting  the  single  market  are  to  be  used  they  can  only  be 
decided  at Community  level. In other  areas where there  are common policies  such  as 
transport,  energy  or  taxation,  Community  measures  obliging  Member  States  to  take 
certain measures may prove necessary if action undertaken by Member States on their 
own initiative appear to be insufficient  to ensure the fulfilment  of the obligation of the 
Community.  In  addition  the Community  can play  a catalyst  role  for  actions  taken  by 
Member  States.  The  Community  has  already  shown  to  be  a  forum  for  exchange  of 
experience  and  research  results.  Taking  a longer perspective,  scientific  analysis  that 
has contributed to the success of Kyoto should be further  developed in the  framework 
of the 5th RTD Framework Programme, in order to underpin relevant policy decisions. 

12 

It  should  be  underlined  that  if  demonstrable  progress  is  to  be  realised  by  2005  then 
certain  elements  need  to be  in place by  2002  which  requires  a confirmation  to  move 
on  certain  actions  now.  The  main  priority  areas  for  action  at  the  national  and  EC 
levels for the main EC sectors are identified  below. A number of key measures which 
can only be done at EC level are singled out for  implementation. 

Energy 

In its conclusions on the energy response to Kyoto (11.5.1998), the Council of Energy 
Ministers noted that "in the field of energy the reduction of greenhouse gas  emissions 
requires  responses  such  as  a  sustained  commitment  to  energy  efficiency  and  energy 
saving,  developing  the  use  of  safe  energy  sources  with  low  or  no  C02  emissions 
within the  framework  of Member  States' policies, and reducing  the impact  of the use 
of  energy  sources  with  high  carbon  content".  Such  measures,  for  example,  could  be 
useful  in industrial and power generating activities. 

Areas  for  priority  action  at  this  stage  are  set  out  in  the  three  recent  strategy 
Communications8  on  Combined  Heat  and  Power,  Energy  Efficiency  and  the  White 
Paper  on  Renewables.  The  Energy  Council  urged  the  Commission  to  continue  its 
work  in  these  fields  and  to  submit  concrete  proposals  on  the  development  of  such 
measures where appropriate. In this respect, priorities for specific  action include: 

•  Measures to promote a substantially increased use of renewables, aiming to double 
their  share  in  the  Community's  energy  balance  to  12%  by  2010,  including  a 
proposal  for  a  harmonised  Community  framework  for  fair  access  of  electricity 
from  renewables  to  the  grid,  increased  support  for  biomass  within  the  Common 
Agricultural  Policy,  and  greater  emphasis  on renewables  in the revised  Structural 
Funds. 

Promotion of rational use of energy, focussing  in particular on efficiency  measures 
in  the  building  sector  (including  amending  Directive  93/76/EEC),  electrical 
appliances,  lighting  and  office  equipment,  long-term  agreements  with  industry, 
promotion  of  energy  services,  dissemination  of  information  on  best  practice  and 
further  development  of  financing  instruments.  It  is  important  that  the  revised 
proposed  Directive  on  Rational  Planning  techniques  should  be  adopted.  Energy 
efficiency  must  also  be  promoted  in  other  relevant  Community  policies  and 
subsidies  and  tax  schemes  counteracting  efficient  energy  use  should  be 
progressively reduced. 

Measures  to  promote  the  use  of  CHP,  aiming  to  exploit  achievable  potential  of 
doubling  the  share  of  CHP  in  the  Union  to  18%  by  2010,  including  the 
encouragement  of  voluntary  agreements  with  industry,  improved  technology 
procurement, and increased and higher quality information  dissemination. 

8  COM(97)514 final; COM(98)246 final; COM(97)599 final. 

13 

Action  is  required  both  at  Member  State  and  Community  level  in  all  these  areas  in 
order  to  adopt  and  implement  common  and  coordinated  policies  and  measures.  The 
ALTENER  II  and  SAVE  II  Programmes  will  provide  support  for  some  of  the 
Community  actions,  and  increased  use  will  be  made  of  other  existing  Community 
programmes  towards  the  objective  of  reducing  greenhouse  gas  emissions  in  the 
energy field. 

Transport 

In  the  transport  area  the  broad  priority  areas  have  been  mapped  out  in  the 
Communication on Transport and C02  (COM(98)204). The measures presented in this 
Communication  are estimated  to be capable  of  at least  halving  C02  emission  growth 
by  2008-2012.  The  main  priority  areas  where  low  cost  emission  reductions  can  be 
achieved are: 

•  measures to reduce emissions from passenger cars; 
•  progress with fair and efficient  pricing in transport; 
• 
• 

the completion of the internal market in rail transport; 
the integration  of the various modes of transport, both in freight and in  passenger 
transport, into an intermodal transport system. 

There are many measures  falling  in these four  categories that should be taken at  local 
and national level and would entail significant  transport, economic and  environmental 
gains.  Examples  are policies  to  promote  best  practice  in  freight  transport,  improved 
urban 
transport 
infrastructure. 

the  development  of  adequate  public 

transport  systems  and 

However,  some  measures  would  have  to  be  developed  at  Community  level  because 
they  have  a  direct  impact  on  the  internal  market  or  are  covered  by  the  Common 
Transport  Policy.  The  Commission  has  already  tabled  proposals  and  drafted  action 
programmes  on  some  of  these  measures,  but  progress  has,  so  far,  been  slow. 
Important  examples  are  a proposal  aiming  at  the  further  opening  up  the  rail  market 
made  in  1995  (COM(95)337),  a proposal  from  1996  for  amending  the  Community 
system  for  road  charges  and  taxes  (COM(96)331)  and  a  Communication  on  Freight 
Intermodality  published  in  1997  (COM(97)243final).  The  Council  has  not  yet  been 
able to decide on the first two proposals and has, so far, not had any discussion on the 
Communication on Freight Intermodality and the attached action programme. 

The  Commission  considers  that  urgent  progress  on  these  and  other  proposals  is 
required  to  further  the efficiency  of the transport  system  as well  as its  environmental 
sustainability. 

