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Monday, Oct. 12, 2009

CO2 emission cuts doable

On Sept. 7 — shortly before taking over the premiership — Yukio Hatoyama met strong resistance from business circles and from the Ministry of Economy, Trade and Industry when he said at the Asahi Global Environment Forum (sponsored by Asahi Shimbun) that his government would aim for a 25 percent reduction in Japan's greenhouse-gas emissions from 1990 levels by 2020.

Critics of the announcement of this target insisted that it would weaken the international competitive power of Japanese industries, impose heavy burdens on people's livelihoods and slow down the nation's economic growth. To those who have specialized in econometrics like myself, it is obvious that these claims have been manipulated by using econometric models.

When Yasuo Fukuda was prime minister, the government formally decided that the nation's greenhouse-gas emissions would be reduced by 60 to 80 percent by 2050. But he ignored the need to specify an approach and timetable for achieving this.

His successor, Taro Aso, deviated from the long-term goal set by Fukuda and proposed an 8 percent cut in 1990 emission levels by 2020. This not only ran counter to the government's earlier official decision by the Cabinet but also, in the words of then Environment Minister Tetsuo Saito, was risible to the international community.

I suspect that the adoption of such a halfhearted medium-term target stemmed from the thinking of its sponsors that "all of us will be dead by 2050, but many of us will still be alive in 2020."

Is a 25 percent cut in 1990 greenhouse- gas emission levels by 2020 really possible. There are at least four reasons why the answer is "yes":

• By fiscal 2020, Japan's population will have fallen by 2 percent from the fiscal 1990 population, according to a middle- range forecast by the government's Statistics Bureau. Coupled with demographic changes as the population ages, this is likely to reduce total emissions by about 5 percent even if per capita emissions remain unchanged from 1990 levels.

• There is a strong possibility that the nation's greenhouse-gas emissions will decline sharply with the increased use of eco-friendly products, including renewable energy generators like solar power panels, light-emitting diodes for lighting, stationary fuel cells, electric vehicles and plug-in hybrid automobiles. This trend will accelerate as the prices of these product fall with mass production.

One problem is how to encourage broader use of eco-friendly products. For the foreseeable future, eco-friendly products like electric vehicles will cost more than their conventional counterparts. This makes it essential to provide incentives to encourage consumers to buy eco-friendly products.

One idea may be to eliminate the acquisition tax on eco-friendly cars and make the tax rate for car ownership proportional to fuel economy. For example, the driver of a car that gets more kilometers per liter or emits less CO2 would pay a lower tax than another whose car has the same engine displacement but is less eco-friendly. It should be noted that electric vehicles, though they don't emit CO2 while running, are responsible for greenhouse-gas emissions released at a power station.

According to specifications of the iMEV electric car recently launched by Mitsubishi Motors, it covers a distance of 10 kilometers on 1 kilowatt-hour of electricity. Existing power stations in Japan discharge about 450 grams of CO2 to generate 1 kilowatt-hour of electricity. This represents an 80 percent reduction in CO2 emissions compared with a typical gasoline-powered automobile, which emits 2,300 grams of CO2 for every 10 kilometers on 1 liter of gasoline.

So, one alternative is to set the tax rate by taking into account the CO2 emissions at power stations. Another way is to set the tax rate according to the actual amount of CO2 emitted by vehicles. For the purpose of popularizing eco-friendly vehicles, the latter alternative may be better.

Another factor favoring the choice of the latter approach is the fact that the CO2 emission rate differs from one power station to another and depends on the operation rate of nuclear power stations.

• It would be desirable if the government promoted the use of renewable energy sources by adopting a "feed-in tariff" as in Germany. Power companies there are required to purchase surplus electricity generated by private homes using solar and other renewable energy sources at above-market rates set by the government.

• An emissions trading system should be adopted soon. Although allocation of quotas may be necessary initially, trading by auction is expected to cover the entire system at an early date.

The concept of carbon pricing has already been accepted by major industrialized nations. The European Union adopted emissions trading in 2005. It is certain that the United States will follow suit in the near future. If Japan's market for such trading can be linked to those of Europe and the U.S., emissions prices are certain to move in a stable manner and remain low.

Japan's real economic growth rate is expected to remain between 1 and 1.5 percent per year from 2010 to 2020. One major problem arising from such a low growth rate is an increasing tendency among corporations to reduce the number of full-time employees and to hire more nonregular workers as a buffer. An urgent task for the government is to create employment opportunities.

That makes it incumbent upon the government to boost domestic demand through personal consumption, private sector capital investments, and public works projects.

U.S. President Barack Obama aims to raise the renewable energy portion of total U.S. energy output to 10 percent within three years from 2009. To achieve this, he has pledged to create 5 million new jobs by investing $150 billion in the next 10 years and to invest another $11 billion in projects leading to an advanced, efficient "smart power grid."

Huge investments in renewable energy and the smart grid would be the initial step in bringing about America's economic recovery.

The Japanese government has much to learn from the active "New Green Deal" of President Obama. In this sense, it is of great significance that Prime Minister Hatoyama has lost no time in setting a target of a 25 percent reduction in greenhouse gases from 1990 levels.

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

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