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Transatlantic Cooperation on Climate Change: Overcoming Divisions

Kurt Volker, Principal Deputy Assistant Secretary for European and Eurasian Affairs
Remarks at the Institute for European Affairs
Dublin, Ireland
April 19, 2007

Thank you very much for having me. It is great to be here. I appreciate the opportunity to speak with you about U.S. policy on greenhouse gas emissions and climate change.

The U.S. is often the subject of a lot of commentary about climate change, about what are we doing and what are we not doing. So I think it is incumbent on a U.S. official like me to take the bull by the horns and say, "Here's what we think about this. Here is what we are doing."

I'll start out with the relationship between economic activity and greenhouse gases, because that's the fundamental thing. We all understand that economic activity produces greenhouse gases, and this has an effect on climate. If you want to change the effect on climate, you've got to change the economic activity in some way so that it doesn't produce the same level of greenhouse gases. That is the heart of the issue.

Ireland is an example of a country that, for the U.S., has some familiar characteristics. Look at what has happened here, and at Ireland's development. Ireland is a country that has had significant economic growth in the last several years, certainly in the last ten. And it's been done in ways that are dear to our hearts: cutting taxes, opening up to foreign investments, cutting regulations, letting the economy grow. The Celtic Tiger is the phrase that people use. It's something to be proud of. It's a great achievement.

And the European Union recognized that achievement when it set its Kyoto targets. It knew that Ireland had a growing economy, and that Ireland didn't benefit from some of the "one-offs" that other parts of Europe benefited from during the 1990's.

In Central and Eastern Europe, for example, we had the collapse of communism and the Warsaw Pact, and the reunification of Germany. This meant that dirty, coal-fired power plants in Central Europe and eastern Germany were closed down and replaced by natural gas, largely from Russia, with a lower greenhouse gas profile. The UK, for its part, switched from coal to North Sea natural gas in the 1990s.

But Ireland had a growing economy, and was not affected by these one-offs. And in recognition of that, the EU said that while the EU as a whole needs an emissions reduction of 8 percent over 1990 levels, Ireland should be allowed to increase its emissions by 13 percent over 1990 levels, given its economy, and reductions being taken elsewhere in the EU. But Ireland's economy was so good, and was making such progress, that it produced emission levels at 25 percent above 1990 levels.

This is something we in the United States understand, because we also had good economic growth, and didn't have any one-off changes, and that put our economy and emissions well above 1990 levels. And this is only natural, because all else being equal, increased economic activity produces increased emissions.

As for the U.S., we are the largest economy in the world. We have five percent of the world's population, but we produce about 25 percent of the world's economic output. We also produce about a quarter of the world's greenhouse gas emissions, so our emissions are not out of line with our economic output. Of course there's some natural variance: we produce more emissions per capita than Germany or France, but less than Australia.

Germany has a very good record on efforts to reduce greenhouse gas emissions. But it is nonetheless the largest greenhouse gas emitter in Europe. That is not a criticism of Germany. It is just a fact that Germany is a big country with a big economy and it produces that level of emissions.

So we all face these challenges, together: the United States, Ireland, Germany, Europe, all of us.

So this takes us to the matter of policy. What do we do about this? And I think that is important for a U.S. official to be very clear on our thinking about this, because there are so many misperceptions.

Right off the bat, let me tell you that contrary to the popular culture and popular expectations, the U.S. does care very much about climate change. We recognize that human activity contributes to climate change. We're committed to slowing, stopping, and reversing greenhouse gas emissions - just like everyone in this room and every country in Europe. We have made tremendous investments aimed at reducing the growth of emissions both at home and abroad. We're working with many other nations to do so, multilaterally.

We support international engagement in this effort, including the UN Framework Convention on Climate Change (UNFCCC) and the Intergovernment Panel on Climate Change (IPCC). In fact, the U.S. is the single largest financial backer of the IPCC's scientific research, which is much in the news these days. Americans are among the leading scientists that are taking part in that exercise in climate science. Those reports inform government policy around the world, including our own policy.

Our efforts to reduce greenhouse gas emissions have produced a trend. We know we start with an economy that has a high level of emissions compared to some others. But we have produced a trend line where we are reducing the rate of growth of our emissions. And we expect that trend to continue and, in fact, accelerate.

We are seeing progress. And if you look at the progress we have made since 2000, it's basically comparable with the progress that Europe as a whole has made over that same time period. If you look at the UNFCCC website, they've got the data up and they show you what's happening country by country and over various time periods.