As  regards  international  aviation  the  Commission  is  of  the  opinion  that  the 
Community  and the Member  States  should  act together  to negotiate  the  limitation  or 
reduction of greenhouse gases with IC AO. To that effect  the Commission has recently 
adopted  a Communication  (COM  (98) 265) in which  one of the  aims  is to  secure  an 
endorsement  of  an  ICAO  workplan  aimed  at  securing  internationally  agreed 
reductions of emissions from aviation. 

14 

Agriculture 

In the  agricultural  sector the main  areas  for  action  derive from Agenda  2000. In  this 
sector  there  is  the  need  for  more  quantitative  analyses  on  how  the  evolution  of  the 
agricultural markets, as well as the existing and proposed rural develoment  measures, 
will influence climate change. 

The Common Agriculture Policy (CAP) is a key EU common policy and actions taken 
in  this  sector  to  address  climate  change  will  have  to  be  taken  within  a  Community 
framework.  However,  there  are  also  a  number  of  possibilities  for  action  under  the 
CAP  which are relevant for climate change, notably in the field of rural  development, 
that  are the main responsibility  of national  and regional  authorities. In the context  of 
Agenda 2000, there are a number of concrete EC common measures, as well  as other 
measures that provide  a wider  scope for  action at the national  and regional  level, that 
would contribute to reducing emissions in this sector. 

Priority areas for action by the EC are: 

• 

intensified  research  in  the  framework  of  the  Fifth  Framework  Research 
Programme; 

• 

•  using appropriate afforestation  measures in the field of rural development; 
•  promoting  renewable  energy  crops  in  the  framework  of  the  voluntary  set-aside, 
notably by  increasing  or differentiating  the voluntary  set-aside rate in the  case  of 
non-food  production;  increasing  state aid ceilings  for  multiannual  non-food  crops 
and through rural development measures for the use of Member States; 
for  methane  emission  reduction:  (a)  by  using  the  rural  development  measures, 
especially  investment  support,  to promote  better  storage  and  treatment  of  animal 
manure; and, (b) by encouraging research on improved feeding of animals; 
for  nitrous  oxide  emission  reduction:  (a)  by  promoting  a decrease  in  the  use  of 
fertilisers,  the  main  agricultural  source  of  nitrous  oxide,  through  the  price 
reductions  proposed  in  Agenda  2000;  (b)  by  increasing  support  to  agro-
environment  measures to ensure  a further  reduction  and a better use of  fertilisers; 
(c) by maintaining and enhancing low-input farming  systems and other sustainable 
agricultural  practices  through  the  development  of  the  Less-Favoured  Area 
Scheme;  and,  (d)  in  the  framework  of  the proposed  Regulation  concerning  rules 
for  direct  support  schemes,  Member  States  may  be  willing  to  make  direct 
payments conditional upon the respect of requirements concerning  fertilisation. 

• 

Industry 

The potential  for  reducing  C02  emissions  in the industrial  sector  is well  researched, 
and  most  energy  intensive  sectors  of  EU  industry  have  improved  energy  efficiency 
and  thereby  reduced  emissions.  However,  there  is  still  scope  for  further  energy 
efficiency  gains  and  sectors  such  as  aluminium,  cement,  steel,  chemicals  and  motor 
vehicles  are  active  in  promoting  technological  improvements  to  reduce  emissions. 
Industry  can  also  play  an  important  role  in  providing  the  right  products  for  energy 

15 

efficiency  improvements  in  buildings  and  the  domestic  sector  The  Kyoto  Protocol 
presents  a  major  new  challenge  for  industry:  apart  from  the  reduction  of  C02 
emissions,  powerful  greenhouse  gases  such  as  nitrous  oxide  and  the  three  new 
industrial gases require immediate investigations and commitments by industry 

There are many measures  addressing the areas for  action referred  to above. Given the 
differences  in  industrial  structure  in  the  Member  States  and  the  different  progress 
made to date in reducing  emissions  in this  sector  in the Member  States, many  of the 
actions to reduce emissions will be taken by member  States. Nevertheless, there  are a 
number  of  measures  that  need  to  be  taken  at  Community  level  for  internal  market 
reasons  or  because  with  a  Community  measure  the  overall  reduction  of  emissions 
would be greater. 

•  Proposal  on  a  Directive  on  Electrical  and  Electronic  Waste  which  could  be  a 

useful  vehicle for reducing HFC emissions. 

•  Negotiation  and  conclusion  of  Environmental  Agreements  with  specific  sectors 
that are major  emitters of C02  and other greenhouse gases at the EC level are also a 
flexible  option.  C02  reduction  for  passenger  cars  is  a  notable  example  but  the 
Commission  is  engaged  in  discussion  with  other  sectors  such  as  the  detergent 
manufacturers  with reduced energy consumption from detergent use a major  goal; 

•  Development of a framework covering all fields of production and use of the three 
the  development  of 

their  emission 

reduction  and 

industrial  gases 
environmentally sound alternatives. 

for 

Cross- sectoral policies 

There  are  a  number  of  cross-sectoral  policies  that  are  particularly  appropriate  for 
action at EC level. Some of the most important are 

•  The  proposal  for  a  Council  Directive  re-structuring  the  Community  framework 
for the taxation of energy products (COM  (97)  30 which enlarges the scope of the 
Community  minimum  rate  system  beyond  mineral  oils  to  cover  all  energy 
products.  This proposal  would  also have  direct  environmental  benefits  and  would 
also  give  Member  States  the  option  to  differentiate  national  taxes  according  to, 
inter  alia,  C02  emissions.  This  proposal  should  be  viewed  as  a  separate,  but 
complementary,  tool to the flexible  mechanisms, given that  it is first and  foremost 
an internal market instrument. 

•  Among various actions on waste the Directive on the Landfill  of Waste. Its aim is 
to reduce the biodegradable component of municipal waste that is being  landfilled, 
thereby reducing methane emissions as well as ensuring that landfill  gas from both 
new  and  existing  landfills  is  collected  and  controlled.  It  would  have  an  impact 
notably on the domestic and tertiary sector. 

