Introduction of Japan’s Emissions Trading Scheme
-Evaluation of “Trial Implementation”-
Graduate School of Economics and Faculty of Economics, Kyoto University
1. What is an Emissions Trading Scheme?
The Emissions Trading Scheme is an excellent way to control total greenhouse gas emissions. It is a policy instrument that has highly desired properties and in theory it can achieve its goals at the least cost. The Emissions Trading Scheme will be briefly described below.
First, the Japanese government sets its own emissions reduction goal and then the total amount or ‘cap’ for emissions is set. Based on this cap, carbon allowances are allocated to each company. The Japanese Government will determine later if the allowances will be sold at a set price or given for free. All companies are required to bring allowances in line with actual emissions at the term end. When the actual emissions are beyond the allowances, the companies have to reduce the emissions to their allowances or buy allowances equivalent to excess emissions from other companies. If companies emitted less than their allowances by promoting aggressive emissions-reduction efforts, then they can sell the unused permits to other companies to earn an income and use it for their business expansion. Therefore, this system is characterized by a mechanism whereby companies that make an attempt to reduce emissions are rewarded.
2. What is a “trial implementation” of emissions trading?
Based on the Fukuda Vision that declared a “trial implementation of emissions trading”, the “Developing Visions for a Low-Carbon Society“ was approved in a Cabinet meeting by the Japanese government at the end of July. This established that the trial implementation will be scheduled to be introduced in October. The characteristics can be summarized as follows.
First, participation is on a voluntary basis. This means that compulsory caps are not allocated to companies, but participation in the Emissions Trading Scheme is voluntary. Second, an acceptable intensity target is set (amount of CO2 emissions/production quantity). In the intensity target, even though efficiency is enhanced, the amount of CO2 emissions will increase as production quantity increases. That is, it tells us that the "trial implementation” does not aim at reducing the total amount of CO2 emissions.
Next, what is called “a domestic integrated market” in the Fukuda Vision is described as follows. It is not a single trading scheme that will be established, but four carbon credits will be used: 1) carbon credit generated from the Kyoto mechanism; 2) carbon credit generated from the Domestic CDM; 3) carbon credit that third parties certified less emissions than the better intensity target that companies declared voluntarily: 4) carbon credit generated under Japan's Voluntary Emissions Trading Scheme implemented by the Ministry of the Environment.
The second credit mentioned above targeted small and medium-size enterprises which are not included in the Voluntary Action Plan. As the name “Domestic CDM” shows, it applies CDM methodology based on the Kyoto Mechanisms to domestic measures, that is, medium-size enterprises. The third credit mentioned above is based on the Voluntary Action Plan by Nippon Keidanren (Japan Business Federation). It says, in effect, that the unused permits can be sold as credits if a company emits less than its allowance allocated under the Voluntary Action Plan. The fourth credit mentioned above is the domestic emissions trading scheme, a so called cap–and-trade system where participants (companies) set a voluntary target for emission-reduction to the level less than the past three year average emissions and cap it.
Integrating different trading systems which generate the four different credits mentioned above is called a “domestic integrated market”.
3. Issues of trial implementation
The Fukuda Vision can be evaluated in that the trial implementation of emissions trading was announced after brushing aside strenuous industry objection. Yet the content of the trial implementation assumed in actuality as mentioned above faces many more problems than the way the emissions trading should be.
First, calling the content of the trial implementation an integrated market sounds nice. However, it is only a temporary system established by collecting and putting the existing systems together. Therefore, the original idea of having a true cap-and-trade emissions trading scheme as a unified system should have been established and implemented experimentally for the coming three years from 2010 to start a full implementation in 2013.
Second, an advantage of the emissions trading is to strictly manage the total amount of CO2 emissions. Yet the trial implementation does not meet this condition. It has many problems concerning the management of the total amount. If the intensity target is allowed, emissions will increase as production quantity rises even though the intensity target is improved.
As stated above, this trial implementation has many problems concerning implementation of ensured emissions reduction. In addition, the trial implementation established by combining different systems is likely to increase in complexity and administrative costs. Nevertheless, it would be helpful for many companies, which do not go through the emissions trading, to become familiar with it through the trial implementation. The trail implementation is also important in that the government can establish infrastructure for various systems and accumulate know-how. However, it can have positive significance only by the prerequisite of full implementation. If the implementation is not extended past the trial, the raison d'etre of this approach itself may be called into question.
4. Challenges for a full implementation
It is not clear when and how the trial implementation will be shifted to the full implementation. However, the author considers that the full implementation will be open for policy debate over 10 years starting at the end of 2009, just around the time the results of the trial implementation will be useful. Additionally the results of the COP 15, which will be held in Denmark, will show what the international framework after 2013 ought to be.
A design proposal of institutional arrangements that the author desires is presented in the book titled『脱炭素社会と排出量取引』, written by Morotomi Toru and Yukari Ayukawa (Printed by Nippon-Hyoron sha in 2007). Persons who are interested in the book are recommended to refer to it. In any case, the Emissions Trading Scheme is a policy instrument that is put at the core of the climate change policy of Japan after 2013. Therefore, political decisions on the introduction of the full implementation, including its duration, that are not decided yet, will be taken as soon as possible and under the framework of full implementation a concrete design of institutional arrangements should be launched.