The most recent time period for which they have comparative data comprises the years 2000 to 2004. They show a U.S. rate of growth of emissions of 1.3 percent and that rate of growth took place at a time when we had growth of $1.9 trillion in the U.S. economy. So, that's about like taking Italy and adding it to the U.S. economy. But, the rate of growth of U.S. emissions during that time was 1.3 percent, a very modest rate of growth.

I would say that Europe also had very modest growth during that time. The EU 25 had a rate of growth of 2.1 percent during that time and the EU 15, those who were a part of EU at the time that the Kyoto protocol was signed, had a growth of about 2.4 percent. All of these are fairly low numbers for rates of growth of greenhouse gas emissions.

The EU had a notable reduction between 1990 and 2000. When the EU set its eight percent Kyoto reduction target, it was already at more than three percent below 1990 levels. The trend in the EU since 2000 has been slow growth in emissions, and what the EU is focusing on now is on trying to reverse that and bring about further emissions decline. The goal is out there. That is also a goal of the United States - emissions reductions. This is a goal we all share.

One of the things that is interesting from the U.S. side of this story is the private sector, because when people think about the United States, they mainly think about the federal government. But in fact, in our country the federal government is just one actor. It sets some of the rules. It stimulates activity to some degree. But the country and the economy are so vast that what happens outside of the federal government is what really determines where our country goes.

Here, our investment bankers have reported that there is a huge second wave of investment in green technology. The first one was in the 1980s, and there was a certain level of technology development, and then that kind of fizzled. Now, again, we see another massive wave of investment into cleaner new technologies, larger than the first.

The people who are truly investing, the people who are the hard money guys - the ones who want to make money - they see investment in clean technology as a profitable thing to do. They can get a return. I spoke to a venture capitalist from Philadelphia about ten days ago. She was saying that venture capital investors are expecting a return in about two to five years on what they invest in startup companies in clean technology. That's a pretty good pace for returns on investments in her world.

There are many examples: one of them is an enzyme-based fuel cell developer that earlier this month took about half a million dollars in venture capital for an alcohol-based fuel product. There are also efforts to produce cellulosic ethanol from different plants - ones which aren't food chain plants, as opposed to corn-based ethanol, which comes from a food plant. There are hydrogen fuel cells.

These are all attracting big investment in the U.S. because people think that the technology is there and the profit is there. If you think about how this works - and this is something that this venture capitalist said - this is not altruism. This is not people going out to make the world a better place per se. This is people who are saying, "How do I increase efficiency, so the inputs cost less, so I can grow a successful business?" Or, "How do I have a process that is going to be more successful in its execution, so that I can out-compete old-technology competitors?"

And, if there are high prices for fossil fuels now - as there are, and as there are likely to be for as far ahead as anyone can imagine - people want to get away from fossil fuels. If we can find an alternative source of energy that is cheaper, business will use it. Alternative sources of energy have been falling in price steadily since the 1980s and are very attractive right now for some of these investors. That is very good news because in our country - and the world - if things are actually going to change, the private sector has to drive it. And that is, in fact, what we are seeing.

Of course the federal government has a role. I want to stress that too. We set mandates. We set targets. We provide fuel efficiency standards. We subsidize investment. We set goals, for example, of a zero-emissions coal plant, FutureGen, in ten years. We have set a target for reducing gasoline consumption by 20 percent of the expected 2017 levels, which is a net reduction from where we are today. People who do these numbers say it's like taking 26 million cars off the road from where we are. So we do set these kinds of targets. Of course the question is, "What are the right ones? How do we stimulate those mechanisms, those businesses, which make investors put technology into the marketplace, so it actually changes the way that the economy functions?"

I gave a speech on this subject in Berlin about two months ago. It's on the State Department website and I refer you to it. It has lots of numbers and lots of things that I mentioned already. One point, and I already covered this point, is the results that we are getting in the U.S. economy, and how they compare reasonably well with results the EU is getting. The second point is that we are taking a multilateral approach.

Now, we don't support the Kyoto protocol and we can talk about the reasons why. But what we have done is to make a particular effort toward working with China, India, and others who share a significant part of the world's population and a significant share of the world's emissions. This is the Asia-Pacific Partnership on Clean Development and Climate. We are trying to work within this group of countries so we all can make a change in our economies, to continue growth, but with lower emissions.

Right now the concern that one can from China or India is something like this: "You, the United States, or you the developed world, you built your economic success on the emissions that are already in the atmosphere, and you filled it up. And now, you are telling us that we can't do that. We can't grow like you did. And that is not fair. We have poverty. We have people who need better healthcare, better education, and to achieve this we have to build our economy."

What these developing nations need is just what we need: to find better ways of continuing all the economic activity that makes a people prosper, without the greenhouse gas emissions. So we need to help develop and share cleaner ways of growing the economy, so that they can benefit from prosperity as we and others have.