•  The  Fifth  RTD  Framework  Programme  (1998-2002)  will  cover,  through  its 
specific  programme  "Preserving  the  ecosystem"  and  one  of  its  key-action  on 

16 

"Global  Change, climate and biodiversity" (400 millions  ECU), the  scientific  and 
socio-economic  research  regarding  climate  detection  and  impacts  assessment  as 
well  as  mitigation  and  adaptation  responses  to  climate  change.  Such  research  is 
intended  to  provide  analytical  underpinning  to  the  identification,  evaluation  and 
implementation  of  effective,  cost-efficient  and  equitable  policy  options  to  tackle 
climate  change  in  the  short  and  long-term  period.  The  Fifth  RTD  Framework 
Programme will also cover the R&D and the innovation policy related to clean and 
efficient  energy  technologies.  This  activity  is  expected  to  deliver,  already  in  the 
short  and medium  term,  new  technologies  which  could  have  a  substantial  impact 
on  greenhouse  gas  reduction;  complementary  innovation  measures  taking  into 
account  socio-economic  assessment  would  help  to  strengthen  the  deployment  of 
these  new  technologies  into  the  market.  Two  relevant  key  actions  of  the  specific 
programme  "Preserving  the  ecosystem"  address  energy  related  issues  ^Cleaner 
energy  systems,  including  renewables"  and  "Economic and  efficient  energy for  a 
competitive Europe")  with a total amount of approximately  1  billion ECU. Another 
specific  programme  entitled  "Competitive  and  sustainable  growth"  also  includes 
key  actions dealing mainly with new technologies  in industry  and transport  which 
could have a significant  impact on greenhouse gas emissions reduction. 

The  Council  is  requested  to  endorse  the  areas  highlighted  in  this  document  as  those 
where action  is needed  and to adopt the necessary  Community  measures, starting with 
those  already  proposed  by the  Commission.  The  Council  should  further  recognise  the 
need for adoption of national measures. 

2.4 

Flexible Mechanisms 

The  Kyoto  Protocol  allows  for  the  use  of  three  flexible  mechanisms:  international 
emissions trading, Joint Implementation and the Clean Development  Mechanism. 
• 

International  emissions  trading  allows  Parties  to  the  Protocol  who  reduce 
emissions below their assigned  amount  to sell part of their emission  allowance  to 
other Parties. If Parties  need  an additional  emissions  allowance, they  can buy  the 
extra from other Parties who have spare capacity and are willing to sell. 
Joint Implementation  is a specific  form  of emission trading at project  level. Annex 
I Parties to the Convention can undertake projects  (e.g. fuel  switching for a power 
station) with other Annex  I Parties which result  in additional  emission  reductions 
in  the  country  where  the  project  is  located.  Those  reductions  can  be  used  to 
increase  the  emission  allowance  of  the  Party  financing  the  project,  while  the 
emission  allowance  of  the  Party  where  the  project  is  carried  out  would  be 
correspondingly  reduced. 

• 

•  The  Clean  Development  Mechanism  is  also project  based,  but  the  Parties  where 
the  projects  are  located  and  the  reductions  undertaken  do  not  have  quantified 
commitments.  For  that  reason,  projects  not  only  need  approval  by  the  Parties 
concerned, but  emission  reductions  resulting from them must  also be  certified  by 
independent agents. 

17 

The  rules  and  modalities  for  use  of  these  mechanisms  have  to  be  further  defined  at 
COP4  in  November  1998.  The  Community  and  the  Member  States  have  to  decide 
how  they  intend  to  use  these  mechanisms  both  within  the  Community  and 
internationally.  Coherence needs to be ensured between what the Community  intends 
to do and what international rules are agreed at COP4. 

2.4.1  Participation  of  Member  States  and  the  Community  in  an  international 

emissions trading regime. 

The specific role for  the Community in emissions trading within the EU 

The EC bubble  is  an  open  system:  it  is  a way  of  distributing  the  effort  between  EU 
Member  States  so  as  to  ensure  that  the  EC's  target  under  the  Protocol  is  fulfilled. 
There  is,  therefore,  compatibility  between  the  EU  bubble  and  international  flexible 
mechanisms.  To  the  extent  that  the  EC  and  the  Member  States  actually  use  the 
flexible  mechanisms,  the  domestic  action  within  the  EC  to  fulfil  its  "assigned 
amount" will lead to emissions within the Community's territory below or above the -
8% target. The  amount by which the actual emissions differ  from  the initial  assigned 
amount  will  depend  on  whether  the  EC  is  a  net  acquirer  of  emissions  credits  or 
permits from outside the EU, or a net  transferor. 

The  bubble  agreement  to  the  Protocol  will  indicate  the  assigned  amount  for  each 
Member State at the beginning of the period. The use of emissions trading (as well  as 
Joint  Implementation  and  the  Clean  Development  Mechanism)  will  increase  or 
decrease  this  assigned  amount  according  to  the  acquisitions  and  disposals  of  each 
Member State (directly or through authorised entities). 

Not  everybody  nor  every  sector  would  be  interested  necessarily  in  participating  in 
emissions trading  arrangements, but  everybody  and  every  sector  should  contribute  in 
different  ways  to  the  attainment  of  targets,  whether  through  taxation,  energy-
efficiency  standards,  voluntary  agreements,  or  a  combination  of  these  and  other 
instruments.  Different  measures  each  have  their  own  attractions,  and  are  targeted  at 
particular  sectors. For those entities that  are to be  involved  in trading,  however,  it  is 
clear  that  a  legally  binding  assigned  amount  of  the particular  gas  or  gases  open  for 
trading needs to be  set quantitatively.  A comprehensive trading  system across  sectors 
would help ensure that the overall reduction target is met in a cost-effective  way. 

Internal  market and state aid 

For  internal  market  reasons, it would  appear  to be preferable  for  an  EC-wide  permit 
market  to  be  considered.  It  would  not  be  desirable  to  have  widely  different  trading 
arrangements  in  different  Member  States.  The  Community's  role  could  be  twofold. 
On the  one hand,  to  co-ordinate  the  actions  of the Member  States,  and,  on the  other 
hand,  to  harmonise  the  trading  system  to  the  extent  necessary  for  the  proper 
functioning  of  the  internal  market.  To  avoid  distortion  of  competition  and 
discrimination,  the  EC  needs  a common  framework,  setting  common  principles  and 
minimum  rules,  similar  to  those  that  exist  on  state  aid  or  for  the  common  Value 
Added Tax system. 

