The Australian Greenhouse Conference - ENVIRO 2000

Good morning, and thank you for inviting me to speak at this Conference. While
much of this Conference’s focus is on emissions trading and the other Mechanisms
— the Clean Development Mechanism and Joint Implementation, my focus is with
the international negotiations whose object is to pave the way for ratification
and entry into force of the Kyoto Protocol.

Entry into force of the Protocol will provide the international legal foundation
for global emissions trading, the Clean Development Mechanism and Joint Implementation.
It will also be the beginning of a serious attempt to address climate change and
would impose substantial costs and structural change on developed economies. It
is expected to cost Australia between _ and 1% of GDP in 2010.

The Third Conference of the Parties (COP) of the United Nations Framework Convention
on Climate Change adopted the Kyoto Protocol in December 1997. The Protocol set
binding targets for 39 developed countries to achieve an overall reduction of
5% in emissions compared with 1990 by the first commitment period of 2008-2012.
This represents a reduction of about 30% below business as usual. Australia made
a commitment to limit its greenhouse gas emissions to 108% of the 1990 level.

Kyoto was a major achievement for Australia in which:

• the concept of differentiation was accepted

• Sinks included

• + 8% target which recognised Australia’s particular economic circumstances.

Unresolved Issues

Kyoto left a number of key issues unresolved which will need to be settled
before major players including Australia will ratify and bring Kyoto Protocol
into force. In simple language the key issues are:

• the extent to which developed countries should be allowed to meet their targets
  through the use of the flexibility mechanisms — international emissions trading,
  the clean development mechanism and joint implementation - and what would be the
  rules, guidelines and modalities for these mechanisms.

• the extent to which sinks should (ie. forestry and land use management) contribute
  to meeting developed country targets;

• what compliance system should apply and what should be the consequences of
  non-compliance;

• the extent to which developed countries need to respond to G77 (developing
  countries) demands for transfers of resources & technology; and,

• how and when should developing countries take on targets under the Kyoto Protocol.

Negotiating parties agreed at the fourth Conference of the Parties in Buenos
Aires in November 1998 to reach decisions on all but the last of these issues
by a meeting to be held in The Hague in November this year — COP6. No agreed
process or time frame exists for addressing the question of developing country
commitments.

Australian Interests

What is the significance of each of these issues and in particular, for Australia,
and where do the major negotiating groups stand?

The flexibility mechanisms hold the prospect of substantially reducing the
cost of implementing the Kyoto Protocol compared to a situation where each country
met its target by domestic measures alone. ABARE modelling suggests that emissions
trading alone would reduce the global cost of meeting Kyoto targets by 80% and
for Australia by 20%.

The Clean Development Mechanism is significant because it has the potential
to give developed countries access to low cost abatement opportunities in developing
countries, and thereby lowering the global cost of reaching the Kyoto targets.
Importantly, it will also lead to substantial flows of investment and technology
to developing countries. This prospect has softened the attitude of many G77s
to the flexibility mechanisms, and to progress in the negotiations more generally.

The European Union, with support from some G77 and most green NGOs has sought
to limit the Mechanisms use. They argue that the United States will avoid substantial
emission reductions at home by purchasing Russian emission credits arising from
the collapse of the Russian economy. The EU is concerned this could substantially
reduce the U.S. cost of meeting its Kyoto target. Importantly, this would undermine
the competitive advantage the EU expects from the bubble arrangement it negotiated
for itself at Kyoto and its anticipated access to credits from potential new EU
members — Poland, Hungary and the Czech Republic.

Australia, with other members of the Umbrella Group (the U.S., Japan, Canada,
Russia, Ukraine, New Zealand, Norway and Iceland) are committed to uncapped use
of emissions trading and the other flexible mechanisms. This will lower the overall
price of carbon thereby making it more likely that the Protocol’s environmental
goals will be achieved.

There is considerable discussion at international negotiations about the institutional
structure required for the CDM. Australia, along with the Umbrella Group are arguing
for a minimal institutional structure that will ensure the CDM’s environmental
integrity, keep administrative costs low, and thereby increase the CDM’s
attractiveness to the private sector. I would like to say that other countries
see it the same way, but I can’t. Some G77 countries are proposing ponderous,
intrusive and expensive institutions. Others, like the EU, are proposing a framework
that goes well beyond what is required. This will be thrashed out in the lead-up
to and during The Hague.