People who talk about a global carbon market or, a global cap-and-trade scheme, make the argument that this is part of how one makes the market work. Increase the cost of producing carbon. That is certainly one means, and we used a similar means with sulfur dioxide emissions in the U.S. We did it at a national level, and our efforts were aimed at affecting the phenomenon of acid rain on forests in the United States.

So there are sometimes ways in which cap-and-trade systems work. But if you look at a globalization of a carbon cap-and-trade system, then we do have some concerns. That does not mean we disagree with the goal of reducing carbon emissions. We just have some different ideas about the means.

Let me explain. And rather than starting from treaties and numerical caps, let's take it from a different perspective. As we know, economic activity produces greenhouse gases. When you want to reduce the national level of greenhouse gas output, you essentially have three options.

First, you can reduce your economic activity, and that reduces your greenhouse gas output.

Second, you can shift some of it overseas, where so doesn't show up on your books. We have examples already where a plant closes in Europe and opens in Morocco and Europe credits a reduction in emissions.

Or third, you change the way your economy works, so it produces less emissions with current (or growing) economic output. And the only way to do this is to put in place new technologies, so that the economy functions differently.

These are the alternatives. Whether or not one is signed up to a global carbon market, a cap-and-trade scheme, or a global treaty, he will still face the question of "How? How to accomplish the reduction in emissions?" And this drives you straight back to these three options.

And the only option acceptable to any of us is to change the way the economy works. Every politician, and more importantly, every family, wants economic health, to up the economic ladder. People want to maintain their jobs, their healthcare and their education, and the welfare in their society. No one wants to reduce economic output, and no one wants to ship it overseas.

So we want to reduce the rate of emissions from current and growing economies, and that's the role of technology. That's why the United States talks about greenhouse gas intensity as a measure. And why we talk about technology so much, and why we are investing in it so much.

An example I like to think of when you talk about how to get technology in the marketplace is currency markets. There was a time when governments felt they could intervene in currency markets to affect currency rates. So if a currency was headed one way or another, governments got their central banks to buy or sell currency in an attempt to sway markets.

What people discovered was that as global financial flows grew, they couldn't achieve what they wanted to. The market was so much bigger than central banks' ability to buy and sell that private investors, bet against the governments and won. As a result, governments gave up trying to directly influence exchange rates. Today, we know that all governments can really do is try to put sound economic policies in place so that the markets make the exchange rates work.

That is roughly what we can do with an economy like ours and greenhouse gases. Set the policy parameters, so the much larger private economy makes the market work. We can't just arbitrarily say "Oh, I'll cut 30 percent this year," without knowing how we are going to do it.

What we can and do decide is to provide some mandates that indicate that we are going to have this level of fuel efficiency or that level of production of bio-fuels, or that we must use bio-fuels in automobiles. We can say that we are going to have automobiles that have to have capacity to run on this or that type of fuels. We can develop or subsidize certain technologies, such as a hybrid fuel cells, or hydrogen fuel, for cars - which is exactly what we do. The hybrid cell technology we use now in the States is based on technology that was developed in the U.S. Department of Energy labs.

We can provide tax incentives. I got a tax break this year because I had to replace my hot water heater. I bought one that was rated more efficient, and discovered that when I filled out my taxes this year I got $150 back because I bought a better technology and more efficient water heater. These are the kinds of things that the government can do. The tax break stimulates a demand for more efficient hot water heaters, and companies produce them and make money by selling them.

That relationship between technology and market economy is critical for actually making a difference in the way the world produces carbon emissions. If the profit motive moves in other direction, it's all up hill. If the profit motive is in favor of using new technology and getting it into the market place, things will take off. And that is something we very much want to see and are working to support.

In fact, the U.S. Government has put an enormous amount of resources into research, science, and technology to help stimulate market application of new technology. I have a handout here that lists a number of the government programs we are pursuing.

Our level of investment is extraordinary. Since 2001 it has been $35 billion. That is more than any other country, more than the GDP of a number of countries. I was just in Bulgaria last week. Their GDP is about $28 billion a year. So our $35 billion is a huge lump of money that is going in to finance the research and development of programs to change our economy. It is important because people think that, "well, the U.S. Government isn't doing very much." Actually, we're doing a substantial amount as a government, but always with the aim of stimulating change in the way the economy actually works.

I mentioned the Asia-Pacific Partnership. Another thing that we have done is launch a Chief Executives forum under the Germany EU presidency. On March 19th in Washington we had the CEO's from a large number of U.S. and German companies. They were substantial companies, about ten from each side, who met with Secretary Rice and Foreign Minister Steinmeier. They got this group together particularly to hear from them what business like to see the U.S. and the EU do as a partnership addressing the issue of energy and climate. A lot of ideas came up in there, a lot of things that business is interested in, and which will now be a permanent feature our U.S.-EU cooperation on exactly these issues.