18 

Of  particular  relevance  is  the  state  aid  context  as  competition  within  the  internal 
market coulo>be distorted due to different  modalities of national trading programmes. 
The issue of state aid is intricately related to the crucial question of whether, and to 
what  extent,  private  entities  are  allowed  to  participate  in  emissions  trading.  The 
Protocol allows each Party to choose whether to participate in the international trading 
system or not. Any authorisation allowing private entities to trade will have to respect 
the  choice  of  the  Member  States  who  have,  as Parties  to  the  Protocol,  to  take the 
decision whether to trade at all. Differences  of approach within the Community could 
themselves give rise to private companies facing different  economic conditions in one 
Member  State  from  what  comparable  businesses  face  in  another  Member  State, 
thereby potentially undermining the internal market. 

If a Member State buys permits on the open market, and then gives them to certain 
enterprises of its own industry for free or without imposing conditions, then this could 
constitute state aid and would need to be authorised in advance by the Commission, 
since  it  could  distort  competition  with  enterprises  in  other  Member  States,  where 
industry must buy the permits it needs at the market price. Clear guidelines will have 
to  be  established  in  this  context.  Similarly,  the  initial  allocation  of  permits  to 
individual companies, in the case that private entities are authorised to trade, will also 
need  to  be  in  conformity  with  the  state  aid  rules:  in  the  Commission's  view  the 
allocation should be transparent, non-distortionary and based on common criteria and 
principles. The market will  also have to be left  open to new entrants who have not 
received credits at the time of the initial allocation. Particularly with respect to initial 
allocations but also in respect to rules for monitoring and compliance, there must be 
no  discrimination  between  participants  of  a trading  system  that  would  infringe  the 
internal  market.  Finally,  account  must  also  be  taken  of  the  specificities  of  the 
Common Agricultural Policy. 

Step-by-step approach 

Theoretically  the  Community  could  immediately  opt  for  a  comprehensive  internal 
emissions trading  scheme covering  all gases and all economic  sectors. However, in 
view  of  the  lack  of  national  and  international  experience,  the  Community  and  its 
Member  States  may  prefer  to  follow  a  prudent  step-by-step  approach  in  the 
development  of  their  internal  emissions  trading.  Trading  requires  a high  degree  of 
certainty  in  monitoring  actual  emissions.  There  are  three  different  ways  of 
implementing this step-by-step  approach: (1) by limiting the number of gases, as, at 
present, C02 emissions emanating from certain sources are subject to less uncertainty 
than other gases; (2) trading could in the first instance be limited to the best known 
emissions sources, such as large combustion plants and big emitters; and, (3) although 
the  possibility  of  allowing  private  entities  to  trade  is  being  considered,  it  may  be 
appropriate  to  limit,  trading  initially  to  Parties.  In  view  of  enhancing  overall 
effectiveness,  there is a clear case for Member States to move towards similar regimes 
in a co-ordinated way. 

19 

2.4.2  Use  of  Joint  Implementation  and  the  Clean Development  Mechanisms  in 

meeting EC commitments 

* 

Contrary to emissions trading as described above, Joint Implementation  and the Clean 
Development  Mechanism  are project-based  instruments  that  allow  for  the creation  of 
emission  reduction  units  or  certified  emission  reductions.  They  can  be  added  to  the 
assigned  amount  of  Parties  and  therefore  can  contribute,  to  a  certain  extent,  to 
compliance  with  the  EC  commitments.  Joint  Implementation  is restricted  to  projects 
undertaken between the Annex I Parties (i.e. those Parties who have targets  set under 
the  Protocol),  and  the  Clean  Development  Mechanism  concerns  projects  undertaken 
in  countries  of  non-Annex  I  Parties  to  the  Convention.  Consequently,  the  credits 
earned by Annex B Parties under the Clean Development  Mechanism  would  increase 
the  total  allowed  emissions  of  Annex  I  Parties,  although  this  has  to  be  balanced 
against 
the  decrease  of  emissions  that  a  well-designed  and  operated  Clean 
Development Mechanism will produce in non-Annex I countries. 

The  Protocol  allows  Parties  to  authorise  any  legal  entity  to  participate  in  Joint 
Implementation  and  the  Clean  Development  Mechanism  activities.  In  particular  for 
those companies who do not accept the imposition of an initial emission allowance  of 
gas that they can trade, Joint Implementation  and the Clean Development  Mechanism 
would  offer 
them  flexibility  on  a  project  basis.  However,  private  company 
involvement  will  still  require  a  strict  project  and  certified  emission  reduction  unit 
tracking and accounting system at both national and Community level. 

funding 

it  should  be  considered  whether  project 

Furthermore, 
Joint 
Implementation  and  the  Clean  Development  Mechanism  could  be  made  in  part 
through  public  funds  (including  EU  funds).  In  general, there is  a need  to  ensure  that 
Clean  Development  Mechanism  projects  go  further  than  state  of the  art  investments, 
and  that  projects  and  technologies  that  go  beyond  the  "no  regrets"  options  are 
implemented  and transferred.  Finally, Member  State and Community  aid programmes 
to  support  Clean  Development  Mechanism  activities  should  result  in  reductions  in 
emissions  that  are  additional  to  any  that  would  occur  in  the  absence  of  the 
programmes, nor should they result in the diversion of aid flows. 

for 

2.4.3  Conclusion  on  application  of 

the  flexible  mechanisms  within 

the 

Community 

Under  the  Protocol,  international  emissions  trading  will  not  become  operational 
before  the year 2008. However,  the Community  could  set up  its own  internal  trading 
regime by  2005  as an  expression  of its determination  to promote  the  achievement  of 
targets  in  a  cost-effective  way.  This  would  provide  the  Community  with  invaluable 
practical  experience  of trading,  and its accompanying  monitoring  regime,  in  a multi-
country  context.  Such  an  internal  trading  regime  would  not  fall  under  the  rules  and 
modalities of international emissions trading under the Kyoto Protocol, and nor would 
it  be  designed  to  generate  early  credits  for  when  international  trading  starts.  Such  a 
Community emissions trading regime would rather ensure that the Community will be 
better  prepared  at  the  start  of  international  emissions  trading  with  effect  from  2008. 
Finally,  emissions  trading  introduced  within  a  single  Member  State  would  be  a 

20 

domestic  policy  and measure  that  would  not  fall  under  the rules  and modalities  of 
international emissions trading under the Kyoto Protocol. 

