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Monday, Jan. 30, 2006

A way past Kyoto's 'hot air'


In a Jan. 7 symposium at Dalian University of Technology, I delivered a keynote speech on the possibility of Japan's implementing the clean development mechanism in China.

CDM, a program described under the Kyoto Protocol, typically would work this way: A Japanese company builds a small hydroelectric power station, or provides technology and funds for improving the efficiency of a coal-burning thermal-power station. In exchange, the company receives carbon credits (tradable carbon-dioxide emission rights) equivalent to the resultant reductions of Chinese emissions of greenhouse gases (carbon dioxide, methane, nitrous oxide, two chlorofluorocarbon alternatives and sulfur hexafluoride).

Emissions of methane and other non-CO2 greenhouse gases are converted into CO2 equivalents on the basis of their global-warming potentials, a system of multipliers devised to compare warming effects of different gases.

In Japan, CO2 accounts for 90 percent of the CO2 equivalent for the nation's total greenhouse-gas emissions. Worldwide, the comparable ratio is about 60 percent, since methane produced by livestock droppings and mines accounts for a large share of the total.

The Dalian symposium was attended by 40 Chinese and 60 Japanese, most of the latter from major companies. Japanese companies obviously have a strong interest in implementing CDM. Among the other Japanese present were representatives of Japanese organizations accredited as CDM operational entities to undertake research, documentation and other consultancy functions of the program.

Northeast China, including Dalian's port, is a major coal-producing area with many old steel mills and coal-burning thermal-power stations. Because of the cold weather, energy demand for heating in winter soars. The region offers abundant opportunities for a very cost-effective CDM.

The Chinese government is ready to welcome CDM despite earlier reluctance. The change in attitude apparently reflects energy-saving efforts prompted by spikes in international oil prices as well as serious electric-power shortages.

A senior official of China's National Development and Reform Commission, addressing the opening ceremony of the symposium, said CDM is likely to enable China to reduce its annual greenhouse-gas emissions by 300 million tons in terms of CO2 -- equivalent to Japan's annual CO2 emissions. This indicates a good opportunity for China to make a drastic cut in its emissions.

The Kyoto Protocol, which took effect last Feb. 18, obligates Japan to reduce its average annual greenhouse-gas emissions by 6 percent from 1990 levels within five years ending in 2012. The government hopes to achieve 1.6 percent of the reductions through the Kyoto mechanism. The question is whether emissions trading or CDM should receive priority.

If a free, transparent and fair market is established for trading emission rights, shortages can be made up with purchases at market prices. I am afraid, however, that establishing such a market will be difficult. In my estimate, if the United States had not withdrawn from the Kyoto Protocol, total emissions by industrialized countries in 2010 would have increased by 8 percent from 1990 levels. With the U.S. out of it, the total should decrease by more than 5 percent during the same period.

Since emissions trading among industrial countries alone cannot possibly result in a 5-percent reduction, the decrease in CDM incentives will make it difficult to create a market for emissions trading. Under such circumstances, emission rights would be traded through one-on-one negotiations. After the first commitment period, a seller's market could prevail between nations with shortages of emission rights and those with surpluses.

For example, Japan, with a shortage of emission rights, would have little choice except to buy "hot air" at exorbitant prices in one-on-one negotiations with Russia. Hot air refers to the large amount of excess emission rights that Russia has accumulated. At the end of the 1990s, Russia had recorded an unintended 30 percent reduction in CO2 emissions from the 1990 level due mostly to economic stagnation. (Its reduction target was only 0 percent.)

To avoid the above-mentioned situation, I believe that the government should promise to buy, at an appropriate price, carbon credits acquired by Japanese companies through CDMs. A company's decision on whether to implement a CDM will depend largely on the price of carbon credits. If the price is high enough, CDM incentives will increase. If too low, there will be less encouragement for CDM projects. Price uncertainty makes a decision difficult.

If the government guarantees a fixed purchase price, companies will be able to implement CDM with confidence. It would be more cost-effective for the government to buy carbon credits from companies rather than hot air from Russia.

At the Montreal conference on climate change in December, discussions centered on plans for the second commitment period (2013 to 2017). A major question was how to get the U.S. to rejoin the protocol and developing countries -- particularly China and India, with the second- and fifth-largest emissions respectively -- to take part. There is no easy answer.

For the U.S. to return to the protocol, a Democratic candidate will have to win the 2008 presidential election. That still may not be enough, considering the oil industry's strong resistance to the pact.

In my opinion, obligations for cutting emissions should be tightened for industrialized countries -- except the U.S. -- so that it is impossible for them to achieve their targets without CDM, or investment in developing countries. The second best option for reducing greenhouse-gas emissions worldwide is to obligate industrial countries to implement CDM as a complementary program.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Institute of Economic Research.


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