I also want to discuss a proposal that we made on the Montreal Protocol. The Montreal Protocol, if you remember, is the international protocol for reducing ozone depleting substances. It's one that the U.S. sponsored in order to help eliminate the production of hydrochloroflourocarbons, or HCFC22, which is an ozone-depleting chemical. A by-product of producing this ozone-depleting chemical is HFC23, which is a particularly harmful greenhouse gas, far stronger than carbon dioxide.

We have, in the Montreal Protocol, targets for countries which are specific. We have baseline years, and then reduce from that baseline to eliminate the production of these ozone-producing gases. China's baseline, and that of some others in the developing world, is 2015. So they have the ability to increase their production of ozone-depleting chemicals until that time and then a requirement to reduce from there.

Now, the carbon-trading system that has developed under the Kyoto Clean Development Mechanism allows countries to buy credits for greenhouse gas production from developing nations. Instead of cutting emissions at home, they pay for reductions in other countries. One billion plus euros is going to that purpose.

But what has happened is that the carbon credits are unintentionally creating a subsidy for the continued production of the ozone-depleting HCFC22. Because filtering out the greenhouse by-product, HFC23, is fairly easy - and because they get paid for doing so via carbon credits - it makes more sense for companies to keep producing the ozone-depleting chemical and filtering the greenhouse gas, than it does to switch away from ozone-depleting chemicals and not produce the greenhouse gas to begin with. So, while we all want to eliminate the ozone-depleting chemical, HCFC22, the carbon trading system is creating a subsidy for its continued production. What we have is a wholly unintended effect: an increase in the ozone-depleting chemical, a wealth transfer from Europe to nations who can still increase their HCFC22 emissions, and no actual decrease in greenhouse gas emissions from what would have happened if they were not using the ozone-depleting process to begin with. It is wholly unintentional, yet very real, and a caution for future global arrangements.

What we have done to address this? The United States has made a proposal to amend the Montreal Protocol, and advance some of the timelines, so we can get away from the unintended effect of the carbon trading. Again, I mention this not to point fingers or cast any blame, but just to illustrate that when you have a global program like this, and you are dealing with economies that have very different national circumstances, you'll often have unintended consequences. It produced a result that nobody wanted, and now we have to think our way through it and deal with it.

Finally, let me say a few words looking back, and looking ahead. The international debate over the last seven years or so has been a disappointment. I am not a climate expert. I'm a foreign policy expert - NATO, EU, OSCE and Russia and the like.

But there has been an enormous and unconstructive public debate over the Kyoto Protocol - a lot of finger-pointing, which essentially says that if one is signed up to the Protocol, one is "doing something" about climate, whether in fact the results bear that out. And that says that the U.S. is bad and doing nothing about climate change because it has not signed up to the Protocol, regardless of what we are actually doing. It has become a pop-culture litmus test that ignores what is really happening in our economies and our emissions, on both sides of the Atlantic.

And this has left a divided international community, when what we really need is to stress our common objectives. It impedes cooperation, when what we really need is to work together with all nations, developed and developing alike. It strikes me that we spend a lot of time arguing over the means, and there is not nearly enough emphasis on the fact that we actually have common goals, and need to work together.

Now, as we look ahead, there is a lot of debate going on in Europe about what happens after that the Kyoto Protocol time period. People use 2012 as a benchmark because that's what the Kyoto period covers. We don't particularly use that benchmark because we are not in it to begin with. Why wait until 2012? Why can't we do things today?

What I would hope is that as an international community we define this issue differently, in a way that we emphasize our common objectives and our common goals of reducing emissions, and that we open up our arms to everybody, whether it is India or China or other developing countries.

We should recognize what people are doing, and encourage and help them and each other to do more. We should support and reward efforts, whatever they may be - whether they are national mandates, or the development of new technologies, or multilateral partnerships such as we the Asia-Pacific Partnership. So, that is what I hope that we see in the future.

I hope that I have made some sense, and made the case that, like you, the U.S. does care about climate change. We are working to reduce greenhouse gas emissions. We have produced results that are pretty good so far, though we know we have to do more. We are working multilaterally to do so, including with Europe. I'm sure our U.S.-EU framework, where we have a High Level Dialogue on Climate and Energy, will produce results. And I hope the U.S. and Ireland, given that we both have had growing economies in the last decade and have a lot in common, can work together on this question in the future.

So, I will pause here. I will be delighted to hear your thoughts, and take some questions.

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