As  all  the  Member  States  are  Parties  to  the  Protocol,  the  intra-EC  trading 
arrangements will have to be in conformity  with the rules  and modalities  agreed in 
Buenos  Aires  for  emissions  trading  at  an  international  level.  Consequently,  any 
definition  of  the  Protocol's  requirement  that  the  contribution  of  the  flexible 
mechanisms  is  "supplemental"  will  also  have  to  be  respected  for  trading  between 
Member States. 

The  Council  is  requested  to  endorse  the  introduction  of  the  flexible 
mechanisms 
in  a  step-by-step  and  co-ordinated  way  within  the 
Community. 

The Council is requested to endorse the objective of the gradual inclusion 
of  private  entities  over  time,  and  that,  as  national  use  of  the flexible 
mechanisms will have to respect the Community law, it would be desirable 
to have a Community framework to safeguard the internal market. 

The  Council  is  further  requested  to  agree  that  the  definition  of 
supplemental will have implications for the cost-effectiveness  of the overall 
EU strategy. 

2.5  Monitoring 

2.5.1  Monitoring in relation to compliance with commitments 

Progress needs to be monitored. In this respect the EC monitoring mechanism has an 
important  role  to  play  in  the  development  and  implementation  of  an  EU  strategy 
owing to the fact  that both the Member  States  and EC have joint  responsibility  for 
meeting their commitments under the Kyoto protocol. 

So far the monitoring mechanism has been relatively weak and data has been late. The 
revised monitoring mechanism9 being adopted that enters into force in 1999 will help. 
It  requires,  inter alia, the  Member  States  to  provide  information  on  the  effects  of 
measures on their emissions so that the Commission can assess annually whether the 
EC is on course to meet its Kyoto commitments. The monitoring mechanism should 
be a pro-active basis for continuing dialogue, tracking progress according to indicative 
sectoral  targets which will  show  each year whether  demonstrable progress  is being 
made, and whether all sectors are contributing as expected, towards the attainment of 
targets. Continuous assessment, peer pressure and review between all the participants 
- the Commission and Member States - will ensure that necessary action to improve 
performance is taken if objectives look as though they are not being achieved. 

9 Proposal for a Council Decision amending Decision 93/389/EEC for a monitoring mechanism of the 
Community for C02and other greenhouse gases -COM(98) 108 final of 02.03.98 

21 

Certainly  there  is  a need  for  enhanced  dialogue  within  the  monitoring  mechanism 
framework  even before the revised monitoring mechanism delivers given that the EU 
needs to show demonstrable progress by 2005. Also in this framework the question of 
whether  we  should  set  interim  Community  target  for  2005  to  help  ensure  that 
measures  we need  are  adopted  in time needs  to be considered.  If  the  EU wants to 
continue to drive the process forward and recognises that Kyoto targets are but a  first 
step,  there  is  a  case  for  setting  an  ambitious  target  for  2005  which  gives  the  EU 
certainty that the EC will meet its legal commitments and be ready to go further in the 
second commitment period. 

2.5.2  Monitoring in relation to the flexible mechanisms 

Use of the flexible mechanisms, by Parties and, in particular, by private entities to the 
extent  that  they  are  allowed  to  participate,  must  be  accompanied  by  a  robust  and 
transparent  monitoring  system.  Such  a  monitoring  system  should  also  cover 
accounting  for  transfers,  and  consequential  adjustment  of  assigned  amounts  as 
appropriate,  verification  of  emission  reduction  units  and  of  certified  emission 
reductions  obtained  through  Joint  Implementation  and  the  Clean  Development 
Mechanism. In addition, compliance (including eligibility to use each of the  flexible 
mechanisms) needs to be settled. In view of the need to ensure a level playing field 
within  the  Community,  it  is  therefore  unavoidable  that  such  a  comprehensive 
monitoring  system  would  require  much  greater  Community  involvement.  The 
Community monitoring system that will be applicable from 2000 on will, therefore, in 
all likelihood have to be substantially modified. 

Once  in  the  commitment  period  (2008-2012),  the  Community's  monitoring 
mechanism will help ensure that the Community as a Party complies with its legally 
binding target, as well as with the rules and procedures that will have been agreed on 
for the flexible mechanisms. 

The  Council  is  requested  to  endorse  the  need  for  a  considerable 
strengthening  of  the  Community's  monitoring  system  both  for  tracking 
progress on implementation  and with a view to implementing the  flexible 
mechanisms. 

3. 

External dimension of the EU strategy 

3.1 

International negotiations of flexible mechanisms 

3.1.1  Objective in Buenos Aires 

In this Communication, the Commission puts forward  a set of guiding principles on 
international  trading  and  other  flexible  measures.  At  the  Fourth  Conference  of  the 
Parties  (COP4) in Buenos Aires, it  is  expected  that  a position  on the main  trading 
principles,  and  possibly  modalities,  will  be  agreed.  The  Community  should  do  its 

22 

utmost to ensure that there is a positive outcome to COP4 that clearly establishes the 
modalities  and rules  for  use of the flexible  mechanisms  at an international  level, as 
well as laying the foundations for an enhanced participation of non-Annex I countries 
in global greenhouse gas reduction efforts.  The Community will have to decide  after 
Buenos Aires to what  extent  stricter internal  Community rules than those agreed at 
COP4 are warranted in respect, in particular, of the internal market and monitoring. 

Irrespective  of  whether  any  individual  Member  State  ultimately  wishes  to  use  the 
flexible  mechanisms  or  not,  a  firm  and  common  EC  position  towards  the 
establishment  of  minimum  rules  for  the  international  trading  system  should  be 
presented at Buenos Aires. 

3.1.2  Eligibility to participate in  an  open, transparent  and  non-discriminatory 

international trading system 

Although the Protocol says that the Parties may trade, they do not need to do so even 
if eligible. During the course of the budget period, a Party may decide that it needs to 
trade if its target is to be reached. Such flexibility can only be preserved, however, if 
Parties fulfil  all eligibility criteria for trading. 

The  EC  and  the  Member  States  have  an  interest  in  establishing  and  fulfilling  the 
eligibility criteria for all Parties involved in trading, irrespective of whether they wish 
to trade or not, as this will keep options open for the future. 

