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Monday, March 10, 2008

Get set for emissions trading

The year 2007 marked the 10th anniversary of the signing of the Kyoto Protocol; the 20th anniversary of the release of the report "Our Common Future" by the World Commission on Environment and Development, headed by former Norwegian Prime Minister Gro Harlem Brundtland (the expression "sustainable development" was used officially for the first time); and the 15th anniversary of the adoption of the Framework Convention on Climate Change by the U.N. Conference on Environment and Development.

During 2007, the Japanese government's Central Council on the Environment and the Industrial Structure Council met jointly 30 times to review plans to achieve targets stipulated in the Kyoto Protocol. Their report stated that from 2008 through 2012 Japan can fulfill its obligations of reducing greenhouse-gas emissions by 6 percent from the 1990 level.

On Feb. 29, the report was submitted to government headquarters for promoting measures to fight global warming, and revised plans for achieving the targets were approved. Public comment is now invited.

Having participated in the joint meetings, I cannot help feeling dubious about the capability of achieving the targets. That's because concrete action programs contained in the revised report contain nothing new: promotion of voluntary actions by business and industrial organizations, comprehensive energy savings at factories and other workplaces, improvements in automobile fuel efficiency, development of new energy sources, better forestation to cope with drought, and citizen-participation campaigns.

Indeed, average greenhouse-gas emissions during 2006 showed an increase of 6.4 percent from 1990. Even when we take into account the 1.6 percent reduction credit allowed under Kyoto for actions that reduce gas emissions for others as well as the 3.8 percent reduction credit through forest absorption of gases, Japan is still obligated to reduce emissions by a further 7 percent.

So, I don't think I'm alone in doubting that the measures recommended in the report are sufficient to attain an annual average emission reduction of 7 percent between now and 2012.

At the joint meetings, industry representatives persistently opposed introducing a domestic trade in greenhouse-gas emission credits and imposing an environment tax. Supported by some members of academia, they insisted that "voluntary actions" by the industrial sectors would be the best means of fighting global warming.

Furthermore, their voluntary actions are targeted at reducing the carbon-dioxide emissions level per unit of production. They refused to admit that such a measure will not be compatible with the Kyoto Protocol mandate of reducing the total emissions volume.

The year 2007 went by without the Japanese government coming up with any effective policy for reducing emissions. In stark contrast, a Senate committee of the U.S. Congress passed the Lieberman-Warner Climate Security Act, which targets an emissions reduction of 63 percent by 2050 and concrete means to achieve the goal.

The two Democratic presidential aspirants, Sens. Barack Obama and Hillary Clinton, have both declared that they would work toward an 80 percent reduction by 2050, clearly indicating that the Bush era is nearing the end.

In an apparent move to avoid missing out on the worldwide momentum toward emissions reduction, the Ministry of Economy, Trade and Industry has announced it will start "studying" the possibility of adopting a emissions trading formula. Following this timely about-face, the Japan Business Federation (Nippon Keidanren) appears ready to follow suit.

As long as Japan is obligated to reduce its total emissions volume on an annual basis, the most effective and efficient means to fulfill that obligation is to institute an emissions trading scheme, even though some problems in designing the system must be solved. The European Union has already introduced the system, and in all likelihood, the post-Bush U.S. will do likewise.

Let us assume for the sake of argument that the future arrangement to replace the Kyoto Protocol obligates Japan to reduce its emissions volume by 15 percent from the 1990 level during a 10-year period that includes the year 2020. If the quantitative process toward that goal leads to the conclusion that a 3 percent reduction was necessary in 2013 from the 2010 level, then the total annual emissions volume would be calculated and determined accordingly. The next step is to decide how much of that total is to be allocated to each industrial sector and then to individual corporations. Any excess would be sold and any shortfall would be purchased in the market.

This is the simplest form of emissions trading, but haphazard allocations could hurt efficiency. There are two ways of determining the allocation of emissions volumes: the grandfathering method, under which each corporation is allocated an emissions volume based on their actual performance of the past several years; and the benchmark method, which calls for establishing an emissions standard for each industrial sector and then determining the allocation for each corporation by multiplying the standard times the expected production volume.

The fairness of the grandfathering method can be questioned because corporations with poor track records in reducing emissions might get larger emissions allocations. As for the benchmark method, the standard could be calculated in an arbitrary manner.

From the point of view of giving priority to efficiency, the most desirable means is for the government to auction emissions volumes allocated to each industrial segment in an open market. The problem with this method is that corporations may face contingencies such as unexpected price fluctuations.

The EU, which currently uses the allocation system, is said to be thinking of shifting to the auction system in the near future. The Japanese government, too, should start drawing up concrete plans for emissions trading as soon as possible. Otherwise Japan will lose face as an environmentally advanced nation.

Takamitsu Sawa is professor at Ritsumeikan University's Graduate School of Policy Science and specially appointed professor at Kyoto University's Institute of Economic Research.

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