How is this in category 3? Give decryption keys to your own government and not the others. I get it if you think it'll require more opsec from your government than you might trust them with, or that it'll have other negative effects (see: category 2), but how is this physically impossible (category 3)?
Edit: and key rotation is also a thing.
No, I don't buy that. Maybe I'm going out on a limb here but I'm gonna say this is almost certainly a strawman caricature of what they're being asked, not what they're actually being asked. Law enforcement isn't stupid and people (especially law enforcement) understand that pretty much nothing in this world works in absolutes. They probably don't think the decrease in security is significant, but everyone (heck, even a kid) understands that the more people have access to something, the less secure it is.
Actually I think there are almost never type 3 objections. Almost every law is something of the form: “Do this, pay fines, or stop providing your service here.” Of course, the “do this” might be impossible, but there’s no mathematical contradiction in the idea that a company can be run out of business.