The EU should insist on an international greenhouse gas trading system that is open, 
transparent  and  non-discriminatory.  Available  permits  should  be  accessible  to  all 
Parties and other authorised entities wishing to acquire them, and there should be an 
open  information  flow  on  the  terms  and  reporting  of  trades, which  must  be  made 
regularly and be accessible to all Parties and other stakeholders. 

3.1.3  Step-by-step approach 

There is a lack of practical experience with the flexible mechanisms. If too much is 
done too soon, the international trading system may prove unworkable. 

Internationally, the EU should therefore urge that a gradual approach be adopted, both 
in terms of participants, in terms of quantities, gases and sources. This is to reflect the 
uncertainties  related  to  the  emissions  of  certain  gases  and  certain  sources,  and  to 
reflect  that accountability  of the Parties must be maintained  as it is the Parties who 
remain responsible  for their own compliance. One option would be to  limit,  for the 
first period  2008-2012, the number  of  actors  involved  in trading  to  Parties,  and, if 
trading by private entities is allowed by the rules and modalities, to initially restrict 
trading to large sources whose emissions are more certain and who are able to monitor 
their emissions with satisfactory accuracy. This step-by-step approach to trading could 
start with emissions that can be accurately measured, such as C02 emissions. 

23 

In  the  case  of  Joint  Implementation  and  the  Clean  Development  Mechanism, 
uncertainties need to be addressed through project  criteria, and agreed methods for the 
verification  of reductions. 

It may be  decided,  at an international  level, that private  entities  could  be involved  in 
trading. As it  stands, the Protocol  confines  trading to the Parties themselves,  whereas 
private  entities  may  also  participate  in  Joint  Implementation  and  the  Clean 
Development  Mechanism.  The  involvement  of  private  entities  in  trading  would,  on 
the one hand, enhance the economic benefits  of trading, but, on the other hand, would 
increase  the  complexity  of  regulation  and  control  to  ensure  that  the  environmental 
goals of the Protocol are met. Whatever the decision on who can trade, Parties  should 
be  free  to  authorise  or  not  private  entities  within  their jurisdiction,  as  long  as  strict 
minimum requirements, to be agreed at the level of the Conference  of the Parties, are 
fulfilled. 

3.1.4  Supplemental 

The reason  for  the Protocol's  inclusions of the word  "supplemental" is to  ensure  that 
the  main  means  of  meeting  commitments  agreed  in  Kyoto  should  be  provided  by 
domestic action. Domestic policies and measures do have benefits  other than reducing 
greenhouse  gases.  Such  benefits  include  the  reduction  of  other  pollutants,  the 
improvement  of  urban  air  quality,  for  example,  and  even  beneficial  effects  in  other 
policy  areas  (reductions  of  road  congestion,  security  of  energy  supply,  lowering  of 
statutory  charges  on  labour  with  tax  receipts  and  encouragement  of  technological 
development).  Furthermore,  some  measures,  such  as  taxes  on  energy,  have  other 
objectives than environmental protection. 

One  option  to  ensure  that  emission  trading  is  "supplemental"  is  to  limit  the  net 
amount  of  the  assigned  amount  that  can  be  traded.  Such  a  limit,  or  "concrete 
ceiling"10,  on  all three  flexible  mechanisms  taken  together  is  one way  to  ensure  that 
real reductions are achieved by the introduction  of other policies and measures, while 
still  benefiting  from  the  cost  savings  that  can be  derived  from  the  flexibility  offered 
by  emissions  trading  and  the  other  flexible  mechanisms.  For  this  reason,  and  to 
preserve  the  maximum  flexibility  within  a  cap,  the  Community  should  continue  to 
insist  on  a common  ceiling  as a condition  of participating  in the international  trading 
system, but that this ceiling should be applicable to the Community as a whole. 

If the Community wishes to have a quantitative ceiling, it should develop a clear basis 
for  fixing  the  amount  of  the  cap  at  a particular  level,  taking  cost-effectiveness  into 
account. On the other hand, the cap may not be necessary if it is judged that the rules 
and modalities  on international  emissions  trading  are sufficiently  strong  to  guarantee 
supplementally  and  an  effective  Protocol.  A  cap  could  create  an  administrative 
burden, in so far as checks would have to be carried out to ensure compliance with the 
cap,  and,  in  limiting  the degree  of  flexibility,  the cost-effectiveness  of trading  would 
be  reduced.  Similar  arguments  would  apply  when  establishing  the  quantitative  or 
qualitative  limits  on the  "part" of credits that  can be brought  into  the trading  system 

10 "Concrete ceiling" is the terminology used in the March 1998 Environment Council Conclusions, 

24 

via projects  under the Clean Development Mechanism with countries that do not have 
a  legally  binding  emissions  target  under  the  Protocol.  However,  for  the  Clean 
Development  Mechanism,  the  wish  to  encourage  the  participation  of  non-Annex  I 
countries is important. 

3.1.5  How to make trading work environmentally and economically 

Strict monitoring of trading is necessary for Parties to be sure that they will fulfil  their 
international  commitments.  Equally,  adequate  monitoring  of  actual  emissions  is 
necessary  to ensure that  trading  is matched  by the  seller making  emission  reductions 
that go further  than what is necessary to comply with the assigned amount allocated to 
him. For emissions trading to be of real benefit  to the environment, whatever  permits 
one Party buys  should  be matched  by  a corresponding  reduction  in  emissions  by  the 
Party that is selling. 

The  certification  and  tracking  of  trades,  ex-ante  and  ex-post  evaluation  of  trading 
systems  and participants  will be necessary  if there  is to be widespread  confidence  in 
the  trading  mechanisms  and  the  purchase  of  credits  or  permits  under  the  system. 
Transfers  could  be  reported  annually,  published  by the  Secretariat  and,  if  necessary, 
broken  down  by  year  of  emission,  country  of  origin,  and  gas.  Parties  could  also  be 
required  to  report  on  national  mechanisms  for  the  certification  and  verification  of 
emission  reduction  credits.  Such  rules  of  operation  could  be  compared  to  a  stock 
exchange  or  comparable  well-structured  and  organised  market,  where  there  are 
obligations  designed  to  maintain  the  transparency  and  efficiency  of  the  market. 
Similarly,  ex-post  verification  by  independent  bodies  should  be  envisaged  as part  of 
the transparency and reliability of the trading mechanism. 