On Joint Implementation, the main issue is whether we need institutions similar
to those for the CDM. The EU and some G77 countries have been arguing for just
this. There is, however, a fundamental difference between CDM and JI projects.
JI projects take place between countries with emission targets each of who will
have to implement robust emissions monitoring systems. In addition, JI is a zero-sum
situation. No new credits are being generated — they are simply transfers
of existing commitment between countries. As such there is an incentive for the
host country to ensure the correct amount of emission credits are transferred.
This contrasts with the CDM where projects are undertaken in countries without
emissions targets and where new credits are generated. For this reason, Australia
has argued there is no need to have similar institutional structures for JI.

Negotiations on Sinks will only really get started after the release of a major
scientific report by the IPCC in May. As expected, the EU and some G77s are trying
to limit the extent to which sinks can be used to meet targets. Sinks are of critical
importance to Australia. The definitions and rules to be adopted will impact on
the size of our abatement task as well as the cost. This will be a key issue for
us at COP 6.

The shape and nature of the Protocol's compliance system was an issue left
undetermined in Kyoto. A compliance system is needed to help countries comply
with their protocol emission abatement targets and to sanction those parties that
fail to meet their targets. We are currently working toward agreement on the operation
of this compliance system at COP 6. An outcome on this issue will be important
to most industrialised countries' ratification decisions.

One of the most difficult issues for parties to agree is likely to be the consequences
that would be invoked if a Party fails to meet its target. Current proposals range
from facilitative means designed to help Parties overcome their implementation
problems to enforcement or "hard" measures such as requiring additional emissions
reductions in a subsequent commitment period. Australia has argued that a strong
facilitative component is important to achieving implementation of Parties' commitments
but is yet to finalise a position on consequences.

Another contentious issue is the way the compliance system deals with the Kyoto
Mechanisms. The EU is looking for ways, in addition to supplementarity caps, it
can use compliance measures to limit access to the Mechanisms. For example, by
loading-up the Mechanisms rules with non-compliance consequences, by setting eligibility
requirements as hurdles to access, and by singling out the Mechanisms for special
compliance attention instead of considering them as a means of achieving targets
along with domestic policies. This is of concern to us given our objective of
maximising access to the Mechanisms.

The Department of Foreign Affairs and Trade plans to release shortly a public
discussion paper to help solicit stakeholder views on this issue and to assist
in the development of our position. This will be available on the Department’s
website.

Developing countries will be seeking outcomes on a number of issues at COP
6 involving financial and technology flows in return for their agreement to a
package of decisions on the issues I have just outlined. These include funding
for adaptation to climate change, particularly for small island states and for
building institutional capacity to deal with greenhouse issues. They also want
technology transfer beyond what will come through the Clean Development Mechanism.
OPEC countries are pressing for compensation for economic loss they might suffer
as a result of any fall in oil prices arising from the emission abatement policies
of the developed economies.

The question of developing countries taking on targets is probably the most
difficult of all the issues, yet is central to ratification by the U.S. and others
including Australia. The US Senate has made it clear that it will not ratify
the Kyoto Protocol unless there is meaningful participation by developing countries.

The G77, particularly China and India, strongly resist any suggestion that
they should take on binding targets. They were successful at Kyoto in having a
draft article on voluntary targets removed from the text. A strong U.S. push to
address this in the formal negotiations in Buenos Aires lead to the G77 blocking
substantive progress on all issues.

The U.S. is now focusing on bilateral contacts and informal dialogue in which
Australia participates, to take this forward. Last November in Bonn at COP 5,
Argentina said it was working towards a voluntary target. Some others may follow.
A successful outcome at COP 6 should allow more focus in the formal negotiating
process on this issue.

The Negotiating Road Ahead

At COP 5 last November an intensified negotiating plan was agreed amid ministerial
reaffirmations of determination to wrap it all up at COP 6 in November this year.
The main risks to a successful outcome at The Hague are perceived to be the sheer
volume and complexity of the issues to be resolved and the fact that the meeting
will take place one week after the U.S. elections.

A COP 6 that delivers decisions on the four issues it will address will, for
many countries, provide the basis for considering ratification. Some EU and G77
countries are aiming to ratify in 2002 — the tenth anniversary of the Rio
Earth Summit. For others, however, including Australia, in addition to the right
outcomes at COP 6, a satisfactory arrangement on developing country commitments
will need to be found before ratification can be considered. In our view, the
Protocol is unlikely to enter into force until that question is addressed.

Thank you.