Those strict rules would have to be adopted by all the Parties involved in international 
trading.  In  this  context,  the  rules  must  be  co-ordinated  as  much  as  possible  at 
Community level. 

3.1.6  Compliance provisions for  the flexible  mechanisms 

Under  the  Protocol,  Parties  (including  the  EC  as  Party)  are  responsible  for 
compliance. It would be unwise to depart from this principle, even if it is decided that 
private entities are allowed to trade as well as Parties. 

As  a  corollary  to  monitoring  and  evaluation,  and  apart  from  the  general  compliance 
provisions  for  the Protocol  as  a whole,  specific  compliance provisions  are  necessary 
to  ensure  that  the  flexible  mechanisms  deliver  environmental  benefit.  Compliance 
should include international sanctions, even penalties, which can be imposed on those 
trading if they  fail to comply with the rules. Sanctions could include suspension  from 
trading until compliance with the trading rules has been re-established,  the  automatic 
deduction  from  the  next  budget  period  of  emissions  which  exceed  the  allowed 
amounts after trades have been taken into account, and even the possible annulment of 
trades  that  are  not  matched  by  emissions  reductions  (so  called  "buyer  beware"). 
Penalties  could  possibly  include  a  stricter  target  being  required  of  a  Party  in  the 

25 

subsequent  budget  period.  Clearly,  the respective  responsibilities  of  actors  in  trading 
will have to be established, so as to avoid liability litigation. 

3.1.7  International  use  of project-related  instruments  (Joint Implementation  and 
the Clean Development Mechanism) with a view to achieving  commitments. 

To  the  extent  that  Joint  Implementation  gives  rise  to  emission  reductions  in  the 
recipient country which are transferred  to the investor's country, the transfer  is similar 
to  an  acquisition  of  part  of  an  assigned  amount  through  trading  by  the  investor's 
country,  except  that  the part  would  not  have been bought,  but  earned  through  actual 
investments in projects. The COP should define  further  guidelines. The guidelines  for 
Joint  Implementation  and  the  rules  and  modalities  for  the  Clean  Development 
Mechanism  should  be  consistent  (e.g.  methods  for  defining  project  baselines,  for 
verification  of  the  emissions  reduction  achieved  and  other  project  related  criteria). 
Analogously,  the  cost-effectiveness  could  be  enhanced  through  the  tradeability  of 
certificates  generated by the projects. 

For  the  Clean  Development  Mechanism,  there  can  be  no  corresponding  downward 
adjustment  of  the  target  of  the  recipient  country,  given  the  absence  of  any  legally 
binding  target  for  this  country.  The  credits  have  to  be  compared  with  an  estimated 
reduction  on  the  basis  of  specific  criteria  rather  than  in  relation  to  targets.  This 
justifies  why  some  additional  requirements  might  be  necessary  for  the  Clean 
Development  Mechanism.  In  particular,  definition  of  the  "part"  that  the  Clean 
Development  Mechanism  can contribute is a priority, in view, among other things, of 
the  possibility  to  generate  early  credits  between  2000  and  2008.  This  part  could  be 
limited in order to place more emphasis on domestic action of Annex I countries. It is 
also essential to define the key criteria for "additional" which, if not carefully  defined, 
could  undermine  the  environmental  effectiveness  of  Clean  Development  Mechanism 
activities. 

The  Council  is  asked  to  endorse  the  orientations  outlined  above  on  the 
external  dimension  of the EU strategy as a basis for the formulation  of the 
EU's negotiating position in Buenos Aires. 

3.2. 

Strengthened international  dialogue 

In the run-up to Buenos  Aires  and beyond  the EU needs to be  effective  in  reaching 
out  to  its partners  and  so it  needs  an  external  strategy.  A  continuing  dialogue  with 
the main players in the negotiations  will help in communicating the EU position and 
rallying  support  to  it  as well  as reaching  a better  understanding  of  third  countries' 
position. The key topics of the dialogue are signature, ratification,  domestic  actions, 
emissions  trading,  clean  development  mechanism,  participation  by  developing 
countries,  helping  countries  to  meet  their  existing  commitments  and  international 
monitoring and compliance. 

26 

As we work on completing the outstanding issue under the Protocol and in preparing 
implementation,  all  Member  States,  the  Presidency  and  Commission,  operating 
within  an  EU  co-ordinated framework, should  use  their  resources  effectively  to 
ensure that partner countries receive consistent and specific messages that reflect the 
priorities of the EU and the specific concerns of these countries. 

A major aim of the EU is the entry into force of the Protocol and so it will therefore 
need to give particular attention to USA and Russia who because of their high share 
in Annex I emissions will have an important influence on this. Equally the EU must 
strengthen  its  dialogue  with  all  other  industrialised  country.  Russia  is  not  only 
important for ratification, but along with Ukraine poses particular issues since these 
are the only countries whose  assigned  amount  are likely to be significantly  above 
their domestic emissions in the first commitment period 2008 - 2012. 

In the run up to Kyoto the EU developed  an effective  dialogue with the Associated 
countries which need to be continued and strengthened. In this context it will also be 
essential to discuss possible joint implementation projects with them. Under the terms 
of the Protocol the Associated States will not be counted as part of the Community  -
8% target for the period 2008 -2012. Nevertheless as they work towards accession the 
evolving acquis on climate change will be a major focus of debate. 

Turkey and the new OECD members Korea and Mexico are important  for  the EU's 
objective of gradually extending the number of countries with binding commitments. 
The EU needs to enter into a constructive dialogue about the possible nature and level 
of commitments these countries might be willing to undertake. 

AOSIS, a group of 41 mainly ACP islands and coastal states, have the most ambitious 
goals  of  all  countries.  Being  among  the  most  vulnerable  of  all  countries  they  are 
increasingly concerned about impacts of climate change. A satisfactory solution of the 
question  of  the  share  of  proceeds from the  Clean  Development  Mechanism  which 
shall be used for adaptation projects will certainly be important for them. At the same 
time,  as  members  of  the  G  77  they  play  an  important  role  in  trying  to  broker 
compromises between industrialised and major developing countries. 

Some African  states are also concerned about the impacts of climate change and are 
potential  allies on climate issues in the context of our wider privileged relationship. 
They  are  looking  for  support  in  unravelling  the  implications  of  the  remaining 
negotiating issues 

Argentina  has  played  a  crucial  role  throughout  the  negotiations  on  Kyoto  and  of 
course  hosts  the  Buenos  Aires  meeting.  A  topic  for  further  consultations  with 
Argentina  is  their  intention  to  submit  a proposal  for  voluntary  commitment  of non 
Annex  I  countries  under  the  Kyoto  Protocol.  Brazil  is  also  a  leading  player.  It 
submitted  last  year  a proposal  how  to  arrive  at  differentiated  commitments  for  all 
Parties, which will be discussed in the upcoming meetings and it played a crucial role 
in defining the Clean Development Mechanism. 

27 

China  and India deserve particular  attention because of the high projected  increase  in 
emissions. They are very concerned  about equity and trade implications of the  flexible 
mechanisms  and have also made clear that the arrangements  for  emissions  limitations 
in the Kyoto Protocol, which are designed for mature industrialised  economies, cannot 
be  extended  to  countries  at  a  very  different  level  of  development.  Thus  they  are 
concerned  about  the type of precedents  that the continuing  negotiations  on the  Kyoto 
rules will create  for the long term. Energy producing  countries, Indonesia,  along with 
Malaysia and the Philippines have a keen interest in these issues and have been  active 
in  the  negotiations.  The  oil  producing  countries  also  have  a  vital  interest  in  climate 
change issues. Reinforced  dialogue, in particular with the Gulf Co-operation  Council, 
needs to be maintained 

Greater  visibility  should  be  given  to  existing  EU  efforts  and  consideration  given  to 
what  more  could  be  done  within  existing  mechanisms  including  the  European 
Investment  Banks  's  role.  The  aim  would  be  to  provide  public  support  to  build 
capacity  so  that  countries  could  benefit  from  the  opportunities  provided  by  both  the 
clean development mechanism  and joint implementation. It will be important  to make 
clear that existing aid flows from Member States and Community aid programmes  are 
not themselves being diverted to obtain emissions reduction. 

The Council  is requested to endorse the priorities set out in this document  for a 
strengthened dialogue with third countries. 

4. 

Next Steps 

If an effective  EU post-Kyoto strategy is to be put in place the Council needs to agree 
on a number of  elements developed in this Communication. These are: 

For  Implementation 

•  First,  a  common  understanding  between  the  Community  and  the  Member  States 
on the strategy process and the respective contributions  of the Member  States. In a 
coherent  strategy  all  actors  need  to  know  what  each  of  them  are  doing  and  what 
they are planning to do. The Commission will formally  request this information  by 
end July. In practical terms the Member  States need to, inform  the Commission  by 
the  end  of  this  year  of  the  national  strategies  they  intend  to  put  in  place  to  meet 
their  emission  reduction  target  and  what  they  expect  Community  measures  to 
contribute. To be useful  this information  needs to indicate in a quantified  form  the 
expected impact of national and Community measures on their emissions as well as 
the state of implementation of national measures. 

•  Co-ordination between the various Council formations has to be improved in order 
to  strengthen  the  consensus  on the need  for  action  on  climate  change.  Agreement 
on  emission  reduction  targets  by  the  Environment  Council  must  go  hand  in  hand 

28 

with  action  by  other  Councils  such  as Ecofin,  Transport,  Energy  and  Agriculture. 
The  Council  has  been  innovative  in  developing  Joint  Councils  and  informal 
Councils that focus  on cross-sectoral  issues and which attempt to involve relevant 
actors. These initiatives  on policy  co-ordination  which usually  focus  on principles 
are  moves  in  the  right  direction  but  there  is  still  a  general  lack  of  co-ordination 
when it come to the translation of political commitments into concrete actions. 

•  The  need  for  improved  policy  integration  and  the  development  of  an  interactive 
process between  Councils on this issue is recognised by both the Commission  and 
the Member  States  and  steps have been  taken  to, advance  the  concept  of  " shared 
responsibility".  On  the  basis  of  a  Commission  Communication  the  Cardiff 
European  Council  will  address  in  June  the  need  for  integrating  more  effectively 
environmental policies such as climate into other  policy areas. 

•  On the basis of all these elements the Commission intends to come forward with a 

more complete post-Kyoto strategy in the first half of 1999. 

A  priority  is  adopting  and  implementing  Community  policies  and  measures  in  the 
areas  set  out  in  this  document,  given  the  need  for  the  EU  to  make  demonstrable 
progress  by  2005  and  that  it  should  achieve  its  target  mainly  through  domestic 
policies  and  measures.  Progress  in  this  area  will  be  an  important  measure  of  the 
success  of  greater  policy  integration  and  co-ordination  between  Councils.  An 
assessment of progress will be made in the first half of 1999. 

For a Negotiating  Strategy 

In order to define  its negotiating strategy for COP-4 in Buenos Aires in November the 
Community  needs  to  agree  after  the  meeting  of  the  Subsidiary  Bodies  to  the 
UNFCCC  in  Bonn  a  position  on  a  number  of  outstanding  issues,  in  particular  the 
flexibility  issue  and  developing  country  participation.  Questions  that  need  to  be 
resolved  are  the  establishment  of  strict  rules  for  the  flexible  mechanisms  and  the 
nature  of the concrete ceiling that  should be set to  limit the  amount  of the target  that 
can be traded These issues will require extensive consultations immediately  following 
the June Bonn meeting when issues have been further  clarified  and the position of our 
negotiating partners is clearer. To assist this process the Commission will provide  the 
necessary  input. The aim should be for the Environment  Council of October to take a 
decision on these issues. 

Buenos Aires is expected to set out the broad principles  in relation to the  outstanding 
issues,  notably  the  flexible  mechanisms.  Further  work  will  be  required  for  making 
these instruments operational. Following Buenos Aires and depending on the outcome 
the  Commission  will  bring  out  a  document  that  will  examine  in  more  detail  the 
possible operational use of flexible mechanisms in the EU. 

29 

ISSN 0254-1475 

COM(98) 353 final 

DOCUMENTS 

EN 

14  12  11  05 

Catalogue number  :  CB-CO-98-378-EN-C 

ISBN  92-78-37094-0 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg